Perspectives of Bitcoin Valuation

3 minute read

Posted by: Nostradammit </span> May 22, 2014

Starting in 2011, Bitcoin’s drastic increase in value led what tended to be an amateur group of crypto-currency enthusiasts to wade into the unchartered waters of currency speculation. An entirely new ecosystem of forums, exchanges, startups and “whales” began to emerge as new fortunes were made and anecdotes of the latest millionaire who rediscovered a two-year-old hard drive were posted online. New speculators began educating themselves on everything from currency valuation to technical analysis. Forums became flooded with posts about double tops, new bottoms, trend lines, and bubbles by rank amateurs and legitimately experienced traders. All of the new entrants were desperately trying to answer the same two questions: Where will the Bitcoin price go next and what is its true value?

In its most basic form, the value of a currency is driven by the demand for said currency. That demand is a product of speculators, demand for use in a currency’s economy, and now for demand of a currency’s technological capabilities, especially with Bitcoin. Speculators hold Bitcoin suspecting that others participants will buy in and that adoption of the currency will cause others to buy in as well. Consumers looking to use SealsWithClubs and SilkRoad buy in to gain access to the services of these sites, while an emigrant of Africa seeks to bypass international banking fees by transferring money with the digital currency. Every one of these participants has a particular demand for Bitcoin and a different timeframe for usage. It is the disparity in gauging the sizes and influence of these different participants that leads to the variation in estimates of the true value of Bitcoin.

Cameron and Tyler Winklevoss have been outspoken proponents of Bitcoin in recent months. Headlines were made by the twins after their statements at the New York Times Dealbook Conference, where they proclaimed their “Bull case scenario is a $400 billion market capitalization.” This estimate is reportedly based on anticipated adoption of Bitcoin. As it stands presently, the Bitcoin market capitalization stands at $5.9 billion. The Winklevoss’ estimate is almost 70 times the size of the current Bitcoin market. This scenario would have a corresponding Bitcoin price per coin of almost $40,000.

Bank of America currency analysts provided their own estimation of Bitcoin’s price in a recent research report. They noted that two key characteristics were responsible for an anticipated growth in price. Bank of America suspects that the ability of Bitcoin to operate as a store of value (like gold), and as a “major player in both e-commerce and money transfer” could drive the market capitalization up to the $15 billion market cap range. In this scenario, the corresponding price would be $1,300 per coin.

Bank of America and the Winklevoss twins seem to differ on the anticipated magnitude of adoption for the new technology. Yet, in the e-commerce market alone, assuming that Bitcoin startups begin to provide a cheaper solution than the PayPals of the world, the market capitalization should be expected to rise well above Bank of America’s estimate of $15 billion. Further consideration of economic instability in the EU and global markets, institutional demand for store of vale, and demand for a currency with value storing capabilities supports the notion of a greater market capitalization.

The takeaway from all this is that Bank of America is in the business of providing a current valuation of Bitcoin. The Winklevoss’ and many other bullish investors have the liberty of vocalizing their anticipation of a growing market capitalization and increasing demand for Bitcoin. The Bitcoin price, in the short-term, will be influenced by adoption, startups, government reaction, speculators, and institutional investors. Timing when these entrants will occur is impossible, but their entrance inevitable. Young speculators will continue to buy and sell on the exchanges in an insatiable effort to time market movements. Yet, as shrewd investors have taught us, looking for an undervalued asset for a long-term investment is the best practice. Bitcoin, through all of the craze, speculation, and misunderstanding of the present climate, is an investment for the long-term.


Updated: 2014-05-22