Want to Know Bitcoin’s Value?

2017 was Bitcoin’s year.

Yes, it had huge gains…but it also started to sift into the mainstream.

Yet while bitcoin has become quite popular, it’s not widely used and is still highly volatile.

So, what´s bitcoin´s real value?

Is it 300…5,000…500,000…1,000,000…0?

The truth is, no one can agree.

It is even hard just to agree on what bitcoin is. Is it an asset, a currency…tulip mania?

But that’s what two economists recently tried to determine during a night out, that is, they tried to figure out bitcoin’s value.

They called their process Côtes du Rhône theory. Yep, you guessed it, that’s the wine they were drinking.

The true value of bitcoin

Here is their thought process, as reported by Bloomberg:

Writing on a tablecloth, Jackman and Savouri turned to the quantity theory of money. Formalized by Irving Fisher in 1911, with origins that go back to Copernicus’s work on the effects of debasing coinage, the theory holds that the price of money is linked to its supply and how often it’s used.

‘Here’s how it works. By knowing a money’s total supply, its velocity—the rate at which people use each coin—and the amount of goods and services on which it’s spent, you should be able to calculate price. Estimating Bitcoin’s supply at about 15 million coins (it’s currently a bit more), and assuming each one is used an average of about four times a year, led Jackman and Savouri to calculate that 60 million Bitcoin payments were supporting their assumed $1.2 billion worth of total U.S. dollar-denominated purchases. Using the theory popularized by Fisher and his followers, you can—simplifying things somewhat—divide the $1.2 billion by the 60 million Bitcoin payments to get the price of Bitcoin in dollars. That’s [US]$20.’

Yep, they determined that one bitcoin is not worth the US$8,924 (its current value at time of writing)…but a mere US$20. They think Bitcoin is overvalued by about 44,000%.

The problem is, as the article continued, that several people used the same theory to determine bitcoin’s value and have gotten completely different values. Using the same equation, they got US$20, US$600, and US$15,000.

So, which one is it? What is bitcoin’s true value?

The bigger picture

Well, what if I told you that they are looking at it all wrong?

That bitcoin’s value doesn’t matter. That it is not about price, but about something else.

That’s what we heard from Sam Volkering, our crypto in-house expert, during Port Phillip’s Paradox of Prosperity summit last week. As he said:

The natural obsession is to take the idea of cryptocurrency and convert it to price. There is one fundamental problem that people have with cryptocurrency. They try and understand what´s happening and try and understand what´s coming in the future. Is they always think about it in fear of money prices. That is wrong. Don´t think about it in price. Don´t think about it in dollars.

So, how do you actually make money from it if you don’t think about it in dollars? Especially when all you hear in the news is price.

As Sam continued:

 ‘The bigger picture here is that we are building an alternative financial system. Alternative infrastructure. Data, privacy, communications.

That is, bitcoin’s value is not coming from price. It’s about more than just putting $100 in and getting back 5,000…100,000 or zero.

It’s about creating an alternative system with new infrastructure built around blockchain technology.

Blockchain technology is revolutionary

If you are not familiar with blockchain technology, it is a shared public ledger, a database that every member of the network can see and contribute to.

As Sam said:

They [the media] just want to report on the price. But the news you don´t get from those organizations is that there is infrastructure being built. There are communication networks being built. […]They don’t tell you about the cryptography, the mathematics, the code and programming. They don’t tell you about the influx of human capital coming to this space. They don’t talk to you about the background of blockchain, about the distributed ledger. They don’t tell you about that because they don’t care cause it’s the news. They just want to tell you about the price. They don’t tell you that it is just cryptocurrencies, it is cryptoassets. It’s a crypto economy. It’s a new economy, it’s a new system. What they are building is bigger than what you hear in the mainstream…we are talking about a cryptorevolution, beyond just bitcoin. It’s bigger than that.’

That is, it’s about creating a whole new economy. An alternative system building new infrastructure that could revolutionize every industry.

An opportunity to create a more efficient system, one where everyone can participate.

But I would love to hear what you think.

Do you think crypto and the blockchain technology will revolutionize the system? That is, are you a crypto-believer? Or do you think cryptos are in a bubble, one that will crash and burn?

Write me a note and let me know. You can reach me at cs@portphillippublishing.com.au.


Selva Freigedo,
Editor, Markets & Money

PS: The crypto revolution is only starting and there is a lot of money coming into this space. There will be winners…but there will also be (lots of) losers. If you want to know what cryptocurrencies Sam believes could change our industries forever, click here.

Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money