Bitcoin And Beyond – Price Vs. Value

December 17, 2020

Always searching, always relentless in the quest for more, bigger, better, etc. It is a never-ending thirst that cannot be quenched; a hunger that cannot be satisfied.

Today’s investor seems oblivious to whatever it was that brought us to this point in world civilization.  Economic fundamentals have taken a back seat to fantasy and hyperbolae.

Case in point: Bitcoin. 

When fantasy takes hold, the sky is the limit. There is no logic to the price that bitcoin and other crypto currencies command. The arguments made in favor of these supposed “monies of destiny” may sound plausible to some. But the expectations for price exceed all fathomable rationale.

The problem is that most investors today do not understand the difference between price and value. As much as this is true of investments in general, it is exceptionally true of Bitcoin.

What is the value of a Bitcoin? Is it the gold content of a single coin at the center of a labyrinth of computerized code? Or is it something else?

In order to determine a value for something, we must be able to define what it is we are valuing. For example, a share of stock in Amazon (or any other company) represents a proportionate ownership in a business operation.

Expectations for growth and profitable operation of the company are based on need and desire for the service and convenience that it offers to consumers. The more successful and profitable the company is in meeting those expectations, then the potential exists for its stock price to rise accordingly.

What is it that investors think they are purchasing when they invest in Bitcoin, or other cryptocurrencies? Some argue that Bitcoin is a new form of money, but that is not the case.

In order to be used as money, Bitcoin must be able to function as a medium of exchange and a measure of value.

“Bitcoin is a digital creation which has no value in and of itself. As such, it can never be used as a measure of value for anything else. Think of it this way: How many Bitcoins is your house worth? How many Bitcoins will your next car cost? If you can answer those questions without any calculations, you will know that Bitcoin has become ‘a generally accepted form of money’.” (see Does Bitcoin Have Value; Is It Money?)

Bitcoin is a process for the transfer of money. It is the transfer process and its privacy which give value to Bitcoin and other cryptocurrencies. The problem is to determine the real value of that transfer process and affix a reasonable price to it.

I don’t see any fundamental difference between Bitcoin and other cryptocurrencies. It is probably more a case of being the first one in the pool. You enjoy it all to yourself and control things – until others start showing up.
 
A bigger issue might be “what do people really think Bitcoin is and why are they buying it?”. Some people are buying it because the price is going up; not for its fundamental value as a process for transferring money between buyers and sellers privately.
 
If analysts and investors have any inkling at all as to the true fundamental value of Bitcoin and other cryptocurrencies, then the price differential between Bitcoin and its competitors will eventually narrow considerably. Also the overall valuations will come down.
 
Price action in Bitcoin is indicative of a desire to own what is going up right now; and hope that the fundamentals justify the gamble.
 
Various forms of money are NOT investments. Money is a medium of exchange and a measure of value. Bitcoin cannot be a measure of value until goods and services have their own Bitcoin price. 
 
In addition, real money, i.e., gold, is a PROVEN store of value. Bitcoin cannot be a store of value because it has no intrinsic value and no history to support that kind of claim. For that it would take at least several centuries. 
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US silver mining began on a large scale with the discovery of the Comstock Lode in Nevada in 1858.

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