How To Value Bitcoin

By: Wayne Duggan

The price of bitcoin has exploded this year, making it one of the hottest investments in the market. The price of bitcoin is up more than 1,000 percent in 2017 from around $1,000 per coin to above $11,000 per coin.

Bitcoin’s extreme volatility has provided plenty of opportunities for short-term traders, but long-term investors are struggling to come up with a way to assign a true value to the cryptocurrency.

The Value Problem

For bitcoin bears, the core of the argument against sky-high bitcoin prices is that the cryptocurrency has no intrinsic value. It cannot be eaten, used to construct a house or used for self-defense, for example. But it shares all of these traits with another popular and valuable investment: gold. For centuries, gold has held onto its value despite the fact that it has limited utility.

Since, unlike gold, bitcoin’s supply is capped, its price is determined by market demand alone. Unfortunately, determining long-term demand for bitcoin is where the trail runs cold for potential value investors. If bitcoin continues to gain mainstream acceptance as a means of buying things, demand could continue to grow indefinitely. If the bitcoin speculation craze passes and/or another cryptocurrency becomes the trendy choice, the price of bitcoin could drop back to where it was in 2010 when 10,000 bitcoin bought one user exactly two large pizzas.

Utility And Energy

Despite the fact that bitcoin has no intrinsic value, some bulls argue that bitcoin’s actual value is in its utility and functionality. In addition to being (mostly) anonymous, bitcoin is easily used internationally, is (mostly) free from taxes and regulation, runs on a unique blockchain technology and is “programmable” in nature. These qualities make bitcoin a much more useful tool than traditional currency for certain types of financial transactions.

Other bulls argue that bitcoin’s value is a reflection of how difficult it is for bitcoin miners to obtain it. As bitcoin approaches its supply cap of around 21 million coins, the computations required to mine it get more and more complex. Today, the energy required for all the global bitcoin mining alone is more than the total electricity consumed by the country of Ireland. Even the advanced machines used for bitcoin mining can cost tens of thousands of dollars before they are even plugged in.

But even if investors see value in bitcoin’s utility and acknowledge the cost and difficulty involved in mining it, it’s still nearly impossible to put a dollar value on the cryptocurrency without some kind of framework to use as a guide.

The Latest Developments

For bitcoin traders, on the other hand, the currency’s volatility is nearly unparalleled. Traders have been watching closely this week as bitcoin seemed to pick up major positive momentum at the same time popular tech stocks had their worst day in nearly three months. By identifying potential correlations with tech stocks or other assets, bitcoin traders can look for pair trades or other ways to mitigate the risk of trading bitcoin.

The CBOE, CME, and Nasdaq have all announced they will launch bitcoin futures (CBOE on December 10, CME on the 18th, and Nasdaq in the first half of 2018). For now, traders without direct access to bitcoin can still trade the Bitcoin Investment Trust (OTC: GBTC).

Lightspeed Financial Services Group LLC is not affiliated with these third-party market commentators/educators or service providers. Data, information, and material (“content”) are provided for informational and educational purposes only. This content neither is, nor should be construed as an offer, solicitation, or recommendation to buy or sell any securities or contracts. Any investment decisions made by the user through the use of such content is solely based on the users independent analysis taking into consideration your financial circumstances, investment objectives, and risk tolerance. Lightspeed Financial Services Group LLC does not endorse, offer nor recommend any of the services or commentary provided by any of the market commentators/educators or service providers and any information used to execute any trading strategies are solely based on the independent analysis of the user.

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