Move over “What is the Meaning of Life?” “What is Bitcoin’s True Worth?” Becomes The Most Repeated Question Of Our Time!
You can set your watch to articles that appear and attempt to answer “What is Bitcoin’s Worth” whenever one of the two events occur:
- Bitcoin hits a big price milestone: 1k, 5, 10k, 50k, etc. or
- Bitcoin drops significantly in price
We actually saw both happen recently when Bitcoin hit 5k and at the exact time, in China’s infinite wisdom, decided to officially ban cryptocurrencies. The ban sent Bitcoin’s price to 3k and gave mainstream media something worthless to write about. I can see the editors now telling their writers to draft their next masterpiece when bitcoin hits 10k and when it drops to 7k be ready to publish.
What is Bitcoin’s Worth? might be this technology era’s most confounding question or writers are just lazy and want a quick headline. I’m guessing the later because it’s a great open ended question that doesn’t really have a correct answer.
Actually it does have an answer. Bitcoin’s worth depends on what people are willing to buy and sell it at. Just check the price on any number of exchanges that trade Bitcoin and you will get your answer.
What will Bitcoin be worth tomorrow or five years from now is anyone’s guess but that isn’t too hard to answer as long as the market stays relatively the same. I answered what Bitcoin could be in 2025 here:
Not that fucking hard to understand. If in 2025 the cryptomarket cap is the same level as it is today AND Bitcoin still represents around 50% of the market, then guess what? Bitcoins worth will roughly be the same as it is today.
The article that sent me on this rant was in the Wall Street Journal yesterday titled “Bitcoin’s Wild Ride Shows The Truth: It Is Probably Worth Zero” by WSJ Senior Writer James Mackintosh.
9/18/2017 Bitcoin’s Wild Ride Shows The Truth: It Is Probably Worth Zero - WSJ
https://www.wsj.com/articles/bitcoins-wild-ride-shows-the-truth-it-is-probably-worth-zero-1505760623 1/3
Behind every bubble is a good idea bursting to get out, and Bitcoin kind of looks like a
good idea, at least if you squint a bit. A digital currency without borders that
governments can’t control and that allows secret online transactions? I’m in. Bitcoin
itself? Not so much.
So is a single Bitcoin worth $500,000, $5,000, $500 or $0? I’m inclined to say $0,
especially if Bitcoin’s value depends on it being adopted as a global digital currency to
replace dollars. There is no chance whatsoever that Bitcoin can displace the dollar, for
the simple reason that it is badly designed. Bitcoin can handle a pathetically small
number of transactions, and uses an inordinate amount of electricity to do so, making it
entirely unsuitable to replace ordinary money.
Even if Bitcoin worked better, it is in a Catch-22 because of Gresham’s law, the nostrum
that bad money drives out good. Given the choice of spending inflationary government issued
money or something which holds its value, everyone would spend the bad paper
stuff and hoard the Bitcoin. You wouldn’t want to be the person who spent 10,000
Bitcoins on two pizzas in 2010, when a Bitcoin was worth a fraction of a cent. Those
Bitcoins are now worth $40 million. But if no one spends Bitcoin, it will never get
established as a currency.
There are two somewhat less ambitious claims for Bitcoin that could give it value. The
first is that it is a limited form of money because of its usefulness for dealing illegal
drugs and dodging capital controls. The second is that it is a form of digital gold: an
insurance that will keep its value even if governments confiscate or inflate away the
buying power of the currencies they issue.
Let us unpack the idea of Bitcoin being based on illegal transactions. Dan Davies, a banks
analyst at Frontline Analysts in London, came up with a value thanks to Bitcoin’s builtin
limit of 21 million in circulation.
In any currency, the money supply multiplied
by how often it circulates equals the price
level times the number of transactions. For
Bitcoin we can estimate three of the four
variables, Mr. Davies says. He observed that
even hardened criminals don’t set prices in
Bitcoin, but rather in dollars, and then
immediately convert. Assume that all drug
dealing moves online, that Bitcoins circulate
as fast as ordinary currencies, and estimate a
$120 billion-a-year market for illegal drugs,
and the formula spits out an ultimate value of
$571 for a single Bitcoin. The more drugs
traded, the higher the value, and the more
Bitcoin hoarded rather than spent, the higher
the value.
Drug dealers might be willing to put up with
the limitations of Bitcoin, notably the
uncertain time taken to complete a purchase and the high transaction costs. Laundering
dollars is more expensive. But studies cited by the United Nations Office on Drugs and
Crime suggest that cryptocurrency-based online drug dealing remains relatively small,
and focused on retail, meaning fewer and smaller transactions than Mr. Davies’ limiting
assumption, so justifying a much lower Bitcoin price.
On this basis the current price of $3,950 is mostly speculation, and J.P. Morgan
Chase & Co. Chief Executive James Dimon’s comparison to the 17th-century Dutch
tulip mania is apt.
Bitcoin is “being driven all over the place by speculative portfolio flows,” says Mr.
Davies.
Digital gold might be more appealing for Bitcoin’s true believers, who would surely
prefer to avoid basing a currency on illegal activity. Gold is hopeless if you want to pay
the mortgage or buy bread, but is useful insurance because we can be confident that if a
government currency collapses the shiny metal will roughly hold its value. It helps that
history holds plenty of examples of currencies losing all their value to hyperinflation
while gold could still be bartered for food and shelter.
Gold has a value far above what is justified by its uses in electronics and jewelry only
because (almost) everyone agrees that it has value. That “network effect” is what Bitcoin
needs to establish itself, and the more attention it garners, the more likely it is to
become established. Yet, gold has had thousands of years and a history of being used to
back money to support its position. Technological disruption may be overturning many
societal norms, but securing society-wide recognition as a safe asset takes more than the
backing of tech evangelists and a bunch of get-rich-quick stock promoters.
Still, the potential to replace gold gives us some figures to work with. Thomson Reuters
GFMS estimates there were 2,155 metric tons of gold held in exchange-traded funds.
Switch all of that into Bitcoin and it would justify a price of about $5,500 for the 17
million Bitcoins currently outstanding.
We could be more optimistic and think Bitcoin might replace gold coins and bars. Leave
aside that the gold is better than Bitcoin because gold doesn’t depend on having an
electricity supply, and the 24,000 metric tons GFMS estimates have been bought for
investment in the past half-century would justify a price of $61,000 for every Bitcoin.
If we assume that Bitcoin will either succeed completely in displacing gold or fail and be
worth zero, it helps explain why the digital token has been so incredibly volatile, with a
40% loss in two weeks, and a 33% rebound since Friday’s low. Based on the simple choice
between total success and failure, we can very roughly say that Bitcoin at 70% of the gold
ETF-derived price suggests a 70% chance of displacing so-called paper gold as society’s
chosen emergency store of value, and a 6% chance of displacing physical gold. Even
digital dreamers should accept that is far too high.
James – if you are reading this, come back to reporting on cryptocurrencies when you have more of an understanding of what is going on because you are all over the place and I don’t have the time to refute all of what you have said.
You didn’t even have the conviction to say Bitcoin is worth zero. You had to use “probably” in your title to cover your ass.
Here is another article by Stan Schroeder titled “What’s the value of Bitcoin. No One Knows.”
http://mashable.com/2017/09/19/how-much-is-bitcoin-worth/#vNbkCKKL6kqX
It’s my fault to think that I would come away with anything concreate. I could have just read their titles to know that they don’t plan to say anything valuable to walk away with.
What is Bitcoin’s Worth? is the ultimate interview or essay question where we will accept any answer where it is more important is to show us how you arrived at your answer then the answer itself.
Well, that is great for interviews and as a college SAT essay. It’s certainly not want I want to read to get informative up-to-date news on Bitcoin or the cryptomarket.
Resteemed all your posts and increased the upvotes :P
Thanks minnowpond. I knew you would!
I, too, was a bit annoyed when I saw that article in the WSJ yesterday. I think people don't want it to be worth anything. Sire Bitcoin has its problems, but it's threatening to disrupt the financial structure that has dominated the world for years. I think that's the main reason why we see people like the Chase CEO say it's worthless and then instruct his company to buy a stake in it.
What a world we live in...
Thanks for sharing.
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