What is the Fair Value of a Bitcoin?
(Mar 26, 2021) Bitcoin is a form of digital money that powers the first “peer-to-peer payment network that is powered by its users with no central authority or middlemen”. Bitcoin is awarded for mining, or discovering blocks. Bitcoin is built on a blockchain, a public ledger that allows everyone to transact on it without centralized authority. It does this by rewarding miners a fee in Bitcoin for operating and maintaining the network. The current incentive structure dictates that the amount of bitcoin that is mined will half every year and the total amount of Bitcoin that exists in the world will reach 21 million max supply. By the year 2140, all of the Bitcoin in existence will be already mined. (https://www.investopedia.com/bitcoin-halving-4843769)
After all of the Bitcoin will be mined, miners will instead be paid by transaction fees for use on the Bitcoin network.
Since Bitcoin acts as a replacement for physical currency, it can be used to buy and sell goods and services and is used in lieu of a nations currency. Because the Bitcoin operates on a blockchain, that can be freely accessed and transacted without government or bank regulation, it is a threat to governments and any controlling body of interest.
Current transaction costs make it difficult to use as a currency for everyday things. The time to verify a transaction on the Bitcoin network is around 2 hours, while the transaction cost is around $15.37 per transaction.
The current Bitcoin market cap is 979B at the time of writing, with a circulating supply of 18,664,600. This makes the value of a single Bitcoin, $52,535 and the fully diluted Market Cap 1,103B. (https://coinmarketcap.com/currencies/bitcoin/)
Speculative Scenario 1 (Bull):
Since Bitcoin is a purely speculative physical asset class that isn’t yet used yet by the mass population in the US, the value of a Bitcoin fluctuates wildly.
A comparison would be the amount of circulating currency in western states.
In the US, there is about $14 trillion tangible USD currently circulating. Of that 1.5T is physical CIC. (https://www.grunge.com/177195/how-much-money-is-in-the-us/)
In the EU, there is approx 1.4T physical CIC (https://www.ecb.europa.eu/stats/policy_and_exchange_rates/banknotes+coins/circulation/html/index.en.html)
In Japan, there is approx 1.08T physical CIC (https://www.boj.or.jp/en/announcements/education/oshiete/money/c06.htm/)
Currently, none of these nations recognize Bitcoin as an currency, only as an asset class.
In the US, Bitcoin is recognized as property. (https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies)
In the EU, there is a proposal for regulating Bitcoin and other Virtual currencies (https://law.stanford.edu/2021/01/12/new-crypto-rules-in-the-eu-gateway-for-mass-adoption-or-excessive-regulation/)
Japan, Bitcoin is subject to regulation, with numerous attempts to launch their own virtual currency (https://www.globallegalinsights.com/practice-areas/blockchain-laws-and-regulations/japan)
In the bullish case, as a replacement for physical currency, the net total of the 3 western nations CIC comes to a total of 3.98T CIC. This calculation is done is USD. With the current value of Bitcoin, this comes out to the value of $213,292 per coin. This implies a 406% upside from the current value. This does pose the risk of regulation and banning in a western nation. If a nation bans or prohibits the use of Crypto Currency, this would obviously prevent the virtual currency from reaching such a lofty valuation.
Another valuation that should be considered is when all 21M bitcoin have been mined, This implies a value per single Bitcoin of $189,523. Once again, if a nation bans or prohibits the use of Crypto Currency, this would obviously prevent the virtual currency from reaching such a lofty valuation. This implies a 363% upside from currency levels.
To reach mass adoption would take 3-4 years of regulatory hurdles as well as a global shift in consumer payment platforms accepting Bitcoin as a payment source. The payment platform adoption is currently underway and the regulation is currently being improved and worked in, especially in the US. In the case of adoption by western nations, if the US adopts Bitcoin, many other will follow since the US typically sets the standard for monetary policy.
If Bitcoin was to become a globally recognized currency for buying and selling goods and services, then it would have become a 21st century version of the Gold Standard.
Speculative Scenario 2 (Bear):
If Bitcoin was to become outlawed in any one of these states, the United States in particular, this would cause a seismic level shift in the Bitcoin marketplace almost overnight. If, for example, Bitcoin is outlawed then the value of a Bitcoin could drastically decrease to levels close to $1,000, maybe even $100 a coin.
In addition this would cause a ripple effect that would collapse the group of promising crypto companies, almost overnight. Without the intrinsic value of Bitcoin being used as a way of purchasing goods and services, there is no need for a Bitcoin and therefore it will not hold any value.
This implies a downside of 98%, maybe even 99.8%. If this was to happen it would have catastrophic implications on the entire Crypto market.
Fintech that are contributing to Bitcoin:
Square - Square is a popular payments platform owned by Jack Dorsey. They own Square terminal as well as Cash App, an iOS app that is used for P2P touchless payments. They have 56% market penetration for their POS system and drive Bitcoin and stock purchasing on their mobile app, which is #1 on the app store in the finance section. However in payment volume, they are lagging behind competitors, Zelle and Venmo (https://www.businessofapps.com/data/cash-app-statistics/)
In 2020, Cash added an option to trade Bitcoin in their mobile app, and has boosted consumer adoption for Bitcoin. (https://finance.yahoo.com/news/square-buys-170-million-more-in-bitcoin-to-boost-crypto-holdings-222926163.html)
Tesla - Elon musk tweeted that he purchased 1.5B worth of Bitcoin is March 2021 and is planning to offer it as a form a payment for a Tesla (https://www.cnbc.com/2021/02/08/tesla-buys-1point5-billion-in-bitcoin.html). This represents 10% of their cash on hand.
Paypal - Paypal, in competition with Square, also announced that they are allowing the purchase of Bitcoin on their mobile app. This also helped drive the consumer adoption for Bitcoin. (https://newsroom.paypal-corp.com/2020-10-21-PayPal-Launches-New-Service-Enabling-Users-to-Buy-Hold-and-Sell-Cryptocurrency)
Coinbase - Coinbase is a consumer gateway for purchasing Bitcoin. It is currently valued at approx 93B and is the most popular consumer product for buying and selling Crypto assets in the US (https://www.cbinsights.com/research/report/coinbase-strategy-teardown/)
Gemini - Gemini is another popular consumer gateway for purchasing Bitcoin.
Recommendation:
I think the current value of Bitcoin, considering the negative risk, is frothy. I think that the fair value of a Bitcoin is close to $25,000 at its current stages. Without mass adoption by the United States, I think that owning a significant portion of your wealth in Crypto, is a risk that should be mitigated since too much of its value is derived from speculation.