Valuation of Bitcoin

[hiddenvalley]

[Introduction]
Bitcoin is an electronic cash, potable, forgery-proof, and not issued by any national government. Its supply is limited by the architect and forgery-proof is guaranteed by block-chain technology. Its scarcity enables itself to function as an international currency, a medium of exchange. Compared to traditional currencies, it is far more convenient to carry, store, and wire-transfer.
It has also limitations in use. Currently, its transaction networks, nationally and internationally, are not well organized. In addition, most of the public including policy makers do not grasp the economic role of Bitcoin. As its price skyrockets, national governments began to regulate its transactions, even shut down Bitcoin trading centers. Without understanding the nature of Bitcoin, people’s fear of Bitcoin trading is rapidly mushrooming. One side tells that current Bitcoin price is just a bubble and soon it will go burst. So they say that Bitcoin trading should be strictly regulated or completely prohibited. But the other side tells that Bitcoin is a new electronic medium that can increase efficiency in all kinds of commercial trading.
I, as an economist, tries to elucidate price determination of Bitcoin and hope this work becomes a useful reference in reducing our fear of electronic currency.
   
[How is the price of Bitcoin determined?]
Bitcoin is just a scarce electronic resource whose supply B is strictly limited. In a market its price is determined where supply S(p) and demand D(p) meets. Since supply is limited, market price of Bitcoin is determined by demand as shown in the equations below. Why is Bitcoin price so high in Korea? Simply because demand there is so high for some reasons.
D(p* )=S(p* ), D(p* )=B
Bitcoin price is however also a price of a new electronic currency, which can function as an international currency. This implies that p* is also an exchange rate in international currency market. If Won/Bitcoin = 20,000,000 and $/Bitcoin = 14,000, then Bitcoin based exchange rate Won/$ = 1,428. Dollar (Won/$) exchange rate is roughly 1,070 in the Won-Dollar exchange market. There exists a wide gap between the two.
The gap between the two exchange rates implies that Bitcoin market is not well integrated with traditional financial market, which means that the gap will become narrower as Bitcoin market becomes more closely tied with traditional financial market. If Bitcoin market behaves irrationally, it is simply an evidence that it is isolated from the markets in general. As Bitcoin becomes a medium to buy goods, services, and international currencies, the relative price of Bitcoin will naturally converge to the traditional exchange rates between currencies.
Shutting down the trading centers of Bitcoin is a simple and bold measure but it also shut down the chance to develop an electronic medium for exchange, globally accepted and trusted, even more trusted than dollar.

[Is it too expensive?]
The relative price of Bitcoin will be constrained by arbitrage transactions and the gap between Bitcoin exchange rate and dollar exchange rate cannot exceed a certain level also because of arbitrage transactions. That is why absolute prices (denoted by national currencies) of Bitcoin in different countries are also closely linked and go in tandem as we observe in reality.
Then what determines absolute prices of Bitcoin? As stated in the previous section, its absolute price is determined solely by the demand of the market given that supply is fixed. Demand for a good, including Bitcoin, depends on its own price, prices of substitutes and complements, income, preferences, expectation and others. At this juncture, preferences and expectation seem to be major demand factors that drive increases in Bitcoin price.
Globally the amount of Bitcoin is limited, implying that without supply of substitutes its price is likely to increase. Many people point out that it has no value. Here “value” means value in use. They argue that its price cannot and should not be that high because it has no value in USE. This argument is the same as the famous water-diamond paradox. Diamond has almost no value in use and its value in use is far smaller than water’s. However, its value in exchange is far greater than water’s. What determines absolute price of a resource is its scarcity relative to demand.
If anyone believes that Bitcoin price is too high, no regulation is the solution. As Bitcoin price increases more substitutes will naturally appear globally.

[What is the value in use of Bitcoin and who gets it?]
The intrinsic value of Bitcoin resides in its forgery-proof nature and its scarcity. Block-chain technology protects Bitcoin from fraud, forgery, and hacking. In addition, it is not backed by a national government, so no national government can control its supply and harvest seigniorage, the profit a government obtains by issuing its currency. National governments can control only demand.
Who gets the seigniorage by issuing Bitcoin? Those who offer (mine) bitcoins initially get the seigniorage profit. Others purchasing bitcoins at the secondary market, as stock investors, can earn capital gains or experience economic loss. Bitcoin investors are no different from usual investors pursuing capital gains by purchasing whatever rare.

[Who will be the losers?]
National governments will be losers because their power of issuing national currency will be gradually eroded as people begin to use all kinds of bitcoins for economic transactions. In addition, they will lose seigniorage profit and a powerful economic policy tool, money supply.

[Should we regulate the crypto-currencies?]
At this juncture, bitcoin markets are not efficient and it is easy to observe volatile price changes in the market. Allowing and encouraging crypto-currency markets to be merged into traditional financial markets are likely to be a shortcut to reduce chaos currently occurring in crypto-currency markets.

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[kimochidesh]

It has been a debatable topic from the beginning that "what is the intrinsic value of BTC?" If we really go into the fact then we realize that there is nothing(Fiat, Diamonds, Stocks, bitcoin etc) have any intrinsic value. It is just the people trust and acceptance which make it worthy. Some people argue only Gold or Silver have the intrinsic value as its worth can be calculated on basis of its purity and a globally accepted mode of transaction in one way or another.

[Don Pedro Dinero]

It has been a debatable topic from the beginning that "what is the intrinsic value of BTC?" If we really go into the fact then we realize that there is nothing(Fiat, Diamonds, Stocks, bitcoin etc) have any intrinsic value. It is just the people trust and acceptance which make it worthy. Some people argue only Gold or Silver have the intrinsic value as its worth can be calculated on basis of its purity and a globally accepted mode of transaction in one way or another.

Stocks have intrinsic value. When you buy stock shares you are buying a participation in a company. That company has assets and debt and it generates cash flow. The intrinsic value is calculating substracting debt from assets and factoring in cash flow projections, based on the free cash flow generated in previous years and other considerations such as projections of growth.

Apart from that, it is true that it has been debated and it is more difficult to calculate the intrinsic value of bitcoin because it is a different type of asset and to make assumptions of future projections is not based on solid grounds.

[dokie987]

I think the valuation of bitcoin depends on what the needs of supply or demand arises. I mean the valuation of this bitcoin arises if the demands increases.

[boboyboi]

its depend on the market demand. btc price getting law .and its not permanent . time and minute taht price punp again,

[brontosaurus]

It has been a debatable topic from the beginning that "what is the intrinsic value of BTC?" If we really go into the fact then we realize that there is nothing(Fiat, Diamonds, Stocks, bitcoin etc) have any intrinsic value. It is just the people trust and acceptance which make it worthy. Some people argue only Gold or Silver have the intrinsic value as its worth can be calculated on basis of its purity and a globally accepted mode of transaction in one way or another.

Yes but gold and silver have their intrinsic value in the form that they can be used as ornaments and a tool for showing luxury. While BTC doesn't really enjoys any such legacy. Its demand is merely due to the great demand it is currently encountering. So if we see a future demand is merely because the price has increased so much in the past few months. If people see that the price is not really increasing that much they might just begin to take their funds out which lower the value of bitcoin too.

[Master_dandosha]

Yeah the old theory of demand & supply determine bitcoin prices and other alternative coins beside development announcement that was clear after every fork applied in bitcoin blockchain .

[btc-facebook]

Yeah the old theory of demand & supply determine bitcoin prices and other alternative coins beside development announcement that was clear after every fork applied in bitcoin blockchain .

Because only depend on supply and demand, bitcoin value is volatile and "easy" to being manipulated by some group of early whale trader.
The fact is people on this digital era need somekind of currency that fit with their need and bitcoin become the savior !
Hope my government can see the positive side of bitcoin rather than negative.

[dogandogru]

It has been a debatable topic from the beginning that "what is the intrinsic value of BTC?" If we really go into the fact then we realize that there is nothing(Fiat, Diamonds, Stocks, bitcoin etc) have any intrinsic value. It is just the people trust and acceptance which make it worthy. Some people argue only Gold or Silver have the intrinsic value as its worth can be calculated on basis of its purity and a globally accepted mode of transaction in one way or another.

Stocks have intrinsic value. When you buy stock shares you are buying a participation in a company. That company has assets and debt and it generates cash flow. The intrinsic value is calculating substracting debt from assets and factoring in cash flow projections, based on the free cash flow generated in previous years and other considerations such as projections of growth.

Apart from that, it is true that it has been debated and it is more difficult to calculate the intrinsic value of bitcoin because it is a different type of asset and to make assumptions of future projections is not based on solid grounds.

True...Bitcoin intrinsic value can't be defined really.
Stocks may have intrinsic value but the price they are trading does not have any solid ground. It is again the result of supply and demand so why not Bitcoin. We can't really determine the intrinsic value of any of these item mentioned above.

[xankor]

Price at the Bitcoin do not is a stable

[marielbeckham]

Pretty informative material and extremely clear for all the newcomers.

[palle11]

It has been a debatable topic from the beginning that "what is the intrinsic value of BTC?" If we really go into the fact then we realize that there is nothing(Fiat, Diamonds, Stocks, bitcoin etc) have any intrinsic value. It is just the people trust and acceptance which make it worthy. Some people argue only Gold or Silver have the intrinsic value as its worth can be calculated on basis of its purity and a globally accepted mode of transaction in one way or another.

Do bitcoin actually have intrinsic value? To me, I think it does not have yet and this is as a result of its high volatility rate.

[Should we regulate the crypto-currencies?]
Allowing and encouraging crypto-currency markets to be merged into traditional financial markets are likely to be a shortcut to reduce chaos currently occurring in crypto-currency markets.

I do think this will be a panacea to the fair surrounding bitcoin and this will go along way to build the much needed absolute trust.

[marielbeckham]

Well, this topic was always quite controversial. Everything mostly depends on the increasing level of market demand.

[TURCAN]

The price of bitcoin varies as supply and demand. Prices change and increase ...

[Primuscoin]

Is it really that expensive?

[SixOfFive]

It is hard to get a value a Cryptocurrency. Here are some parameters on which valuation of a crypto currency can easily be done like crypto-utility, Network value to transaction ratio(How active users are?), Investor Vision, Daily active users, Qualitative analysis like Team, Whitepaper, Blockchain strength etc.

[Lieldoryn]

It is impossible to apply traditional methods of price calculation such as those used in the stock market to bitcoin. This does not mean that bitcoin has no real value. There is the price of electricity required for its production, there is the cost of equipment. All this is what fills bitcoin with real money and makes it a part of the global economy. But there is a large amount of speculative capital that is invested in bitcoin. Speculators can withdraw their capital and real capital in the form of profit. Then the price of bitcoin can go down to zero.

[Claudyah]

Bitcoin has reversed its decline as miners began to use new software that has resolved its assessment problem, a problem that has persisted for more than two years and has sparked a split over the virtual currency.

[TrumpD]

[What is the value in use of Bitcoin and who gets it?]
The intrinsic value of Bitcoin resides in its forgery-proof nature and its scarcity. Block-chain technology protects Bitcoin from fraud, forgery, and hacking. In addition, it is not backed by a national government, so no national government can control its supply and harvest seigniorage, the profit a government obtains by issuing its currency. National governments can control only demand.
Who gets the seigniorage by issuing Bitcoin? Those who offer (mine) bitcoins initially get the seigniorage profit. Others purchasing bitcoins at the secondary market, as stock investors, can earn capital gains or experience economic loss. Bitcoin investors are no different from usual investors pursuing capital gains by purchasing whatever rare.

Very informative piece in general - did not know about the seigniorage thing for governments. However, you should also add that anonymity is a major value creator for Bitcoin. You can say that because of this anonymity feature that is why the demand for Bitcoin is high; so in a way they are tied together.

[Haiduongbg]

Yeah the old theory of demand & supply determine bitcoin prices and other alternative coins beside development announcement that was clear after every fork applied in bitcoin blockchain .

Because only depend on supply and demand, bitcoin value is volatile and "easy" to being manipulated by some group of early whale trader.
The fact is people on this digital era need somekind of currency that fit with their need and bitcoin become the savior !
Hope my government can see the positive side of bitcoin rather than negative.

Bitcoin depends mainly on the supply and demand. In my opinion, we cannot evaluate Bitcoin, the Bitcoin is only priced by supply and demand law, not much utility. Bitcoin share many characteristics of currency. For that reasons, we can only say we trade Bitcoin, not invest Bitcoin.
Because of limited supply, the volatility of Bitcoin will never be eliminated. In terms of fiat, the central banks often stablize the fiat value by controlling the supply, that method cannot be used for Bitcoin