How much is Bitcoin really worth?

    29 Nov 2021

    There are two big questions considered “uncouth” in financial circles. For fiat currencies, it is: “What backs the central bank-issued money?” For cryptocurrencies: “How much should 1 BTC actually be worth?”

    Recently in the United States, Republican Senator Cynthia Lummis from Wyoming told CNBC that bitcoin is the standard, so, unlike other cryptocurrencies, it’s not going away any time soon. “Bitcoin is the standard. Other cryptocurrencies need to be assessed separately because they were created in a different way”, – noted the senator.

    In late July, Lummis argued that the depreciation of the US dollar is accelerating the adoption of cryptocurrencies like Bitcoin. According to the senator, this is the stupidest and most inflationary way to push people towards using digital assets. She also talked about the advantages of bitcoin. Digital money could halt the devaluation of the US dollar and other fiat currencies, Lummis claimed.

    She is not the first to bring up the idea that BTC should at some point become a kind of standard in finance. However, it raises an essential question: what is its real value? Or, more accurately, what price for 1 BTC can be considered correct. Incidentally, the question is a real rabbit hole: I learned from experience that the more you immerse yourself in it, the less you understand what “correct” even means in this context.

    To begin with, there are two opposing points of view about what price to call “correct”. The first is that an asset is worth what people are willing to pay for it. In we accept it, the conversation is over: one Bitcoin token is worth $ 65,000 – or whatever the price is at any particular moment.

    Right now, the asset value is determined by market mechanisms based on the supply/demand ratio. How much is the owner of the crypto coin ready to sell it for, and what does the buyer agree to pay? Naturally, the owner wants to sell at a higher price, and the buyer wants to pay a lower price. Somewhere in between, their interests will meet – thus, we get the market price of BTC. At the same time, the question of how economically justified it is remains open. An asset can be both overvalued and undervalued.

    Another opinion is that the value should be based on the cost of mining, i.e., the production of 1 BTC.

    The miner has operating expenses – the cost of equipment, electricity bills, maintenance, air conditioning systems, rent of premises, employee salaries, etc. And all this with a high hash rate. According to experts in the area, the cost of mining one bitcoin is now at least $ 15,000 – $ 18,000.

    However, no one ever sells in-demand assets at prime cost. There is a reason for Bitcoin’s $ 1.3 trillion capitalization – it reflects (except, possibly, overbought) its great economic importance as one of the foundations of the new financial system.

    Here we see the influence of trust as a factor in the real cost of BTC. The comparison to classical finance is appropriate since the euro or dollar exchange rate is also based partially on trust and is not just the result of clashing supply and demand.

    As in the traditional financial market, trust is backed by infrastructure (the dollar or euro is backed up by the banking structure, economy, GDP, and so on). In turn, cryptocurrencies are backed by financial institutions, exchangers, exchanges, a vast mining infrastructure, and most importantly, by an increasing number of people using them in everyday life.

    Despite all the volatility, Bitcoin allows its owners to maintain and increase the value of the capital invested in it. At the same time, it remains an effective speculative tool. Notably, this unique combination of properties in one asset is a distinct feature of cryptocurrencies.

    Finally, there is one somewhat irrational factor upholding the value of Bitcoin in people’s eyes. It is the feeling that something is fundamentally broken in the global economy. People are not satisfied with the banking system and its total control over money, assets, expenses, and income, with class inequality, the printing press, the actions of politicians. Advances in technology and the desire to become more self-reliant have motivated people to create and support Bitcoin. And – thanks to its independence – BTC is, in a sense, trusted more than traditional assets.

    Using their methods of calculating the value of financial assets, analysts at JPMorgan concluded that the actual cost of bitcoin is $ 35,000. The assessment method itself wasn’t revealed; analysts only clarified that they compared the first cryptocurrency with gold. According to them, the volatility of digital assets’ prices is four times higher than that of the precious metal. If the fluctuations in the bitcoin price were halved, its real value could be as high as $ 73,000, JPMorgan experts said.

    While I tend to agree with JPMorgan’s estimate (around $ 35K for one BTC), Bitcoin still must be viewed as primarily a market instrument. Its current price fully reflects the value it has in the eyes of market participants. The issue is, it is determined more by the asset’s investment attractiveness, not by its use as money. Here we see a kind of “division of labor”: there are crypto coins that are more convenient to use as a means of payment, those that are more convenient for DeFi services, and then there is Bitcoin – an investment tool and the “golden standard” for the crypto industry. Although this does not negate the fact that BTC is now quite overvalued, and its current exchange price is based more on the excitement around it than on its real value (which is still very impressive).

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