PRICE VS VALUE
Most investors do not understand the difference between price and value. If they did, the prices they are willing to pay to invest in certain things would either be higher or lower, depending on the fundamentals. Usually, though, an investor is more likely to overpay; either out of ignorance or as the result of wishful thinking. Case in point: Bitcoin.
BITCOIN AND OTHER CRYPTOCURRENCIES
As an investor, I need to be able to analyze and assess real fundamentals in order to arrive at realistic valuations for prospective investments. Only after the valuation process can a price be applied which is a reasonable estimate of value.
The typical Bitcoin investor doesn’t have a clue as to what the value of his investment is. What he does know, is that its price has gone up – a lot. The price action is what attracts the typical investor; not the fundamentals.
As a result, the price of Bitcoin bears practically no relationship to its fundamental value.
So, what is the value of Bitcoin? First, it is important to note that the value of Bitcoin is not a function of the token itself, or the limited number of tokens. This is also true of other cryptocurrencies. The value of Bitcoin and other cryptocurrencies is that they can be exchanged between individual parties PRIVATELY on a decentralized blockchain. That is a hugely positive characteristic which is the primary basis for realistic valuation of most cryptocurrencies.
However, we live in a highly regulated society. Our financial system is the epitome of stringent regulation and control. That control is evident in the process involving financial transactions and the transfer of money, including taxation.
Financial transactions on the blockchain are unregulated and can go unreported. As the dollar volume of transactions increases, so does the potential loss of tax revenue.
It is naive and short-sighted to think that any government which claims to have regulatory authority, either directly or through one of its agencies, would not take steps to intervene in areas where financial activity is perceived as a threat to its own control and power. (see Janet Yellen Re: Cryptocurrencies And Terrorists)
A QUESTION FOR INVESTORS
If the value of Bitcoin lies in the private transfer of ‘money’ between investors, and that value is the same basic fundamental that applies to other cryptocurrencies, then why is the Bitcoin price at or near $100,000 while the price of XRP is only $2? Is Bitcoin wildly overpriced; or are other cryptocurrencies underpriced?
There are unique characteristics for various cryptocurrencies and there are differences that make certain ones more attractive than others depending on useful value to individuals. These include fees, transaction speed, conversion costs, stable value tokens, etc. Nevertheless, the decentralized private transfer between individuals remains the common attraction and basis for value in most cryptocurrencies.
IS BITCOIN MONEY?
Bitcoin has been described and characterized as a form of money. But, is it?
Money has three distinct characteristics: medium of exchange, measure of value, store of value. Bitcoin and other cryptocurrencies are, to a limited extent, mediums of exchange. But, they are not measures of value.
Money is used to value other items – by price. Under our current monetary system, we place a relative value on various goods and services by attaching prices to them. The goods and services we buy and sell, our own labor, education, etc. – all have value. The value of various items is determined and a price is affixed using a commonly accepted medium of exchange. Currently, that medium of exchange is the US dollar. For Bitcoin to be considered money, it would need to function as a measure of value. In other words, how many Bitcoins will it take to purchase your next vehicle? or dress? or steak dinner at your favorite restaurant?
We don’t know because there is no reasonably reliable application of value for Bitcoin. In other words, how much is Bitcoin worth? At least with US dollars – for now, anyway – they serve as a medium of exchange and a measure of value.
There is no possibility for Bitcoin to be considered a store of value. Being a store of value requires a retention of purchasing power over long and indefinite periods of time. It is impossible to determine Bitcoin’s value because there is no history of sufficient length to provide evidence that it serves as a store of value. Sufficient evidence would require centuries.
How do you determine a value for nothing, i.e., Bitcoin? A house has value. Companies that produce and provide goods and services have value. Real money (i.e. gold) has value. The much-maligned US dollar, a paper substitute for real money, has a commonly accepted, implied value, even though it continues to lose purchasing power.
Bitcoin is a digital creation which has no value in and of itself. As such, it can never be used as a measure of value for anything else. Think of it this way: How many Bitcoins is your house worth? How many Bitcoins will your next car cost? If you can answer those questions without any calculations, you will know that Bitcoin has become “a generally accepted form of money”. (see Is Bitcoin Money – Does It Have Value?)
CONCLUSION
What is the value of a tulip bulb? (see Tulip Mania: About The Dutch Tulip Bulb Market Bubble)
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED