Bitcoin is gaining worldwide momentum, and the famous venture capitalist Anderson, even famous venture investor Marc Adreessen is paid in bitcoin for his salary. How do we evaluate value of bitcoin over time if we’re interested in investing and mining bitcoin?
We have an insider’s explanation of the bitcoin’s value calculation. Joshua Seims is an angel investor and entrepreneur from San Francisco. He set up a company to provide secure storage of bitcoin.
From Joshua Seims:
One very important question for bitcoin investors: From the long term perspective, how much is bitcoin worth? I agree with the popular view point, that is in 10 years bitcoin either becomes worthless, or exceedingly worth multiple times than its current value. There’s no third possibility.
Favorable arguments for bitcoin’s success include: it spreads virally, once you start using bitcoin, you want to use it everywhere. Bitcoin can protect your assets against inflation, as many countries’ currencies have high inflation. It has low transaction costs, without central agency’s control, offers anonymity, and as a digital asset it’s convenient to use it globally. As bitcoin’s decentralized, it’s hard to be regulated by governments.
There are also many factors that can lead to bitcoin’s failure. Once bitcoin gets enough attention, governments are threatened to forbid its circulation. As bitcoin’s anonymity affects governments’ tax revenue, governments are motivated to regulate bitcoin.
Other virtual currencies have potential to replace bitcoin as well. Also bitcoin protocol has a fatal flaw that will reveal when it’s in larger scale. Finally, it’s complicated to mine and use bitcoin, so it’s hard to enter the mainstream currency market.
Let’s assume bitcoin can be successful, and how much is its value? Let’s take a look at bitcoin’s specific applications. There are three most discussed applications:
Store of value: bitcoin and gold have similar characteristics (their supplies are limited, value is divisible and interchangeable). There are other excellent characteristics (digital storage, high anti-inflation function) According to Wikipedia, the total value of world’s gold reserve is up to $7.65 trillion.
Black market: Statistics has shown that black market is about 22% of the world economy (assuming with the same currency’s circulation rate, black market has about $650 billion). Bitcoin is perfect for black market transactions, with the only drawback of semi-anonymity.
Since all bitcoin transactions are publicly visible, bitcoin transactions are traceable.
Global currency: it is said that bitcoin can replace about $3 trillion U.S. dollars in world currency circulation(calculated by gross world product divided by the velocity of money). It’s impossible for now.
I’m not sure whether this is a good thing (you can refer to Austrians and Keynesian’s arguments). However this is truly happening.
Finally, assuming there are 17 million bitcoins in circulation after 10 years, we can input the parameters into an interactive calculator.
For example, if we assume there’s only 10% chance of bitcoin’s success, then bitcoin’s total value is equivalent to 30% of gold market value, and every bitcoin can be valued at $13,500. With its current price, it’s a very good investment. (of course it comes with high risk as well)
If you enter your assumed parameters into the calculator, how much would you get? If it’s greater than present value, then it’s worthwhile for investment.