For so called value investors a “value” is a crucial investment concept. Their goal is to buy an asset, e.g. a common stock or anything else, for a price way lower than the actual value of the asset. There is still of course uncertainty, which is (at least in theory) covered and avoided by a so called “margin of safety”.
You may imagine it as buying a house on the cheap, let’s say for $20,000, while you are almost sure you’ll be able to sell it in a year or two for $60,000 or so. You are not 100 % sure, but your margin of safety is so huge, you don’t care whether the real market value as confirmed by the future sale would be 53 or 63 thousand. You will get richer either way.
When Bitcoin and other cryptocurrencies emerged, the common opinion among value investors (and not only them) was that Bitcoin doesn’t have any such intrinsic, fundamental value and therefore it must be a bubble.
Well, Bitcoin might be overpriced, but they are probably wrong about the “no value” core of the argument.
Where do I (as a value investor) see the intrinsic value of Bitcoin?
- the utility value of Bitcoin as a platform (which certainly isn’t null)
- Bitcoin’s age, because the older it is, the more robust it seems to be against attacks, bugs, price manipulations and other risks, including hard forks
- the invested value of Bitcoin infrastructure (exchanges, wallets etc.)
- the invested value of the expensive mining hardware, both old and new
- the value of electricity consumed to create and move bitcoins around
There is definitely a real value underlying Bitcoin’s price, but because cryptocurrencies are a new class of asset, it is harder to see their intrinsic value, not speaking of calculating it. But sooner or later, someone will calculate it properly and there will be a simplistic valuation for decision making, pretty similar to Buffett’s Berkshire Hathaway Price-to-Book ratio.
Well, I may also be proven wrong in at least two improbable scenarios:
- There would be a strong regulatory action against Bitcoin (and other cryptocurrencies) on a global level, for instance a ban by the G20 countries.
- Bitcoin (or one of its epigons) becomes the main global currency or is adopted as such. In such a case, the fiat money fundamentals would become obsolete and irrelevant.
I have to admit I am slightly pessimistic about the future of Bitcoin and consider it overpriced at its current level of almost $20,000, but I may be proven wrong in this regard too. But I can’t see it as “all bubble” either.
Disclaimer: This is only an essay and not an investment recommendation of any kind. The investments in Bitcoin and other cryptocurrencies are risky and their prices are wildly volatile. I am not qualified to give advice on investments to anyone. I am a private investor both in value stocks and cryptocurrencies, having sold most of them during the crypto peak of December 2017 with a hefty net earning of 700 % (after fees, before taxes).