In the financial world, value is everything. Understanding the true value of a stock, a commodity or currency can be a complex process involving things like free cash flows, asset-based analysis and other arcane concepts, but the underlying idea is pretty simple. “Is this thing I want to buy worth the asking price?”.
If it’s valued too high, it’s probably a bad investment. If it’s valued too low, it might be a source of profit. As Warren Buffet once said, “Price is what you pay. Value is what you get.”
When it comes to bitcoin, however, traditional valuation models are too antiquated to provide much insight. Valuation experts have been consistently baffled by bitcoin, and respected analysts have offered perfectly rational estimates ranging from $10 to $1 million. There’s no consensus, and part of the reason for this is that nothing like bitcoin has ever existed before. It’s completely changing how we think about money, assets and value.
I’m not an expert in valuation, but I know enough to understand that old ways of valuing things like stocks or commodities simply don’t fit bitcoin. It’s like trying to measure the internet with a ruler: It doesn’t make sense. In this article, I’d like to give you a few new ways to think about how to come to the current value of bitcoin.
Is Bitcoin a security?
“A financial instrument that represents: an ownership position in a publicly traded corporation (stock), a creditor relationship with governmental body or a corporation (bond), or rights to ownership as represented by an option.” – Investopedia
One of the biggest mistakes experts make when they attempt to place a value on bitcoin is thinking about it like a company. In fact, you’ll often hear them refer to bitcoin as if it was an organization, even though that couldn’t be further from the truth. Bitcoin is open-source software, used to varying degrees by millions of people. Just like the internet is a group of computers all sharing information, bitcoin is a group of computers sharing a financial ledger.
Because bitcoin isn’t composed of one company and its assets, it doesn’t have an “underlying” or “intrinsic” value. Tens of thousands of companies and millions of people use bitcoin, but no one actually owns the network. Trying to value bitcoin like a company’s stock simply doesn’t make much sense.
Is Bitcoin a currency?
“A generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy.” – Investopedia
Many people, and even some governments, have declared that bitcoin should be treated like a currency. From the perspective of a financial regulator, this even makes some sense. It can be exchanged in much the same way a foreign currency is, and it can be used to buy things much like a credit or debit card. Surely, bitcoin is a currency!
The problem with thinking about bitcoin as a currency is that it doesn’t actually work like one. Most countries have central banks that issue their money. By analyzing the country’s debt, GDP and other factors, an analyst create a precise value for its currency. If the government wants to alter the relative value of its currency, the central bank has a wide range of options for making that happen, such as devaluing the currency through inflation.
Bitcoin isn’t issued by any government or central authority. It exists completely outside of international borders, and there is no direct way for anyone to change its volume or value. While governments can dictate how their citizens use bitcoin, bitcoin itself can’t be regulated. Trying to analyze it in the same terms as a local currency like the dollar, the euro or the yuan simply won’t work.
Is Bitcoin a commodity?
“A basic good used in commerce that is interchangeable with other commodities of the same type.” – Investopedia
According to the U.S. tax authority, the Internal Revenue Service, bitcoin is a commodity. As the IRS sees it, digital currencies are much like gold or silver. They have value, every tradable unit is functionally identical, and in some contexts they are used as a medium of exchange and a store of value. In that context, it makes sense to view bitcoin as a non-physical commodity.
It’s certainly true that bitcoin is often compared to gold, largely because gold has more-or-less the same value everywhere in the world. Like gold, bitcoins can also be exchanged for regular currency to be used for everyday products and services. Unlike gold, however, you can also use bitcoin without converting it to currency.
As long as you have access to the internet in some form (even via CoinPip’s SMS gateway), you can use bitcoin. While gold and silver can be stolen easily, stealing bitcoin is extraordinarily difficult. Unlike gold, any amount of bitcoin can be sent to anyone, anywhere in the world, in seconds. Whole fortunes can move without anything needing to cross a border, go through customs or be declared.
Is bitcoin fairly defined as a commodity? Time will tell. But bitcoin’s similarity to commodities isn’t a strong one. As such, using traditional methods for valuing a commodity, such as futures analysis, generally don’t apply to bitcoin.
What is bitcoin then?
If bitcoin isn’t a security, currency or commodity, what exactly is it? If you can’t easily define it, how on earth can you expect to create a realistic value for it? It may be a groundbreaking technology for finance and payments, but does it have to be so confusing?
I’m not here to confuse you. As I mentioned, even the greatest financial experts in the world disagree on what exactly bitcoin is. Almost all of them agree it’s a potentially world-changing technology, even if it won’t behave and fit neatly into a box. Every day, bitcoin’s ecosystem and value grows and changes, and it looks more likely that the traditional experts will have to come up with a new way of estimating value to explain what bitcoin is actually worth.
Here at CoinPip, we’re growing and learning with bitcoin. What we’ve learned is pretty simple: If someone claims to know how much a bitcoin is worth, you should stay away from them. Bitcoin is still in its very early stages, and its value will change rapidly as the world adapts to its innovations. That value is very likely to go up over time, but exactly how high is anyone’s guess.
Here’s what we do know: The bitcoin protocol will only create 21 million bitcoins between now and 2140. At the moment, there are around 12.8 million bitcoins in circulation, with around 3,600 new ones being “mined” each day. The amount of new bitcoins being mined will reduce at a completely predictable pace.
Unlike the a standard currency like the U.S. dollar, bitcoins are finite. There is no Federal Reserve to pump new bitcoins into the economy. Even though bitcoins can be used like currency, they’re even more finite in supply than gold. Unlike gold, bitcoin cannot be turned into a product, removing it from circulation. By definition, bitcoin supply is limited, grows at a defined rate, and the total number and location of every coin is traceable by anyone looking at the public ledger, called the “blockchain.”
Because the supply of bitcoin is limited, any increase in demand tends to have an impact on the value. This is one case where bitcoin actually follows a well-known rule of value: The greater the demand and the lower the supply, the more something tends to be worth. When only a few people in the world knew what bitcoin was, the demand was low, and a single bitcoin was worth less than a dollar. Today, most people have at least heard of bitcoin, and millions of people have bought a little. As a result, a single bitcoin is worth hundreds of dollars, and has been worth as much as a thousand.
Knowing that the supply of bitcoins is limited, and understanding the value people have already given it, you can decide for yourself where the price of bitcoin will go in the future. At the moment, bitcoin is still seen as a risky investment, mostly because it is new and poorly understood by analysts and their customers. As more people begin to see the potential of a bitcoin, however, many of them will want to try it out. So if I ask you now, what is 1 bitcoin in usd today? Are you confident enough to give me your reasoning for it? Rhetorical question :).
Bitcoin Exchange Rates
Nevertheless, it’s still important to keep track of current prices of bitcoin. There are many websites that provide bitcoin prices now. Below are some of them.
- Bitcoin Charts (Very good tool that shows extensive bitcoin price charts)
- Google Finance
- Yahoo Finance