Bitcoin: Going from Speculative Investment to Currency Equivalent

Screen Shot 2017-12-03 at 1.05.02 PMAs markets wake up to the fact that bitcoin is a legitimate currency, there will be a mad dash to acquire some.  However, when bitcoin is rising at the rate of 750%  per year it is seen as a strong speculative investment, not just as a currency. The amount of dollars held in investments is something close to $25 trillion depending on what you want to call an investment and what asset classes you include in the evaluation. Let’s just consider the cash equivalents.

People will want to hold what they need in bitcoin as cash, and, what they want to hold in bitcoin as an investment.  Later on, when it reaches its natural value and behaves more like a currency in relation to other currencies, people will be comfortable holding just enough cash to satisfy their liquidity needs.  We’re not there yet.  Instead, you can expect the amount of bitcoin people hold will be equal to the amount of cash they currently have in fiat currency PLUS an investment amount.

If you had a very, very good investment idea, one so good that there was barely any risk at all, and the reward was phenomenal, would you invest between 25% and 40% of your portfolio?  Let’s be conservative and call bitcoin a good investment but not phenomenal.  Then, you might expect a 10% – 20% investment.  If bitcoin rises to that level of speculation and that amount is invested then a bitcoin would reach $225,903. = ($25T x 20%)/ 16,600,000 bitcoins. There would be some overlap between the money you considered an investment and the money you considered cash.

Bitcoin will run up in value to $225,903. as an investment.  It will then transition to cash from speculative investment.  At that point, bitcoin values will go to $301,204.  We are witnessing the run up to $225,903 as people speculate on a good thing and bitcoin becomes fully invested.  As more and more people have more and more bitcoin and the value stops going higher, it will slow.  Before it stops altogether, however, it will transition to being just another currency which that we won’t pay attention to.  Bitcoin will go up to $301,204 as people throughout the world hold an average somewhere between $666 (cash equivalent) and $961 (gold equivalent) in bitcoin.

171106 Bitcoin Valuation

For-sale-sign-home.jpgWhat is the intrinsic value of Bitcoin?  Intrinsic value? How can a virtual currency have any intrinsic value?  Let’s ask that question in a different way.  What should Bitcoin’s value be in order for it to represent value?

Putting a value on currency is tricky business.  What is the value of a U.S. dollar?  How does it compare to other currencies around the world?  That calculation has to do with the underlying value of the U.S., the U.S. economy, the money supply, the trade deficit, and a dozen other factors.  In the end, people get a sense of the value of a dollar by seeing what can be purchased with dollars.  That’s not possible, yet, with Bitcoin.  There aren’t enough things to buy or exchanges to use.

If something is very easy to manufacture, chances are it will not cost very much.  A producer should be able to buy raw materials, do the manufacturing, sell the finished product, and be able to keep some extra money generated in the process.  If too much money is generated, more people do manufacturing.  If not enough money is generated, the price goes up and there are scarcities.  You can’t buy a good, natural bristle painter’s brush today because they are difficult to make and not enough painters use them.

We are just at the beginning of cryptocurrencies being used to represent commerce online in a virtual world but their uses are varied and many.  However, we have hundreds of examples where cryptocurrency does a better job than fiat currency.  Countries are adopting Bitcoin where their own currency was not working well.  People are able to send money great distances, securely, by using Bitcoin and avoiding banks.

Let’s say Bitcoin is used for purchasing homes.  There are 5.5 million new and existing homes bought and sold each year in the United States.  The average price of a home is $188,900. In other words, one trillion dollars in homes are marketed each year.  If a person bought Bitcoin in preparation for purchasing a home and held it a year, there would have to be one trillion dollars in Bitcoin available just for home marketing.  A single Bitcoin would have a value of $62,587.35 because there is roughly 16,600,000 Bitcoin of the 21,000,000 that will ever be mined already out there.

Add to the one trillion in homes the value of  all cars, all jewelry, all food, all sporting equipment, all drugs, all hospital stays, all doctor visits, all tuition, all theatrical tickets, all salaries, all tips, all publications, all subscriptions, all art, all military equipment, all aircraft, and everything else you can buy with a credit card.

171020 Bitcoin = $455,777.33

WHAT IS BITCOIN WORTH?  WHAT WILL BITCOIN BE WORTH?  Many people have told us what they think Bitcoin might be worth today, tomorrow, by the end of the year, in 2018, in five years, in ten years.  It’s all guesswork.  No one knows. Let’s take the next few blog posts to start evaluating Bitcoin by different measures to give us a feel for what the possibilities are.

The first valuation for Bitcoin will be a comparison to gold.  Let’s say that Bitcoin one day takes over the position gold has in the world for representing wealth.  There’s a fixed amount of gold.  Of course, more is being mined every year but that represents just a small fraction of the total amount of gold that is already in existence.  From Wikipedia, there are an estimated 165,000 to 171,300 metric tons of gold. That’s about 181,881 ordinary tons or 363,762,732 pounds, or 5,820,203,717 ordinary ounces.  Let’s just call those 5.8 billion ounces.

There are 7.6 billion people in the world.  That is just about 3/4 ounce of gold per person for every person on earth.  That is, by today’s rate of $1,286.10/oz., $981.50 worth of gold per person.   All the gold in the world is worth $ 7,459,377,200,000.00.  That’s 7.5 trillion dollars worth of gold.  

There is 16,366,275 bitcoin in existence today.  If they are going to represent the same worth of gold, one bitcoin would be worth $455,777.33.  Sounds absurd? Using the M2 money supply definition, if you were to look for all of the U.S. dollars in the world you could expect to find $10.8 trillion in existence.  If you want to count only actual paper and coin, there are about $1.2 trillion around the world.  

Not exactly the same as the worth of gold, but U.S. dollars, both physical and virtual, yield numbers in the same ballpark.  Bitcoin = $455K is not impossible.