Many people say nothing but that is the same of all money like assets to some degree. Bob Shiller says we can’t actually tell as it is worth what people think it is worth and that could be anything. I wonder if we can do better. To be sure, “better” is not great. But I was interested in the theories of value that Bitcoin purchasers have put forward and what they imply. These theories are based on some optimistic scenarios about Bitcoin and are, therefore, highly unlikely. But they might give us some sort of upper bound.
By the way, I know that I am going to annoy everyone with this post. This is just a back of the envelope thought. There is actually lots to argue with and I am 100% certain that any calculation I do is surely incorrect … but still …
Theory 1: Gold substitute
This theory states that people will hold Bitcoin as a safe store of value independent of any government. They argue that gold has historically performed this function but Bitcoin is better. So what if Bitcoin replaced gold? In about 2015, Bitcoin and gold prices turned from positively to negatively correlated so this may be something.
First of all, how much gold is there? According to this site, 140,000 tonnes of the stuff. At current prices that is about $7.5 trillion. Around 32,000 of this is held by Central Banks and of the rest about 17 percent of gold produced each year is used for investments. By my calculation that means 18,300 = (140,000 – 32,000)*0.17 is used by private investors as a store of value. That adds up to about $800 billion.
Second, if all of this went to Bitcoin, how much would a Bitcoin be worth? There are currently 16,752,000 bitcoins which gives a calculation of $800 billion/16752000 = $47,755 per Bitcoin. Bitcoins are projected to rise to about 21 million. In that case, we get $38,000 per Bitcoin.
Of course, this is what Bitcoin might be worth if it actually replaces gold. That would be historically unprecedented not to mention that surely gold has better value in a zombie apocalypse so there’s that.
Theory 2: USD substitute
The second theory is that Bitcoin will prove useful as a circulating medium of exchange and become the world’s reserve currency. Arguably, at the moment that is the US dollar which has held that position since the 1920s. If Bitcoin replaces the USD, what value might it be?
This is a tricky calculation. For starters, we economists argue over what the total amount of USD there is in the world. This is because banks and other financial institutions create more of it and that currently isn’t happening with Bitcoin. There is nothing stopping that from happening in the future (actually, my guess is exchanges might be already doing it) but it does muddy the calculations.
So I am going to focus on cold, hard cash which is the closest thing that we can tie to Bitcoin itself. Back in 1925, there was $4 billion in cash while today there is $1,600 billion. That is an increase of 400 fold. We can take that as some aggregate increase in the value that is required to be a functioning reserve currency.
But here is the rub. Bitcoin cannot increase in supply that much. That means that if Bitcoin were to replace the USD, then all of that extra value would get built into the virtually fixed Bitcoin supply. That means that it will increase in value some 400 fold.
What is the baseline? If we start from a few cents, that does not bode well for Bitcoin. But I am going to focus on the 2013-16 odd period where Bitcoin seemed relatively stable at around $250. I am treating that as Bitcoin’s 1925.
If that is the case, then that gives a upper bound reserve currency value for each Bitcoin as $100,000. That is a nice round number that was purely accidental if you can believe me on that.
If you believed my calculations, then people purchasing Bitcoin today at about $15,000 a pop (this keeps changing so what are you going to do), then on the gold theory, those people believe there is a greater than 31 percent chance Bitcoin will replace gold and on the USD theory, they believe there is a greater than 15 percent chance Bitcoin will replace the USD. I don’t believe either of those probabilities hold but then again I don’t have a crystal ball either.