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Considering The Fundamental Value Of Bitcoin

By Boris SchlossbergCryptocurrencyDec 21, 2021 10:58AM ET
www.investing.com/analysis/what-is-the-fundamental-value-of-bitcoin-200612266
Considering The Fundamental Value Of Bitcoin
By Boris Schlossberg   |  Dec 21, 2021 10:58AM ET
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  • Bitcoin is a superior store of value due to its portability

  • The offshore banking market can be viewed as a proxy for store of value 

  • Given such valuation metrics, Bitcoin can still appreciate significantly

What is the fundamental value of Bitcoin? It’s difficult to provide the answer using traditional valuation metrics because Bitcoin does not generate any income streams and is therefore impossible to value on a discounted cash flow basis. However, in a recent Market Hive podcast with Bilal Hafeez, Ari Paul co-founder of crypto firm BlockTower, provides an interesting approach to viewing Bitcoin on a fundamental basis.

Paul argues that if we think of Bitcoin as essentially a “Swiss bank” in your pocket, then there is an objective way to value the economic worth of the cryptocurrency.

Suppose you accept Bitcoin as a store of value – and given its near-universal adoption all across the globe–it’s reasonable to say it has achieved that status. In that case, Bitcoin becomes a far superior form of gold. Just as gold, Bitcoin is permissionless and allows the bearer of the asset to convert it into any good or service anywhere in the world. To be sure, this is nothing but a social convention, but so is gold as it carries no intrinsic value and generates no cash flow. Bitcoin’s key advantage over gold is its portability.

Unlike the owner of gold, the owner of Bitcoin can store billions of dollars in assets is nothing more than a flash drive or a phone app. The portability advantage of Bitcoin is so immense that it may ultimately replace gold completely as a store of value. Although just like fiat, Bitcoin is a digital rather than a physical asset, unlike fiat, Bitcoin’s supply is constrained. In fact, conceptually, Bitcoin is, in fact, a superior store of value to gold because its supply can never be expanded.

Even if we accept that Bitcoin is a store of value – a modern-day version of digital gold–the question of valuation still remains open. However, Paul proposes a novel way of determining the possible fundamental value of Bitcoin. If we accept the offshore banking market as the proxy for the value of all assets that investors seek to protect from the arbitrary seizure of the state, then that market is currently estimated at approximately $35 Trillion.

Most of those assets are not just fiat cash and gold but productive economic assets such as stocks and bonds, so a simple one-for-one comparison would not be accurate. Nevertheless, if we accept the general valuation metric, Bitcoin, which currently carries a market capitalization of fewer than one trillion dollars, has plenty of fundamental upsides. If we simply assign a 10% value of the offshore banking market to Bitcoin, then the cryptocurrency has the potential to triple in the foreseeable future.

 
Considering The Fundamental Value Of Bitcoin
 

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Considering The Fundamental Value Of Bitcoin

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Comments (8)
Peter Cooper
Peter Cooper Dec 21, 2021 10:33PM ET
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Bitcoin entered a bear market in the summer. JP Morgan's CEO says it is fundamentally worthless, who is a better judge the king of Wall Street or some unknown commentator?
Tyler Phillis
Tyler Phillis Dec 21, 2021 10:05PM ET
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He starts out with a borrowed premise with begs the exact question everyone thinking about bitcoin (or any crypto) should be asking themselves. Why should I accept bitcoin as a store of value?
Benjamin USA
Benjamin USA Dec 21, 2021 9:29PM ET
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Ponzi coin :)
Alan Rice
Alan Rice Dec 21, 2021 1:41PM ET
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Yeah. Lugging around all that Gold is really tiresome !!
John Lakran
John Lakran Dec 21, 2021 11:55AM ET
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Easy no value can easily be duplicate by another coin to replace it.
Tom Sc
Tom Sc Dec 21, 2021 11:36AM ET
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convenience should never be conflated as being a better "store of value". I always love the irony of hodlers misappropriating all these gold terms to BTC and then telling people gold is stupid? doesnt make a hell of alot of sense unless you are threatened by gold or want its mcap. I really think the two have nothing to do with one another in actuality but I can see why people do as it is pumped with countless articles and ads on an hourly basis that make that comparison....again, not by accident. if hodlers like BTC for the reasons they allegedly do then they should love it....I mean, if BTC is digital gold than isn't gold physical bitcoin? shouldn't you hold both? will be fun to watch this play out and I suspect it wont end well for crypto but I've been wrong before and I'll be wrong again.
gary leibowitz
gary leibowitz Dec 21, 2021 11:23AM ET
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It was attractive for one reason, hiding assets.  The biggest users were drug dealers and black money transactions.  it has no intrinsic value unlike GOLD. Gold is a valuable asset with real demand for it. You want to replace government currencies because you think it also has no intrinsic value?  I find that amusing since no mention of currencies was mentioned. I would say currencies are real easy to barter with.  As for safety and security there is hardly any.  Has been hacked, will be exposed to government scrutiny and tracking for tax purposes.  99% of investors are clueless how it works.  A fad.  It is supposedly a hedge against inflation and deterioration of government currencies?  It should base at 16K within the year and then drop from there.  Tulip Mania took Three whole years.
Matt Walker
Matt Walker Dec 21, 2021 11:23AM ET
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I agree with alot of what you said, but I wonder if maybe the fact that it is so en vogue will in and of itself make it perpetuate and increase in value over time?
Tom Sc
Tom Sc Dec 21, 2021 11:23AM ET
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to a certain degree but usually things that are "en vogue" aren't like that forever. in theory, with more "adoption" and a capped amount of BTC, the price should be almost infinite but at a certain point you will need to ask yourself if you want a Van Gogh or a BTC? it's basically a designed Ponzi scheme and I think that having a hard cap will ultimately lead to its collapse for this reason.
Martin Perry
Martin Perry Dec 21, 2021 11:23AM ET
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Hi Gary are you posting regularly anywhere at the moment? Thanks.
Doug Wildman
Doug Wildman Dec 21, 2021 11:00AM ET
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Crypto and stocks are overvalued, why not Gold?
 
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