How Much Is Bitcoin Worth?

What is Bitcoin Worth in 5 Quick Headlines ...

>>   Currencies possess value because they are usable both as a unit of exchange and as a store of value.

>>   To be successful, currencies need these 6 qualities: Utility, Divisibility, Durability, Transferability, Scarcity and Counterfeit-ability.

>>   Bitcoin possesses value because, when checked against these 6 qualities, it emerges well - its current most important issue is as a unit of exchange because most business enterprises don't yet accept Bitcoin for payment of goods and services.

>>   Bitcoin's transferability and utility have been challenged due to problems surrounding Bitcoin's storage and exchanges.

>>   But if/when Bitcoin gains in popularity to reach 15% or more of the global currency market, the value per Bitcoin would then be about $514'000. This assumes that all 21 million Bitcoins will be in circulation.

What is Bitcoin Worth ... In Detail ...

In its short history, Bitcoin has shown itself as an efficient way of transferring money via the Internet.

Its control is decentralized, it has transparent rules and it offers an alternative to fiat currencies controlled by governments and their central banks.

There is continuing debate as to how Bitcoin and other digital currencies should be priced but the question is:      What gives any currency VALUE?

Why Do Currencies Have Value?
Bitcoin's Utility
Bitcoin's Divisibility
Bitcoin's Durability
Bitcoin's Transfer-ability
Bitcoin's Scarcity
Bitcoin's Counterfeit-ability
Bitcoin's Challenges
Bitcoin as Store of Value
Bitcoin's Worth vs. Fiat Currencies
Bitcoin's Valuing Difficulties
Velocity of Money

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Why Do Currencies Have Value?

Currency is usable if it can be trusted to maintain its relative value over time and without depreciation.

Earlier societies in history used commodities or precious metals as payment methods because they were trusted as possessing relatively stable value.

But instead of expecting people to carry around inconvenient amounts of gold, wheat or some other type of currency, people eventually changed over to minted currency as a more convenient alternative.

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In history, many types of minted currency were trusted due to their being reliable stores of value, being made of precious metals with little or no depreciation risk.

In modern times currencies mostly are in the form of paper money which doesn't possess intrinsic value compared to coins made with gold or other precious metals.

We also use electronic currency and payment methods and some currencies rely on being "representative", i.e. people trust knowing they can exchange their electronic currency at any time for a certain amount of some commodity.

But as the USA and other countries stopped linking their currencies to gold in 1971, currencies like the Dollar, Sterling, Euros, Yen, etc. are now classified as "fiat".

Fiat currencies are issued by governments or their central banks and are not backed by any precious metal or commodity. Fiat currencies instead depend entirely on trust placed in them by the people and their governments.

Utility,  Divisibility,  Durability,  Transfer-ability,  Scarcity & Counterfeit-ability

Apart from whether a currency is a store of value or not, a successful currency needs to qualify with regard to Utility, Divisibility, Durability, Transfer-ability, Scarcity and Counterfeit-ability.

1. Utility

To be effective, people must be able to reliably trade using convenient units for goods and services. This is why currencies were developed in history - so that individuals and traders could avoid cumbersome barter for trading goods and services.

Utility also means being able to easily move money from one place to another. This was/is obviously a drawback for precious metals and commodities.

One of Bitcoin's advantages is that it uses blockchain technology, a distributed ledger system which is trustless and decentralized, which means that nobody participating in Bitcoin needs to establish trust with one anyone else in order for the system to work.

This is possible because the blockchain provides a complex verification system which is essential to maintaining the ledger and is also essential to the Bitcoin mining process. And because of its flexibility, blockchain technology is now being increasingly adopted for other uses with no connection to cryptocurrencies.

2. Divisibility

To properly function efficiently for all types of goods and services, currencies need to be divisible into convenient smaller units. They must be sufficiently divisible in order to accurately reflect the value of every item or service throughout the economy.

No more than 21 million Bitcoins will ever exist which is a much smaller number than most world fiat currencies. Bitcoin is divided in up to 8 decimal points with the smallest unit, 0.00000001 Bitcoin, called a "Satoshi". This means there is an ample supply of individual units for distribution throughout the global economy.

One Bitcoin is significantly more divisible than the USA Dollar or other fiat currencies. While the Dollar can be divided into not more than 100 cents, the Satoshi is 1/100'000'000 of 1 Bitcoin, so it is extremely divisible, so allowing for its scarcity.

If Bitcoin continues to increase in value over time, even holders with a small fraction of 1 Bitcoin will still be able to use it for day to day transactions.

3. Durability

To be usable, a currency needs to be physically durable. Banknotes or coins made of something that can easily be mutilated or destroyed or which disintegrate in a short time are not acceptable.

For fiat currencies in the physical form of banknotes, durability is important because a dollar bill or a Euro banknote, although fairly robust, can still be torn or burned.

By contrast, Bitcoin cannot be destroyed in the same way a dollar bill can be. Note however that Bitcoin can be lost if the user loses his/her crypto keys, rendering the Bitcoins in the wallet unusable, although still existing.

4. Transfer-ability

In order to be useful, currencies need to be easy to transfer between participants. Fiat currency needs to be transferable inside a particular country's economy and also between countries.

Because of the existance of cryptocurrency exchanges and wallets Bitcoin is easily transferable between parties within minutes, whatever the size of the transaction with relatively low transfer fees.

By contrast, the process of transferring fiat currencies can take days and can incur significant fees. Transferability is a very important aspect for any currency and despite taking significant amounts of electricity to mine Bitcoin and process digital transactions, individuals don't typically hold any physical Bitcoin representation in the process.

5. Scarcity

A key condition to maintaining the value of a currency is limiting its supply. Too much money supply can cause price inflation, ultimately leading to economic collapse. But too little money supply may also cause economic problems.

Monetarism is a concept aiming to address the part that money supply plays in the health and growth of an economy. Fiat currencies in most world countries continue to be printed as a way to control scarcity.

Many governments aim for a specific annual inflation percentage which they set for themselves and which drives down the value of the fiat currency. E.g. The USA has traditionally aimed for about 2% inflation per year. By contrast, Bitcoin is issued at a flexible rate which varies over time.

When Bitcoin launched in 2009 its protocol stipulated that the supply would not exceed 21 million. At 2021 the supply of Bitcoin is about 18 million with the release rate decreasing by half about every four years.

If the protocol were to be altered, it would need the agreement of the majority of all who are contributing their computer power for Bitcoin mining, which is highly unlikely.

The continuing availability of new Bitcoins has encouraged a robust community of miners but this may change when the limit of 21 million Bitcoins is neared.

It's not yet known for sure what will happen when that time comes, but fortunately the last Bitcoin won't be mined until about 2140.

Scarcity can, of course, drive value higher as is the case with precious metals like gold and silver.

6. Counterfeit-ability

In the same way as a currency need to be durable (see 3 above), it also needs to be difficult to forge or counterfeit if it is to endure. If a currency is not counterfeit-proof, criminals will disrupt the currency system with fake banknotes, thus degrading the value of the currency.

Due to its complex, decentralized blockchain ledger system, Bitcoin is very difficult to counterfeit. To do so you'd need to confuse ALL Bitcoin network participants!

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Virtually the only method to create a counterfeit Bitcoin would be by achieving a double-spend. "Double-spend" is a situation where a user spends or transfers the same Bitcoin in two or more separate settings, thus creating an effective duplicate record.

Although this is not a problem with a fiat currency, e.g. you can't spend the same dollar banknote twice, it's theoretically possible with digital currencies.

However, what makes double-spends unlikely is the size of the Bitcoin network. A so-called 51% attack, where a group of Bitcoin miners might theoretically control more than half of all network power, would be required.

By controlling a majority of all the network power, this group could dominate the remainder of the network in order to falsify records.

An attack on Bitcoin of this magnituded would require an almost unbelievable amount of effort, money and computing power, so that possibility is extremely unlikely.

Bitcoin's Challenges

In general, Bitcoin compares quite well in the above 6 categories compared to fiat currencies. So what other challenges face Bitcoin as a currency?

Bitcoin as Store of Value

Bitcoin's use as a store of value depends on its utility as a medium of exchange. This assumes that, to be a store of value, Bitcoin needs to have intrinsic value and if Bitcoin doesn't achieve success as an exchange medium, it won't have any practical use and consequently it won't have any intrinsic value and won't be appealing as a store of value.

Just like fiat currencies, Bitcoin isn't backed by any physical commodity, such as gold. Throughout most of its relatively short history, Bitcoin's value has been mainly driven by speculative interest and it has exhibited bubble characteristics with sudden price changes and media attention. This will likely reduce as Bitcoin sees increasing mainstream adoption, but the future remains uncertain.

Bitcoin's transfer-ability and utility face challenges due to difficulties related to cryptocurrency storage and exchange platforms. For some time, digital currency exchanges have faced thefts, hacks and fraud.

Fraud and thefts are, of course, also present in the world of fiat currencies, but in those cases regulation generally provides more straightforward means of redress. In comparison, all cryptocurrencies are still viewed as something of a regulatory "Wild West".

Bitcoin's Worth vs. Fiat Currencies

To place a value on Bitcoin depends on what market penetration it is going to achieve.

The simplest approach is to look at the current worldwide value of all exchange mediums and all stores of value compared to Bitcoin and then calculate the value of Bitcoin's projected percentage. In today's world, the predominant exchange medium is government backed fiat money.

In short, there are two types of fiat money:
Central bank money (M0), which are obligations of a central bank including currency and central bank depository accounts.
Commercial bank money (M1-M3), which are obligations of commercial banks, including current accounts and savings accounts.

Roughly speaking, M1 and M0 are currently together worth approximately 4.9 trillion USA Dollars, which can be considered as the current worldwide value of exchange mediums.

M3 money less M1 is worth approximately 45 trillion USA Dollars. To this can be added an estimate of worldwide gold value held in storage, i.e. Gold bullion.

In 1999 the US Geological Survey estimated there were approximately 122'000 tons of mined gold, of which about 48% was located in bullion stocks. Taking an estimated price of $1'200 per ounce, that amounts in value to about 2.1 trillion USA Dollars.

Not counting other precious metals and gemstones, it is estimated that the global value of stores of value, including savings accounts, small and large time deposits, money market funds and gold bullion, together amount to maybe 47.1 trillion USA Dollars and the total estimate for global value of exchange mediums and stores of value amounts to some 52.1 trillion USA Dollars.

If Bitcoin achieved 15% of this valuation, its market capitalization would be about 10.8 trillion USA Dollars and, assuming all 21 million Bitcoin in circulation, that amount to a price of $514'000 per 1 Bitcoin.

Bitcoin Valuing Difficulties

We don't yet know how much adoption Bitcoin will achieve, so estimating a value for Bitcoin's price would involve including a risk element for low adoption or failure of Bitcoin as a currency, which might also include Bitcoin being displaced or replaced by another digital currency or currencies.

Velocity of Money

Estimation of this sort often considers the velocity of money, given that since Bitcoin supports transfers taking less than an hour, the velocity of money in a future Bitcoin ecosystem will be higher than the current average velocity of money.

A different view is that money velocity isn't restricted by today's payment rules in any significant way and that its main factor is the need or willingness of people to transact. Consequently the velocity of money could be treated as approximately equal to its current value.

Another viewpoint when estimating Bitcoin's price is to consider specific markets or industries could be impacted or disrupted and estimate how much of those markets or industries could end up using Bitcoin.

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