How Can Investors Determine Bitcoin’s True Value?

It has been an eventful couple of weeks for bitcoin traders trying to predict where the cryptocurrency is headed next. But amid the rampant short-term speculation, many long-term investors looking to derive a true underlying value for bitcoin don’t even know where to start.

There are so many moving parts to the bitcoin story that the first step in determining the digital currency’s true value is to take inventory of what it is, what it was designed to be and why it has been in the news so much lately.

What bitcoin has to offerBitcoin investors see the digital currency as a true safe haven from inflation and a means of preserving wealth free from government interference. Since bitcoin transactions are completely anonymous and occur on peer-to-peer networks, bitcoin accounts are theoretically immune to government interference. Using bitcoin is completely tax-free. In addition, since only 21 million bitcoin will ever be created, supply is fixed and limited.

Bitcoin’s public ledger, known as the blockchain, is the true power behind the currency. Every bitcoin transaction is tracked and recorded on the blockchain, making the currency resistant to manipulation.

Grandview Research estimates the global blockchain technology market will reach $7.7 billion in size by 2024. The problem for investors is that bitcoin isn’t the only blockchain game in town. Rival crytocurrency ethereum utilizes just one of dozens of other public and private blockchains, all of which have their own unique technology. Blockchain technology has value, but that value may only be loosely tied to the value of a single bitcoin in the long-term.

Utility is key. With the supply of bitcoin fixed, the currency’s fate hinges on a single variable – demand. That demand will be closely tied to bitcoin’s utility. Billionaire hedge fund manager Ray Dalio is the latest to call into question bitcoin’s utility as an alternative to traditional currency. In an interview with CNBC this week, Dalio said bitcoin can currently only be used to buy and sell a very limited number of products and services. The ability for consumers to buy things is typically one of the basic requirements of a currency.

“It’s a shame. It could be a currency,” Dalio said. “It could work conceptually, but the amount of speculation that is going on and the lack of transactions [hurts it].”

Dalio also said that, due to its wild price swings, bitcoin is not a viable store of value, another basic role of a typical currency. The price of bitcoin is up 1,670 percent in just the past two years, yet the currency’s remarkable climb is riddled with crashes. Since 2013, bitcoin has experienced at least five different sell-offs when the price of a bitcoin collapsed by at least 30 percent in a matter of days.

Another factor that may limit bitcoin’s utility is government regulation. Bitcoin prices plummeted by more than 37 percent from Sept. 1 to15 after China announced it is shutting down major bitcoin exchanges in an effort to crack down against fraud. Bitcoin’s anonymous nature makes it a useful tool for criminals and money launderers. In fact, Blockchain Intelligence Group recently estimated that roughly 20 percent of all bitcoin transactions involve illegal activity. In time, more regulation could potentially limit bitcoin’s utility further.

Big-name skeptics. Even if bitcoin has true long-term value, Dalio is the latest name on a growing list of skeptics that believe its current price of around $4,000 per coin is out of touch with reality.

“Bitcoin is a highly speculative market,” Dalio said. “Bitcoin is a bubble.”

J.P. Morgan Chase CEO Jamie Dimon took his analysis a step farther earlier this month, blasting bitcoin for being a “fraud.”

“It’s just not a real thing, eventually it will be closed,” Dimon said at the Delivering Alpha conference.

Even back in 2014 when bitcoin prices were hovering about $600 per coin, legendary Wall Street investor Warren Buffett warned investors that bitcoin is a “mirage.”

“Stay away from it,” Buffett says. “The idea that is has some huge intrinsic value is just a joke, in my view.”

Valuing bitcoin is a tall order. There are plenty of opinions out there on bitcoin, but investors looking to sit down and objectively calculate a value for bitcoin have very little information.

Jeff Goldman, founder of JC Trading Group and author of the book “Failed Traders: The 20 Common Mistakes Committed By Over 1,000 Losing Traders,” says bitcoin could end up priced anywhere from $200 per coin to $50,000 per coin in the long term.

“Right now, it’s impossible to price bitcoin based on fundamentals, so the only force driving price is pure demand,” Goldman says.

According to Goldman, the more mainstream bitcoin use gets and the more common applications it has, the more demand for the currency could send prices sktyrocketing.

“On the flip side, if no mainstream use is developed, bitcoin could pretty much go back to zero,” he says.

Michael Farr, president of Farr, Miller & Washington, says that without government, gold or any other backing, there’s no basis for calculating bitcoin’s value.

“Cryptocurrencies like bitcoin are fiat currencies without the fiat,” Farr says. “There is no underlying fiat or precious metal or anything other than anonymous buyers and sellers supporting it. It’s fairly impossible to get any benchmark of value when you can’t even determine who owns the stuff.”

Dennis Dick, proprietary trader and market structure analyst at Bright Trading, says bitcoin’s supply may be limited, but the overall cryptocurrency market is exploding with supply.

“There’s an extremely low barrier to entry,” Dick says. “It’s very easy to start a new digital currency. There are nearly 1,000 of them now. Even if you believe in the cryptocurrency craze, how do you know bitcoin is going to be the winner?”

Dick says the cryptocurrency frenzy reminds him of the dot com bubble of the late 1990s. At the time, everyone knew the internet was a huge business opportunity, but few recognized (AMZN) as one of only a handful of huge long-term winners.

There are…

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