Is it possible to find Bitcoin's intrinsic value?
With Bitcoin falling rather sharply over the past few days, perhaps it is time to make some postulations as to what a Bitcoin "should" actually be worth.
First, keep in mind that this post in not inteded to base your buying or selling decisions on but more of a fun thing I decided to do based on a couple articles I have read in the past.
This being one of them:
https://medium.com/@dsquareddigest/how-i-guesstimated-the-value-of-bitcoin-in-2014-e64f327753c8
Now that we have gotten that part out of the way, lets dive in!
The first thing we must consider, does Bitcoin have any use cases?
Most people might say "nope or yes it does but very little" upon first thought. However, after doing some digging, I can conclusively say that Bitcoin does have one very strong use-case indeed.
That of purchasing illegal goods, specifically drugs.
Now, before I go any further I'd like to point out that I do not support that use nor am I happy that one of my main investments is used for illegal purchases, but keep in mind that the US dollar is also used for many nefarious activities and that doesn't make it in of itself, bad.
Further more, this same use that is frowned upon by myself and many others is actually what gives Bitcoin the investment a floor, at least potentially.
You see, if every government around the world were to all of the sudden outlaw Bitcoin and make it illegal to use, there would still be an underlying market that uses it.
By the way we already know that every country won't do that as we have already seen some legalize it as official legal tender and others have allowed taxes to be paid in it, which is basically the same thing.
However, for coming up with a price floor for our model, lets assume that Bitcoin has been made illegal and has no other purpose other than that of the Black Market and purchasing illicit drugs.
Which is a rather large market by the way...
The global drug industry was estimated to be somewhere between $425 and $652 billion USD annually.
Using that number perhaps we can take an age old equation and rework it a bit to get a reasonable price for Bitcoin, what do you say?
Lets try using the famous (infamous?!) MV=PT equation.
It was created by Irving Fisher in 1911 and it was known as the "Equation of Exchange". It is now known mostly as the "Fisher Equation" and is based around the Quantity Theory of Money.
It is actually part of the thought process behind QE that so many countries around the world have been implementing over the past decade or so.
In this equation:
M = Money Supply
V = Velocity of money
P = Price
T = Transactions
Is it possible that we can use this equation and the information above to come up with a reasonable value for Bitcoin?
Sorta, kinda, maybe.
In this instance:
M = The number of Bitcoins (just under 17 million currently)
V = For this example we will use 10 as our number (though the velocity of money is rarely a constant)
P = This is the number we will be trying to find
T = Any number between $425 and $652 billion (as those were the numbers given for the illicit drug trade).
Bear with me here as I am going to use some magic mathematical wizardry to get the equation set up in the way we need it to be in order to solve for P.
Now, if we take MV and multiple them together, we get 17,000,000 X 10 = 170,000,000.
Then lets say we use $500 billion as our drug market number as a conservative number based upon the range we were given, we can then take our reconfigured equation and divide $500 billion by that 170 million number from above.
Which would give us $2,941.
That would mean that in our example if all the illicit drug trade were to be priced in terms of Bitcoin, it would give Bitcoin a price of roughly $2,941 per coin.
With Bitcoin currently trading around $3,800 per coin, that number does't sound all that unreasonable now does it?
Again keep in mind that this number is mostly taken out of thin air, though not entirely, and mostly intended for fun and entertaining purposes.
If nothing else I hope the thought process behind the pricing was interesting to you and perhaps opened your eyes about the possibility of there indeed being a price floor in Bitcoin.
Stay informed my friends.
Sources:
https://www.nolanchart.com/article5583-mvpt-a-classic-equation-and-monetary-policy-html
https://medium.com/@dsquareddigest/how-i-guesstimated-the-value-of-bitcoin-in-2014-e64f327753c8
Image Sources:
https://bravenewcoin.com/news/bitcoins-value-altcoins/
http://www.investopedia.com/articles/05/010705.asp
https://blockchain.info/charts/total-bitcoins
Follow me: @jrcornel
Is this value based only on Illicit drug market? If you consider other market price will go high. btw great calculations. I never had this idea before :)
This post received a 4% upvote from @randowhale thanks to @steemero! For more information, click here!
Yes, this is based solely on the illicit drug market. It is basically pricing it as if there were no other use cases or adoptions for the coin
The illicitness would mean a massive crime across the globe. I believe that just like gold or other pegged fiat currencies. This has come into being but internet based hence its value is realized through the exchange conversion widely acceptable.
Came to say exactly this :)
Good analysis on the fair value of bitcoin. I agree that US dollars are used for illicit activities so the argument that bitcoin should be shut down for this same reason is dumb. Supply and demand drive a lot of short term pricing so it will be interesting to see if demand goes down at all due to the recent news.
Well anything self-serving interest says is dumb.
I think the demand won't go. Why would people stop using it when they can get it cheaper now?
Demand will change once Bitcoin changes, i.e.: higher / lower transaction fees, faster/slower network etc.
Price won't effect the supply / demand relationship at all in my humble opinion.
Yo ,
Nice work sir
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Follow me @Yehey
Thank you.
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too much numbers make me dizzy
is it possible? dunno
but if one things for sure I want to have a lot of em!
Same here. Especially the cheaper they get!
still dipping!
Certainly an interesting approach to valuation.
From observing BTC and altcoins for a while now, "usage" keeps coming up... yet there doesn't seem to be a lot of effort being put into "creating legitimate USAGE" for most coins our there. Everything seems to be looked at mostly in terms of "investment" and "returns." I'm just surprised there aren't more people trying to... "protect"... their investments by creating a reason for that investment to exist, in the first place. Strikes me as a bit "house of cards-ish," but maybe I'm missing something?
One of the appeals of Steemit/Steem was precisely the fact that there seems to be the potential for an underlying economy, to support the token. Maybe I'm just old-fashioned in terms of how I assess "value," but in order for something to call itself a "currency" doesn't there need to be actual USAGE for it?
Its like trying to find the intrinsic value of the internet in the 1980's.
So true
I agree to this
Like .COM a correction is bound to occur... And then an upward correction.
On Aug 22nd I told everyone who thought they missed the bitcoin surge to buy around $3400, way before the china news, thats the last correction point that was missed, now as it approaches, what to the charts say??? buy bitcoin around $3400-3500 the coins do what they are supposed to do regardless of all the BS
Great point. I agree completely. In all the other systems they work great when the price is going up, but completely disappear when the price starts going down, very house of cards ish indeed. Ideally we still need a market for people to actually start transacting in steem... an online "steembay" or something where people exchange goods for steem.
Maybe it's time to bring that up again... I floated that idea about 4-5 months ago and it seemed to fall on somewhat deaf ears... although @steemgigs and @steemshop came along as fledgling initiatives... but I think we need something more robust.
denmarkguy - Exactly! Value! I'm writing a long article about this. Hope you'll read and will let me know of your thoughts.
PS: I still don't like that the valuation of a currency being made by drugs. I'm hoping that trust and human values are still relevant when it comes to investing
AGreed. thanks for sharing :) Also why I like Steemit as it feels sustainable because of it's underlying economy :)
All that can be a bubble??
Valuable point :)
Its funny how the bears come out of the woods every time there's a dip. Same old story over an over for 8 years lol I just keep buying the dips and laughing my way to the bank. Easy money hahahahaaaa
yo my man!
haha very fun calculations! and its true hehe :)
Wow, that was a very cool way to break this down. Much better than the guesses being thrown around by pundits or bogus comparisons to the tulip market. This was the best article I saw that dispels the tulip bubble argument.
https://steemit.com/money/@thehutchreport/dimon-is-whistling-thin-air-out-of-his-two-lips-bitcoin-is-not-like-the-tulip-bubble
Oh and thank you for sparing us the complicated details, but I could not resist looking up the complete Fisher version, so here it is also if anyone else wants to see it:
"
MV = ∑ piqj = PT ….(4.1)
where
M = total stock of money in an economy;
V = velocity of circulation of money, that is, the number of times a unit of money changes its hand;
Pi = prices of individual goods;
∑P = p1q1 + p2q2 + … + pnqn are the prices and outputs of all individual goods;
qi = quantities of individual goods transacted;
P = average or general price level or index of prices;
"
You no what ? I don't understand nothing, I have a lot to learn
there is nothing to understand... if @petpeeves had a daughter, she would certainly not be a genius (there is a big truth in this sentence, and if you don't know the quote... enjoy the ride :)).
Probably not .... but she would pass the chauffeur test. :)
https://www.farnamstreetblog.com/2015/09/two-types-of-knowledge/
Nice to see that you got the quote and the humor ;). I am sure she would, why would she be?
I'm simple 1 x 1 = 1 😎
Accounting 101: + -
the rest is garbage ;).
Hahahaha.
Thank you
ahaha against which color is this home for sell?
Thank you @jrcornel
A very fun exercise. Of course, you are presuming that 100% of the illegal trade is captured by bitcoin and we both know the USD isnt going to give up that market without a fight.
Value is basically a social agreement that exists between people. We agree what something is worth. At one time, people thought Cabbage Patch Dolls has a value...not it is agreed upon that they dont. The USD is agreed upon to have value mostly from its backing by the US Government which means something to a lot of people. That might not always be the case.
Bitcoin, in and of itself, has no value..just like everything else. In the end though, I think people will turn to this mechanism as a store of value.
So you caught that, a very big presumption on my part indeed. ;) If Bitcoin were only half of that market you could cut the price prediction in half and maybe that is a better measure. As you can see, there are many variables in this "analysis". Great comment by the way!
I just love when people try to attack Bitcoin by saying that it is used for illegal activities.
What do they think this is?
There were more drugs bought in the last week using USD than there are bitcoin in existence.
A truly stupid attack on BTC and defense of the USD.
very true!!
Woah! Interesting breakdown of how to determine bitcoin's true value... The question still remains however, does it truly matter what it "should" be valued at? As a speculative investment, the true value and the perceived value rarely meet.
Great point. In the grand scheme of things it means very little, in the here and now, it was kind of fun to think about. :)
Great comment by the way!
Thanks, I enjoy your posts man.