Bitcoin has really gone up quite a bit this year and I have been hearing confused news anchors simultaneously declare  that ” it’s over valued” and  “buy it now”.

So who is right?

This post is intended to provide a framework for you to value Bitcoin using rationale thought rather than market price action (also known as guessing).

What is Money?

First it is helpful to understand  money.

At its essence, money is anything that can serve as a store of value, unit of account and medium of exchange.[1]

And the six characteristics of money are durability, portability, acceptability, limited supply, divisibility and uniformity.[2]

Bitcoin, fits this description perfectly. Indeed, it is a better fit than almost anything before it except for universal acceptability.

What should Bitcoin be worth?

With that framework in money in mind we can now determine possible valuations of Bitcoin by comparing it to other stores of values and then doing the simple math. Your job is to determine if Bitcoin will become a more or less common store of value over time. I have no idea but with this framework you can at least calculate the value based on your assumptions.

As of this writing (I did this analysis in the spring of last year but the concepts still apply) a Bitcoin exchanges for $1058.48  U.S. dollars.[1]And there will be, at most, 21 million Bitcoins in existence. Currently there are 1.5 Trillion in U.S. reserve notes in circulation[2]

 

Scenario Projected Bitcoin value
Today, speculative investment $1058 (current)
Bitcoin replaced by other digital currency $0
Shadow currency eventually reaching 1% of U.S. currency in value $714.28
Replaces all U.S Currency $71,400

 

From here you can extrapolate out. If Bitcoin replaces the worlds currency it will be larger than $71,000. And if it gets replaced or supplanted by a government issued crypto currency then this might go to zero. And, gold the original reserve currency totals about $1.8T so it’s replacement value would be similar.

None of this includes speculation or over-buying of the Bitcoin which may add a multi-factor increase to any of these numbers. A buyers versus sellers model could help you with that part if you want to get fancy.

It’s all very exciting for technology geeks like me (although block chain is the real marvel of Bitcoin) to observe but I suspect you can make a lot more money – and make it right away which you need to help with tuitions – with a quality dividend stock.

A much better investment than both of these options, of course, would be in education for you or a family member. Take a class instead.

[1] Coindesk. “Bitcoin Price Index – Real-time Bitcoin Price Charts.”

[2] “Current FAQs Informing the public about the Federal Reserve.” FRB: How much U.S. currency is in circulation?

 

 

[1] “Back to Basics: What Is Money?” – Finance & Development, September 2012

[2] Amin, R. K. Economics for engineers; a text book for engineering students. Anand (W.R.) India: Charotar Book Stall, 1963.

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