For better or worse, Bitcoin was one of the hottest topics of 2018 purely due to its rapid price appreciation. Bitcoin had its highest historical price on October 18, 2017, when it shot up to $19,498.63. After two years of a bullish market, the so-called “crypto winter” started: at the beginning of 2019, Bitcoin’s price sank to $3,800.
While its price was fluctuating by as much as 50% in a single day, Bitcoin has drawn interest, controversy and heaps of conspiracy theories. Regardless of one’s opinion about it, the number of people using Bitcoin has been only growing. We can see from this graph that, despite the long bear market, more than $2 trillion in Bitcoin were traded in 2018 alone. That is 60% more than the volume traded the previous year! Bitcoin is being traded at a much lower price than it was a year ago, but does this price reflect its real value? If not, what is Bitcoin really worth?
Estimating the Real Value of Bitcoin (BTC)
Calculating what is Bitcoin worth using the size of the network
Michael Gromek, from the Forbes magazine, uses the size of the blockchain to estimate what Bitcoin is worth (through a traditional financial methodology called the Metcalfe’s Law). In layman’s terms, the law affirms that the size of a network (that is, how many people are using it) is exponentially proportional to a currency’s real value.
By adjusting the exponent to fit the context, Gromek estimates that in a scenario in which Bitcoin has 300,000,000 active users, it would be expected to have a market capitalization of $49 billion. By dividing it by the number of Bitcoins in circulation (17,162,500), he concludes that Bitcoin is worth $2,855. The complete concept of how Michael reached the conclusion of pricing per user is vague, but his proposal was widely read. But Bitcoin's pricing is much harder to value than just taking an analysis of how many people use it.
4 Major Factors of Bitcoin Price
Scarcity: This affects Bitcoin's price as we know that only 21 million Bitcoins will ever exist. Currently, there is a little over 17 million in existence.
Utility: In other words, the consumer's perceived "usefulness" of Bitcoin will play a factor in determining Bitcoin's price. True believers in blockchain and Bitcoin understand the revolutionary monetary movement that Bitcoin represents... However, while the mass public does not understand the concepts and ideas that gave birth to Bitcoin... There won't be as much utility attached to it until the wider-populations begin to realize Bitcoin’s full potential. As the realization of Bitcoin's utility grows, this will continue to positively affect Bitcoin's price.
Supply: Related to scarcity, Bitcoin is extremely rare, especially compared to most other blockchain projects that have followed it. Some alt and “shit” coins have maximum supply of tokens in the BILLIONS! But we know there will only ever be 21 million Bitcoins in existence, so the supply will forever be limited and subsequently affect Bitcoin's price. There are many famous cases of thousands and thousands of Bitcoins being lost forever as Bitcoin wallets have been lost, so the real-world total supply of Bitcoin is actually far below 21 million Bitcoins. This artificial restriction in supply will only help to drive up Bitcoin's price in the long run.
Demand: As demand increases, so does the price that the consumer is willing to pay for Bitcoin. Consider the early days of Bitcoin's inception where actual demand was almost non-existent. Bitcoin's price was basically a fraction of a penny! In fact, the first case of Bitcoin having an actual real-world price that paid for a physical product, was in 2010 when a Bitcoin enthusiast paid 10,000 Bitcoins for 2 Papa John’s pizzas! This was the first real-world case of Bitcoin’s utility (As a payment mechanism) and demand (Someone willing to trade a physical good for the Bitcoins in the transaction).
Fungibility: The forethought of breaking down 1 Bitcoin into 100,000 individual “satoshis” lets the individual consumer send any fractional % of a Bitcoin from one person to another. This property is a great benefit to Bitcoin’s overall price, as Bitcoin is now much more versatile and you can send or receive any specific amount of it.
Bitcoin’s Price and Mainstream Adoption
A significant period of Bitcoin's past that affected Bitcoin's price for the better was in December 2014 when Microsoft decided to accept Bitcoin as a form of payment.
This was a huge vote of confidence in Bitcoin as a source of value, and a legitimate payment option and rapidly increased Bitcoin’s utility as individual consumers could now purchase popular items like Xbox consoles, Windows phones, and apps, with Bitcoin.
As more and more markets begin to adopt Bitcoin as a viable payment method, it becomes more mainstream, and the demand inevitably grows which affects Bitcoin’s price.
Crazy Bitcoin Price Volatility?
The question of Bitcoin's ever changing price valuation is so common it has even become a meme in the internet culture!
Price volatility isn't only reflected in Bitcoins price. It is just the most publicized!
Price volatility is rife across many other asset classes like stocks and even real estate property. It is a normal part of any emerging market and is expected to continue affecting Bitcoin's price while Bitcoin is still in its early years of development.
Bitcoin is only just reaching its first decade of inception, but only a small percentage of this time has seen any meaningful adoption and usage. Bitcoin's technology and Bitcoin's price is still in the very early stages of a nascent market.
In fact, by all estimates, there is currently around $90 trillion of total money in the world, and currently, Bitcoin's market cap is around $70 billion, meaning Bitcoin’s current market cap represents less than 00.08% of the world's total money supply.
Bitcoin Price: Subject To Manipulation?
It doesn't take too much consolidated money and effort to have a manipulative effect on Bitcoin's price, because compared to other large and established industries, Bitcoin's market cap is still quite small.
There has been periods of extremely obvious market manipulation by the large "whales" of the Bitcoin market and it has been done to specifically affect Bitcoin's price either up or down in the favor of the manipulators.
Maybe they wanted to reduce Bitcoin's price so they could do a mass "buy-in" at a temporarily and artificially cheaper price point, or maybe they wanted to trick the naive individual investor into a temporary bullish FOMO (fear of missing out) situation as the prices quickly rise, so that they could do a mass "sell-off" of their Bitcoins at an artificially high price before reinvesting after the next inevitable dip.
With much less liquid money in the Bitcoin market compared to say, the Forex trading market, there exists larger room for "spreads" (AKA the difference between buy and sell orders) in the Bitcoin market. Whereas the far more liquid Forex trading markets might only have a spread of a few pennies at most.
This larger spread incentivizes those with large pools of money to enter and manipulate Bitcoin's price as it is far easier to affect Bitcoin's price when there are larger spreads in a less liquid market.
What Bitcoin (BTC) is Worth According to the Cost of Mining?
Given that it has no intrinsic value, we could consider that each Bitcoin is worth at least as much as it costs to be created. This is the concept associated with traditional assets.
To “create” Bitcoin, one needs to solve extremely hard mathematical problems in a process called “mining”.
But how much does it cost to mine a Bitcoin?
Considering a state-of-the-art, efficient machine located in China, summed with the maintenance costs and electricity costs, mining a Bitcoin would cost, on average, $1,800. If we add the variable costs and a profit margin of 25% (the same margin practiced by the gold mining companies), the final price would be something like $2,500. There's one caveat: Bitcoin profitability varies a lot by network difficulty, which is the total amount of machines competing to win a block reward. So, the cost of mining Bitcoin keeps on changing. The $2,500 value, though, is pretty similar to the value calculated by Michael Gromek at Forbes. Perhaps he was onto something after all.
Using the Quantity Theory of Money to Decide What Bitcoin (BTC) is Worth
This estimation is based on the quantity theory of money, postulated by Irving Fisher in 1991. Fisher argues that the value of a currency depends on its supply and how it is being used.
The velocity of a currency is the rate at which each coin is being spent.
We can then calculate its price using its velocity and the number of services and products a unit of Bitcoin can pay. Bloomberg did the math on Bitcoin's velocity, considering supply of 15 million Bitcoins with each coin being traded, on average, four times a year, a Bitcoin valuation of $2 could buy equivalent value of goods as $1.2 billion dollars.
In the same analysis, Bloomberg used other parameters that are not publicly reported, to estimate the number of goods that one Bitcoin can buy and reached $2,000 and $6,000. The value increases considerably when one includes, for example, illicit goods bought using Bitcoin, although their volume is highly uncertain. Bloomberg's analysis, however, looked at Bitcoin as a mere currency and disposed of the volume associated with its trade as storage of long-term value; this factor plays a major role in Bitcoin's value.
Bitcoin’s Real Value is Close to Being Revealed
One way to identify the market value of an asset is by using an indicator called NVT (Network Value Transmitter). In Bitcoin’s case, it compares the market capitalization of the cryptocurrency with the total value of the coins going through the blockchain. An NVT greater than 100 means that the value of an asset is higher than what it’s really worth (in other words, that it’s overbought).
Bitcoin’s NVT reached its highest value (higher than 200) in 2011, which was followed by a noticeable drop in its price. Currently, Bitcoin’s NVT is close to 108, indicating that it is probably above market value. As the NVT is constantly changing, one has to monitor charts at the time of NVT valuation.
The main takeaway is that, when the NVT stays below or close to 100 for several months, we can conclude that its price at that level would be very close to what Bitcoin is really worth.
Comparing Bitcoin (BTC) Price to Price of Gold
Gold has historically been used as a transaction mechanism. Like Bitcoin, we understand that gold has supply and demand.
At the same time, gold has more utility than Bitcoin, simply because it has been used in trade for thousands of years and is well known the world over. Like Bitcoin, gold has a degree of scarcity. Unlike Bitcoin though, gold's total supply isn't completely certain. Yes, it is very rare and accordingly has a fair valuation attached. But at any moment, there could be a discovery that absolutely floods the market and devaluates the price of gold. In this case, Bitcoin's scarcity has its own advantage. We can rely on there never being any rapid influx of Bitcoins produced that could suddenly cause a devaluation in Bitcoin's price based on this rapid short-term inflation alone.
What are the experts saying about Bitcoin Price?
Besides trying to estimate what Bitcoin is worth by using mathematics, we may also consider the opinion of people who are knowledgeable in the area.
These are the good, the bad, and the ugly opinions about what Bitcoin is worth.
Bitcoin is Worth $0?
Nouriel Roubini, an American economist known for predicting the 2008 financial crash, thinks that Bitcoin is the "biggest bubble in history." Roubini stated that Bitcoin has the "fundamental value of zero" and that, therefore, is "moving towards its real value of zero".
Another expert who believes that Bitcoin is worthless is Wall Street analyst Richard Bernstein. The head of Richard Bernstein Advisors LLC went as far as comparing Bitcoins mining with earning coins by playing Candy Crush.
He argues that "increased liquidity, increased use of leverage, the democratization of the market, increased turnover and new technical problems" are indicative of a classic financial bubble. Bernstein believes, however, that regulations able to protect the market and eliminate fraud can be a solution.
Bitcoin is underpriced and will reach $1,000,000?
John McCafee, the founder of a world-famous anti-virus product, is extremely optimistic when it comes to Bitcoin.
Even though his bet on a Bitcoin valuation of 7 figures seems bold, he believes the world will eventually opt for a decentralized currency and, when that happens, Bitcoin price would have to appreciate exponentially.
He has restated his claim and believes Bitcoin will reach $1 million by the year 2020.
Does it seem realistic?
Even though it may sound unlikely, before 2017, assuming that Bitcoin would grow as much as 9000% would be considered almost equally as odd. So, it's tough to say whether McAfee could be right or wrong.
News and Bitcoin Price
Let’s imagine a pharmaceutical company discovered the cure for cancer… Their stock price will shoot up to the moon.
If a pharmaceutical company's new cough medicine contains an ingredient that's proven to block arteries and cause heart attacks... Their stock price will quickly drop to zero.
The latest news article on Bitcoin will always have an effect on Bitcoin's price. To have some understanding of what the future holds for Bitcoin's price, intelligent investors try to keep up to date on what's next in the Bitcoin world.
If there is a significant upcoming milestone in Bitcoin's development timeline, we can expect Bitcoin's price to rise. For example, if a new large-scale company announced they will soon be accepting Bitcoins as a payment option.
If a large-scale crypto exchange is hacked and thousands of Bitcoins are stolen (Think Mt. Gox exchange around 2014 where 850,000 Bitcoins were stolen), then Bitcoin's price will begin to decrease as the bad news and lack of security for the individual is once again highlighted in the news and media.
Bitcoin’s price has a lot of factors that will move it up and down. It might be frustrating at times for investors seeing such inconsistency, but in the long run, it is far better than the alternative fiat money system that places all trust of the supply of money into the hands of private banks and Governments.