Does Bitcoin Have a Fundamental Value & What Is It?

Bitcoin

Does Bitcoin Have a Fundamental Value & What Is It?

In October 2021, bitcoin reached its peak point so far. For the first time in bitcoin price history, its value exceeded $66,000, which made analysts predict that this number would reach $100,000. This did not happen, though, and at the moment of writing in late December 2021, the bitcoin price stands even lower than its peak point, at slightly less than $52,000. So, the question — is bitcoin a good investment? What is its fundamental value, if it has any? To answer that, we should dig into some finance basics first.

Fundamental Value Concept in a Nutshell

In finance, fundamental value means the return on investment on assets. Simply put, if you have a cow, its fundamental value is how much milk it gives minus the money/work you spend on feeding, watering; in other words — maintenance. Renting an apartment is another good example — its fundamental value is the rent you get minus maintenance expenses.

That sounds pretty simple if we put it this way, but the practical reality is always a bit more complex. In our example of cows and apartments, another thing to consider is how you’ve gotten both assets — did you buy it (add to expenses), inherit, find in the woods? Just joking, but the point still stands. This already diminishes fundamental value because cows and apartments cost money, and both have their own (shelf) life.

Still, the most important factor that defines the fundamental value of anything, from cows to bitcoins, is market demand. When everyone in the area lives a vegan lifestyle, cows have no fundamental value because no one will buy your milk or meat. Apartments have their specifics, too — if it is next to a spaceport, the next Firefly launch will render it pretty much useless.

The same logic applies to national currencies and cryptocurrencies like bitcoin, even though they have differences.

Evaluating National Currencies

money

Ok, so we use paper money and credit cards today — do paper sheets and digital numbers have any real fundamental value now that the gold standard has been abandoned? Well, yes and no. Today’s fiat currencies are no longer backed up by a vault of gold and have more of a ‘reputation’ value. Sure, finance experts have six other parameters — scarcity, utility, divisibility, durability, transportability, and resistance to counterfeits — but in practice, it all goes down to demand and supply.

Money exists because people need a medium of exchange, and national currency value depends on the economic strength of the state issuing it. For example, people deem the US dollar valuable because the US has an advanced economy and supplies goods worldwide. Many people believe it will stay this way, so USD has value.

But what about bitcoin? Well, bitcoin worth also depends on faith, but with a twist.

Read more: Making sense of bitcoin, blockchain, and cryptocurrency in detail

How Do We Set a Bitcoin Value?

Unlike gold, bitcoin mining is not so tangible, so setting a value on it is pretty tough. This cryptocurrency is not backed up by any real-life assets, which makes it no different from any other national currency — except that bitcoin is not backed up by governments and economies either. Simply put, bitcoin is a private fiat currency. But what makes it valuable then?

Bitcoin trading, pretty much like everything else, relies on demand. As a medium of exchange, bitcoin has some features in common with national fiat money. Its supply is, arguably, not endless, so bitcoin has a scarcity feature; it can be divided into more decimals than most national currencies; bitcoin is tougher to counterfeit than most currencies, and it is definitely durable and transportable.

But what about bitcoin utility — perhaps, the most realistic indicator of money’s worth? To make bitcoin truly worth something, people will actually need to start making cryptocurrency transactions in exchange for something else. So far, this aspect lags behind because the only state that accepts bitcoin as a medium of monetary exchange is El Salvador. At the same time, USD remains just as valid there, and after bitcoin was acknowledged as a valid currency, massive protests surged.

On a corporate level, many online platforms support bitcoin payments already, but the only major company that accepted it in exchange for tangible goods was Tesla. Was. Because Elon Musk’s company abandoned its bitcoin practices less than two months after initiating them.

So, Is Bitcoin Valuable?

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Bitcoin news exploded after the currency reached its peak value in October 2021. However, its further value has not reached an estimated $100,000 prognosis so far. Curiously, analysts also attempted to estimate the real bitcoin value based on the total amount of monetary mediums of exchange (cash, digital assets, gold, etc.) The latter stands at $52.1 trillion, but another issue arose — how do we set money valuation? Especially given that money valuation (that is, an agreed amount of an asset’s estimated worth) is as intersubjective as currencies’ fundamental value?

If we think of bitcoin as digital gold that is not endless, it has all the chances of becoming more valuable than gold because bitcoin is supposedly more scarce. That, however, does not explain why the bitcoin price, after reaching $64,000 in April 2021, dropped to $30,000 next month. In other words, it’s not always about scarcity and supply — it is about demand.

Will bitcoin demand persist? No one can say for sure now especially given multiple bitcoin enthusiasts and promoters. Still, unless people actually start using this cryptocurrency as a widespread payment method, bitcoin futures are not so bright.

Check out: What You Need To Know About Bitcoin Taxation: How To Avoid Getting In Trouble With The IRS

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