Fundamental value of Bitcoin

[JackRab]

Now, I'm not full with in-depth knowledge of the tech behind Bitcoin... but I do know somewhat about economics and monetary workings and concepts.

I've been thinking about the intrinsic value of bitcoin... and any currency really.

I'm in the group of people who believes bitcoin could have a value when it's actively being use a a means of transaction/exchange of goods and services. Without that use, I don't see it should have any value really... it should be about utilization. Without that, it's a gimmick, it wouldn't be adopted widely... I don't see the point. Not talking about the technology behind it, but that technology is there now, even without the actual coin. So I believe in some value and future use of the blockchain technology in other areas... but that can and should be separated from the value of the coin itself.

If you look at normal fiat currencies... which arguable are not really backed by gold anymore, they are mainly used to buy and sell goods and services. Currency is a means of exchange. And it's a relative value, how much can I buy with 1 dollar/euro/etc?
Goods and services are measured by GDP... Money by the money supply, of which IMO M2 is the most appropriate, it's what's held in savings/deposits/cash.

So money lubricates the economy... it's utilized in creating GDP... without money as a means for exchange it's very difficult to create an economy and trade goods. So money services GDP.

The US money supply (M2) is about 13.5 Trillion USD. And the GDP is about 18.5 Trillion USD, that's a ratio of about 70%. If the GDP would be double that... you need more money flowing around to servive that, so you would have to increase the money supply...
That M2/GDP ratio is roughly the same for all major economies, between 65% and 90%.

Relating this to Bitcoin... if BTC is used as a true currency, as a means of exchange in goods and services... the value is related to it's GDP. So, how much bitcoin is used in actual goods and services transaction, excluding any USD/BTC trading?

Currently the money supply of BTC is 16.5 mln units at a value of about 75 bln USD (= M2 in USD). So if you use the 70% ratio, the amount of goods and services in BTC would be 23.5 mln BTC at a value of 105 bln USD yearly. IMO, if there's less BTC utilized this way, say 25 bln USD in yearly transactions, that would mean BTC should be about 1060 USD.

If it would truly replace the USD as transactionary system, the sky is pretty much the limit, since at a maximum of 21 mln bitcoins... you do the math... it will be 700.000 USD value per BTC. But then there are the other digi coins that will dilute the value when they are widely accepted and used...

Does this make sense?

Can anyone else give me a decent analyis of why it would be worth x? Because I haven't heard any valid argument of why it should be at 4500 USD... except for it will go higher, or TA says so... which are both non-arguments since they don't give a proper economical analysis of value....
Anyone who says it's going to be at 20k since it's in an upward trend... that's just TA, and doesn't hold any fundamental arguments...

Not interested in the "I love it" or "I don't" or "I think it should be 0"... I need arguments on why it would have a value and how to assess that value.

 

[JackRab]

Also, if we are in the scenario of 1 BTC = 700.000 USD... that would basically mean that the USD itself is not used anymore and totally dropped in relative value. It would be similar to Zimbabwe, where inflation in USD would have skyrocketed and say a loaf of bread would cost 10k USD, and the value of BTC in goods would have gone to say a loaf of bread = 0.015 BTC.

Basically there will be financial mayhem.... and the USD and any other normal fiat currency is dropped as a means of exchange.

Probably the current way of life is gone... and I wonder if the internet would even exist, in which case Bitcoins can't be used anymore since it's network can't be run anymore... and we all live in tents... and we all come together to sing songs around a campfire about past lives and the new gods... blablabla

I find it hard to believe this would actually happen, so don't take this part too serious.

 

[sss12]

Now, I'm not full with in-depth knowledge of the tech behind Bitcoin... but I do know somewhat about economics and monetary workings and concepts.

I've been thinking about the intrinsic value of bitcoin... and any currency really.

I'm in the group of people who believes bitcoin could have a value when it's actively being use a a means of transaction/exchange of goods and services. Without that use, I don't see it should have any value really... it should be about utilization. Without that, it's a gimmick, it wouldn't be adopted widely... I don't see the point. Not talking about the technology behind it, but that technology is there now, even without the actual coin. So I believe in some value and future use of the blockchain technology in other areas... but that can and should be separated from the value of the coin itself.

If you look at normal fiat currencies... which arguable are not really backed by gold anymore, they are mainly used to buy and sell goods and services. Currency is a means of exchange. And it's a relative value, how much can I buy with 1 dollar/euro/etc?
Goods and services are measured by GDP... Money by the money supply, of which IMO M2 is the most appropriate, it's what's held in savings/deposits/cash.

So money lubricates the economy... it's utilized in creating GDP... without money as a means for exchange it's very difficult to create an economy and trade goods. So money services GDP.

The US money supply (M2) is about 13.5 Trillion USD. And the GDP is about 18.5 Trillion USD, that's a ratio of about 70%. If the GDP would be double that... you need more money flowing around to servive that, so you would have to increase the money supply...
That M2/GDP ratio is roughly the same for all major economies, between 65% and 90%.

Relating this to Bitcoin... if BTC is used as a true currency, as a means of exchange in goods and services... the value is related to it's GDP. So, how much bitcoin is used in actual goods and services transaction, excluding any USD/BTC trading?

Currently the money supply of BTC is 16.5 mln units at a value of about 75 bln USD (= M2 in USD). So if you use the 70% ratio, the amount of goods and services in BTC would be 23.5 mln BTC at a value of 105 bln USD yearly. IMO, if there's less BTC utilized this way, say 25 bln USD in yearly transactions, that would mean BTC should be about 1060 USD.

If it would truly replace the USD as transactionary system, the sky is pretty much the limit, since at a maximum of 21 mln bitcoins... you do the math... it will be 700.000 USD value per BTC. But then there are the other digi coins that will dilute the value when they are widely accepted and used...

Does this make sense?

Can anyone else give me a decent analyisi of why it would be worth x? Because I haven't heard any valid argument of why it should be at 4500 USD... except for it will go higher, or TA says so... which are both non-arguments since they don't give a proper economical analysis of value....
Anyone who says it's going to be at 20k since it's in an upward trend... that's just TA, and doesn't hold any fundamental arguments...

Nice job...looking forward to hearing the responses.

 

[Pekelo]

The short answer is, nobody knows. For the long answer, let's use a maybe not so good analogy, the telephone.

When the telephone was invented, what was the value of 1 telephone? Well, beside the uniqueness, zero. Telephones are for communication and you need at least 2 to make them useful. So what was the value of the first 10 telephones? As long as they were in the hands of the same family and friends, at least they could communicate with each other, so there was a serious practical value for those people. But the real value came when even common people could afford to have a machine that let them speak to each other far from one other.

But with mass production and widespread usage also came cheap price. As technology improved for the same price you could get better and better telephones.

The same with cryptos really. The first bitcoins were worthless and useless, you couldn't buy anything for them and nobody wanted them. Once practical usage came with them and they were accepted more and more, their value increased. But in a good old capitalist fashion so did competition, and even better cryptos arised. So once people recognize that there is nothing special or unique about one particular crypto over another, not to mention they can be created cheaply and easily, their price will drop, although their usability might stay forever.

Remember: usability =/= value

Just like today with a cheap burner cellphone, everyone can have them in the future, but that doesn't mean they will keep their high evaluation...

 

[O(1)]

Relating this to Bitcoin... if BTC is used as a true currency, as a means of exchange in goods and services... the value is related to it's GDP. So, how much bitcoin is used in actual goods and services transaction, excluding any USD/BTC trading?

I wonder if Bitcoin is seen as more of a medium of exchange or more as a store of value?

 

[NeoTrader]

Can anyone else give me a decent analyis of why it would be worth x?

This is the million dollar answer that nobody has... And not just for bitcoin, for just about anything... Why does a certain stock or commodity is worth "X"? Sure there are fundamentals that, to a degree, are important and participate in forming the price of the "thing", but at the end off the day, if there was actually a way to know exactly why a certain thing was valued, in theory, the person who knows this would be able to predict price movement, which is impossible, and would basically be a infinite source of "free" money.
But, regarding the value part of bitcoin, as with any currency that is not backed up by anything(which virtually are all of the present day currencies), the only thing that gives value to it, is people's belief that it is worth something, which means that he or she can accept that as payment, because other people will do it too, when he or she tries to use it to buy something. That is especially true today, a time where virtually all governments print money to do "taxation without representation" and many other stupid things. This, imho, makes descentralized cryptocurrencies increasingly attractive and it will naturally affect the relation between bitcoin and other govenment issued currencies. And let's not forget the good old supply and demand.
People might think that the dollar or other government issued currency has value because it is backed up by the goods and services of the american economy, and to a certain extent, this is true. But the real reason is simply that people believe other people will accept dollars as payment too...

Regarding another part of your post, I'd like to add something that is related to what I just wrote. You said: "If the GDP would be double that... you need more money flowing around to servive that, so you would have to increase the money supply..."
I used to believe that too... If GDP grows, money supply HAS to grow too. That is actually not true. I'm reading "A monetary history of the United States" by Milton Friedman and Anna Schwarz. In this book, he mentions that twice in the history of the U.S. there was no printing of money sufficient to follow the growth of GDP and the result was deflation, which did not hinder the growth of the country at all. Deflation was merely an adjustment to the exceding growth of production compared to the quantity of money available. So this makes you wonder: Is this story about the necessity of printing money to trace the growth of goods and services produced just another lie to justify more govenment intervention(by the FED, in this case)?
As you know, bitcoin has a very definite number of coins that will be issued and not only the competition with other currencies, but also the world's GDP would influence it's value to a certain extent... And since it is not government issued, I suspect(and this is just me speculating now), that the fundamental analysis of bitcoin will have much more relationship with the goods and services produced, than the government issued currencies, which will make the former increasingly more stable than the latter.

 

[SoesWasBetter]

whats the value of two lips? depends what they are wrapped around.

 

[peilthetraveler]

The value of bitcoin is it's volatility and the amount of money people are willing to put into it to trade it for a quick profit. People trade $2 billion dollars worth of bitcoin per day. That's almost twice the value of what people trade in Googles stock price every day.

Trading in bitcoin right now is like trading in a dot com era stock. You can make 10% per day trading it. That's the reason its value is so high right now.

Bitcoin missed it's chance to actually be something useful. Now its just a tool for making/losing money.

 

[lovethetrade]

I've been thinking about the intrinsic value of bitcoin... and any currency really.

Whether something or anything has intrinsic value or not is philosophical, a matter of opinion and has been debated for centuries.
https://plato.stanford.edu/entries/value-intrinsic-extrinsic/#WhaHasIntVal

With regards to Bitcoin, I don't think one can differentiate between its intrinsic or market value to determine if it's trading at a premium or discount. Technical analysis would probably be the next best option due to the speculative nature of the asset.

With regards to market value, I think there's a synergy of factors that contribute towards it. These include:

1. Its use as a non-inflationary store of value and better alternative to gold.
2. Scarcity and difficulty in creation.
3. The ability to control it, move it around freely and trade it without third party intervention and with minimal delays and transaction fees.
4. Expected price appreciation. The market expects ts value to keep rising due to its increasing scarcity and evolution so it represents a better investment alternative to storing fiat money in a savings account or fund earning low interest.
5. Its new technology, millennials and an ever increasing amount of early adopters immediately embrace new technology that gives them more control and convenience over their lives.
6. Anti-government and institutional sentiment post GFC.
7. It's decentralized, secure and more private (debatable for Bitcoin) than other forms of payment.
8. It's easily accessible and supported by all the exchanges so can be easily traded with other currencies and with minimal delay. There's none of the excessive red tape you get with regulated markets.
9. Barriers to entry are almost non-existent, doesn't require significant capital
10. One can quickly and easily build a portfolio without paying the excessive fees usually associated with share purchases. You don't need to purchase equipment or a platform licence to actively trade it.
11. When trading it, there's no intermediaries, brokers or market maker and no conflict of interest.
12. It has the largest market capitalization and highest daily trading volume. More exposure seems to translate into a higher value. This was seen with Monera just recently.
13. It's viewed as the most stable cryptocurrency making it the most trusted by counterparties.
14. It has the largest number of miners and hash power directed towards mining it.
15. It's becoming more accepted in online retailing as a form of payment e.g newegg.
16. Strong brand name and public perception.

In a nutshell, there's a competitive market for it now, volume and interest has increased exponentially which is driving its market value and promoting its evolution towards becoming a standard form of online payment, store of value and unit of account. You could probably argue there's bit of self-fulfilling prophecy going on because the market wants the technology to succeed whether it currently offers actual, quantifiable value in an economics sense or not.

Because I haven't heard any valid argument of why it should be at 4500 USD... except for it will go higher, or TA says so... which are both non-arguments since they don't give a proper economical analysis of value....

It worth 4500 USD because that's its market value based on market capitalization and number of coins in circulation.

 

[O(1)]

1. Its use as a non-inflationary store of value and better alternative to gold.
2. Scarcity and difficulty in creation.

1. Isn't that assuming that Bitcoin will be the only crypto? How will it be noninflationary when you can find more and more cryptos that can do the same thing?

2. Once mining coins slows down or comes to completion, why will miners not want to move on to mining incentives from other coins? Especially after they've invested so much money into their rigs..