Bitcoins price has been on a wild ride. 2017 alone saw massive gains – starting the year at under $1,000 and at its peak reaching $19,694! As Bitcoins popularity surges & its price rises and falls, more and more people are asking the same question…
“How does Bitcoin, something that’s essentially invisible and intangible, have value?”
Scarcity & Utility
Scarcity just means that the supply is finite. In the case of Bitcoin, there’s actually a set cap on the number of Bitcoins that can ever exist – 21 million.
Ben Yu, a blockchain expert living in San Francisco, says this set cap makes it more desirable that other assets – even gold!
“We can have things like the California gold rush, where people find an enormous supply of gold just by accident somewhere and that can dramatically increase the supply over time…Or technological increases make it far easier for us to mine gold. So we actually see that today we mine gold at four times the rate that we did just one hundred years ago.”
So if Bitcoin checks the box for scarcity – what about its utility?
Bitcoins utility lies in its potential to be a more efficient currency or commodity than we already have. Proponents say it’s useful for a number of reasons.
First, Bitcoin is decentralized. This means that no bank, government or single person has control over it. It can’t be toppled by corruption at the top. Another use of Bitcoin is that its trivially divisible, meaning you can buy a donut with it as easily as you could buy a house or even a mansion.
“Gold is very difficult to use transactionally. You can’t go to the store and shave off some gold shavings to pay for your cup of coffee or buy a car with it.” – Ben Yu
And third, the code it’s built on is open source, meaning its available for anyone to look at, scrutinize, and even modify. But as you may noticed, none of those uses are intrinsic and that’s a point Bitcoin skeptics love to make…
“The idea that it has some huge intrinsic value is just a joke.” Warren Buffet – Berkshire Hathaway Chairman & CEO
But here’s the thing… Other assets and currencies that we trust, like gold and paper money, don’t have that much intrinsic value either. Take dollar bills for example. According to the Federal Reserve, it costs about twelve cents to create a $20 bill. So the rest of that twenty bucks – the remaining $19.88 comes from the trust people place in it.
“…& that’s actually exactly the same with Bitcoin. Fiat currencies and Bitcoin & almost any other form of money is just based on the trust that people place in it.” Ben Yu
Tom lee (Managing Partner & Head of Research – Fundstrat Global Advisors) says that Bitcoin is no different from Facebook or Google.
“If you ask a baby boomer, ‘Can you justify the value of anything that’s a digital business.’ They probably don’t accept that Facebook, Google, Netflix, Amazon, Apple, I mean, these are the largest companies in the S&P 500 and they’re primarily digital businesses built almost purely on digital trust.”
So if we agreed Bitcoin has some value – at least for some people, then how much could a single Bitcoin actually be worth? We see people on T.V. making predictions all the time…
But how are they actually getting these numbers?
A lot of them do it by comparing Bitcoin to Gold because they perceive those two assets as being most similar to each other. The total value for all the gold ever mined in the world is about $7.5 trillion dollars. So if Bitcoin were to replace gold completely, then each Bitcoin would be worth $357,000 Its simple math…
The total value of gold – divided by the total number of Bitcoins – equals the potential value of each Bitcoin.
$7.5trillion ÷ 21million = $357,142.86 (potentially)
Or if you want to more realistic, just take a portion of it…
“If Bitcoin just captures %5 of the total market for alternative currencies today, which is predominantly gold, Bitcoin’s worth $25,000 per coin.” – Tom Lee
And here’s another theory analysts use to price Bitcoin – Metcalfe’s Law.
Metcalfe, an electrical engineer, proved that the value of a social network or telecom company is proportional to its number of users – squared. A good way to think about it is like this…
A single telephone is useless. But the value of telephones increases exponentially as others get phones. Metcalfe’s Law holds for Facebook using ten years of data &
Tom Lee says it holds for Bitcoin –” Since 2013, 94% of the value of Bitcoin has been explained by just those two variables.”
Ultimately, Bitcoins price will depend on the demand for it. If people believe in it and continue to buy it more than they sell it, then the price will rise. And conversely, if Bitcoin is sold more than its bought, the price will fall. Many people think that Bitcoin is a bubble and that’s predicated on the concept that Bitcoin has no value – but there’s reason to believe that simply isn’t true. By definition, Bitcoin is scarce. And the crypto may have utility as a superior way to store and exchange wealth.
For more information about Bitcoin and other crypto-currency prices, visit CoinMarketCap.
Editor’s Note & Disclosure: The author invests in cryptocurrency markets. Neither the author nor New Age Crypto endorses participation in any token sale or cryptocurrency investment, all of which have significant inherent risk. Seek advice from a financial advisor as well as do your own due diligence before considering investment. This Blog post was originally transcribed from a CNBC video that can be found here.