How Do You Measure Bitcoin’s Value?
What is Bitcoin Anyway?
“It’s a mirage basically.”
“The idea that it has some huge intrinsic value is just a joke in my view,” — Warren Buffett.
So that’s a pretty strong opinion about what Bitcoin is from the famous Oracle of Omaha. He famously preaches to the masses to only invest in “what you know.”
Buffett has admitted that he doesn’t know anything substantive about the technology or mechanics behind Bitcoin. Therefore it only makes sense he is such a staunch critic of it-he can’t invest in it himself. Investing in Bitcoin goes against his investment philosophy because he doesn’t understand how it works.
But his inflammatory critique of Bitcoin’s intrinsic value being a joke makes one wonder:
What makes Bitcoin valuable?
Is Bitcoin a currency, security, or a commodity? Or is it something else entirely?
Governments and regulators are trying very hard to find the answer to this complicated question.
After looking at history to learn how objects were assigned value and another opinion from Warren Buffett.
It’s clear Bitcoin has the most in common with the famous commodity — gold.
Warren Buffet has also famously said gold has “no utility.”
So for all intents and purposes, Bitcoin is a commodity by nature. It’s a lot like gold because there is a limited quantity of it available for distribution. Satoshi Nakamoto made only 21 million Bitcoins available for circulation when creating Bitcoin. This number is unalterable.
It, like gold, also holds an intrinsic value due to the scarcity of it and isn’t easily manipulated like fiat currencies because there is a limited supply and it’s unalterable.
What makes gold valuable?
Everyone can agree that gold holds some intrinsic value. Throughout history, it has even been accepted as currency from time to time. But even though it isn’t a currency in the present day, people still invest and assign a value to it.
Gold has value because of the following traits:
- Liquid- readily convertible to cash
- Portable -you can hold $100,000 in a small coin tube and can use all over the world
- Divisible-it’s very easily divisible compared to other metals, without hurting its value
- Durable-gold has been around for 1000s of years
- Convenient-Not too bulky and heavy so it’s easy to transport physically versus other precious metals
- Confidential-you control who knows you own it
Gold cannot be:
- Printed-it takes a mine ten years to go from discovery to production
- Counterfeited-technology catches it every time
- Inflated-the whim of a central banker can’t alter its supply
Gold is valuable because it has intrinsic financial traits that no other physical asset does.
What Makes Bitcoin Valuable?
After reading through the reasons why gold is valuable, it sounded eerily similar to why Bitcoin also holds value.
Bitcoin has value for the following traits:
- Liquid-now easily convertible to fiat currency
- Portable- all you need is your wallet address, and private key-you can use it worldwide
- Divisible- each bitcoin is easily divided into Satoshis, which is a one hundred millionth of a single bitcoin (0.00000001 BTC)
- Durable- the decentralized network makes it very hard to hack
- Convenient-it can be transferred to anyone within 30 minutes anywhere in the world without a middleman
- Confidential- it’s technically not confidential, it’s pseudonymous, but you do have more privacy with Bitcoin than other forms of payment.
Bitcoin cannot be:
- Printed- can only be successfully mined within the bitcoin network
- Counterfeited- every transaction is recorded permanently on the blockchain fixing problem of double-spending
- Inflated- it can’t be reproduced by the whim of a central banker
Bitcoin is valuable because it has intrinsic financial traits that no other asset possesses because you can send it to anyone anywhere in 30 minutes or less without a physical exchange, unlike gold. For example, if you had to transport the equivalent of 10 million USD in gold across the world you couldn’t do it in a fast and secure way. 10 million USD would weigh approximately 530 lbs. How are you supposed to securely ship it? You couldn’t put it in suitcases and check your bags on an airline, someone would stop you.
So is Bitcoin the new “gold”?
So Bitcoin is a lot like gold in a myriad of ways. When trying to assess the value of Bitcoin, you can look to gold as a benchmark for what it’s total worth could potentially be one day.
Bitcoin is also currently on the CBOE and CME with futures contracts that are being sold and cleared as if it is a commodity already. The value of Bitcoin could potentially be similar to the value of gold because it has a lot of the same fundamental traits of how it’s useful for storing money.
Michael Novagratz-former billionaire, hedge fund manager and one of the early investors in the Ethereum protocol has the following opinion about the value of Bitcoin,
It is still too soon to be able to predict how much Bitcoin will ultimately be worth in the future. It’s also too early to classify it as an official commodity because government organizations are still struggling to classify it.
But if you think of Bitcoin as a commodity, it helps you begin to understand how this “mirage” has lasted nine years and keeps adopting daily new users worldwide. As long as more people continue to put their money into Bitcoin, then it’s not too crazy to think that one day it could be the new and improved gold.
