My recent search to find the intrinsic, or fair, value of Bitcoin via the internet was not really proving to be very useful. True investment professionals really don’t find any value in Bitcoin and will tell you it has no value whatsoever. They liken it to a commodity and compare it to tulip bulb mania. Some Bitcoin mavens will blurt out an inflated value – such as between $50,000 to $100,000 – without providing the reasoning for these numbers. Still others predict a value of $1 million! One day, I decided to figure out such a value on my own by taking a scientific-based approach rather than one based on irrational exuberance.
The initial approach I took was a rather simple one. Figuring that holders of Bitcoin will be most likely to spend their Bitcoin in a retail setting (at places such as Microsoft (NASDAQ:MSFT), Expedia (NASDAQ:EXPE), Newegg, etc.), I took to the internet to find the dollar value of worldwide retail sales in 2017. It turns out that this number is around $27 trillion. Surmising that worldwide only 1 percent of all people currently hold Bitcoin, finding 1 percent of $27 trillion yields $270 billion. This means we can expect a maximum of $270 billion to be transacted with the cryptocurrency. Taking things one step further and dividing this number by the current number of bitcoins in circulation (16,769,000), one arrives at a fair value of Bitcoin of around $16,000.
However, this approach is rather rudimentary. What it fails to recognize is that while 1% of the population holds Bitcoin worldwide, in the US it is more like 15%. In technologically progressive countries like Japan, it is much more – in fact, one can go about his or her daily business and pay for things in Bitcoin (with perhaps a majority of the population paying for things in Bitcoin!).
Taking a similar approach to my worldwide, back-of-the-envelope calculation, I set out to find the fair value of Bitcoin in the US only, using 15% of the value of retail sales in the US and again divided by the total number of Bitcoin, which yields a value of $46,156.60. Why such a high number? Well, it’s because a higher proportion of the US population holds Bitcoin (and is thus more likely to transact in it) than does the worldwide population, where emerging markets countries are likely to drag the number down. Think of it – people with little access to computers or venues to spend Bitcoin aren’t as likely to value it as much as people living in highly developed, computerized societies (i.e., ones in which Bitcoin is more likely to be used). Some repressive countries have also taken to the unfortunate extreme of banning the use of cryptocurrencies entirely (perhaps saving its citizens from burned-out motherboards and prohibitively expensive video cards).
Taking thing further, I backed into an ex-US fair value of Bitcoin by taking worldwide retail sales and subtracting out the value of US-based sales, then taking 1% of that number and dividing by the total number of Bitcoin. This yields a value of $11,721.63. The reason why I did this is because referring to the MSCI ACWI Index, one will see that the weight of companies in the index worldwide is heavily tilted in favor of the US at around 52%. Calculating a weighted average of values (taking 52% of the US value of $46,156.60 and adding it to 48% of the ex-US value of $11,721) yields a value of $29,627.81.
As a further experiment, reducing the ex-US value of retail sales by 10% to account for countries that have banned or frown upon Bitcoin for payments (China, India, South Korea, etc.), I arrived at a number that is very close to $29,000.
As with everything, the model I used is subject to scrutiny. It would have been more correct to use my weighted average method with the proportion of people in the US who hold Bitcoin versus those that hold it worldwide; however, we will never know this number, as owners of Bitcoin are kept private (thank you, blockchain!). If we were to base things on a proportion of the number of people worldwide who live in the US as a proxy, one would arrive at a final value of Bitcoin of almost $500,000 (making absolutely no sense and invalidating this exercise in the process)! Another aspect that is subject to criticism is that my method takes US holders of Bitcoin and compares it to everyone else as one lump – as mentioned before, Japan and other technologically savvy countries are more likely to use Bitcoin in a proportion that is higher than just 1% of their populations! It would be more correct to figure out what these proportions are and have used a weighted average approach that accounts for every country in the MSCI ACWI Index (not just a US versus every other country approach!). But again, estimates of these proportions would be just that – highly subjective estimates, as blockchain technology keeps Bitcoin holders hidden.
In conclusion, an attempt to find an intrinsic, or fair, value of Bitcoin grossly overvalues it compared to today’s prices – $29,000 versus its current trading value of around $14,000. One can argue that the true value of Bitcoin lies not in the fact that some think of it as a commodity, but in the fact that it is a currency or payment system that is more adaptable in some technologically progressive countries than in others.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The author is a holder of Bitcoin and a believer in the cryptocurrency movement as a developing currency/form of payment.