MT9 | How Much Is Bitcoin Really Worth?

Bitcoin has been all over the news and Twitterverse for months now, giving non-HODLers like myself FOMO and giving cautious buyers heart attacks! You need diamond hands to hold Bitcoin, they say. But is Bitcoin deserving of diamond treatment? Will it become digital gold, shooting to the moon when the global economy crashes? Or will it turn out to be just flashes of electricity, ephemeral and eventually worthless?

In this episode, we take a quick look at how Bitcoin works and then summarise a few different ways in which it is being valued. We end with a quick look at how most traditional investors (ie not the diamond hand types) are investing in it so you can decide whether you might want to do the same.

Discussion Topics: How Much Is Bitcoin Really Worth?

• Now the even big guns have an opinion on Bitcoin. Unfortunately their opinions are all over the place!
•  What is Bitcoin and how does it work (and how is it different from regular money)?
• Bitcoin interest is primarily driven by worries about Inflation
• An aside on hyper-inflation
• On one end of the spectrum: Bitcoin is worth nothing
• On the other end of the spectrum: Bitcoin should – and will – be worth $1M or more
• In the middle: Another way of valuing Bitcoin, based on energy consumption
• If you do plan to invest in Bitcoin, this is one strategy you could consider

Transcript: How Much Is Bitcoin Really Worth?

Hi, everyone, welcome to another episode of MoneyTok, where we help make personal finance and investing simple and accessible through both my own experience. I’ve been doing this for about 20 years now. This show is about money and wealth creation. And we talk about so many ways of making money, bought retirement planning about stocks, bonds, gold, real estate, crypto, and so many kinds of things.

Bitcoin has been much in the news – and Twitter – over the past few months. Today we’re going to discuss whether it might actually be a worthwhile addition to your portfolio – and at what price. Whether you’re a sceptic or a believer, or just out to make a buck, today’s episode should help you be better informed about Bitcoin and its potential future.

Bitcoin Decentralisation

Regular money works through a centralised system, where you trust an authority to process and record your transactions. Banks, stock exchanges, insurers, reserve bank. Bitcoin and other crypto are ‘trustless’ and don’t need a single reference authority. Individual market participants, called nodes, spread around the world, collectively mine bitcoin, process and record transactions in return for consideration ie mining reward or processing fees.

For any action to proceed, more than 51% of the network must agree on the action, making the system more tamper proof than centralised ones where the lynchpin controls everything. Since transactions are happening on an independent global network, it allows this form money to flow freely, independent of capital controls, exchange rates, sanctions

For those of us used to painfully slow wire transfers, this is liberating. Unfortunately it it’s even more liberating for bad actors, who can use this network to bypass regulators, law enforcement, governmental sanctions. Some may even try to use this network to avoid taxes. Though some people who are definitely not me, say that’s probably a good thing.

Bitcoin scarcity

One of the top concerns the regular person has nowadays is rising prices. Everything is getting harder to afford, especially if you are on the lower end of wage earnings, since those have generally been stagnant or slow-rising around the world.

Government is potentially making the situation worse, with massive amounts of new money being generated to fund Covid-related stimulus around the world. The US has been particularly free-handed, producing 20% increase in money in just the last year. To the point where the world is now pretty worried that all this extra money chasing the same products will result in massive price rises

This is possible because money is currently divorced from anything tangible. Earlier it used to be linked to the amount of gold held by a country. But it hasn’t been that way for a long time now. The value of a country’s currency is just pegged to the level of faith people have in the country’s financial strength. And because the US dollar underpins global finance, the US government has the most leeway to issue massive amounts of new dollars

Bitcoin was designed to avoid this whole situation. Supply is limited to 21M BTC, of which 18M is already mined, and based on how the algorithm works, the remaining will be mined at a slowing rate over the next 140 years.

Since BTC is fixed, there is no way for anyone to issue more of it unlike with dollars and hence its value is expected to at least keep pace with price growth, similar to how we think of gold. Do note though that BTC is not alone in being scarce. There are many other coins that are limited supply but don’t enjoy the kind of market cap that BTC does.

This scarcity, combined with high inflation expectations, is also what is driving the FOMO that resulted in the massive price gain in the past few months. People want to hold hard assets like real estate, gold, BTC rather than cash which could potentially lose value quickly

The case for Bitcoin to be worth $0

Let’s begin with the sceptics case for Bitcoin. It is a financial asset that is backed by nothing, unlike precious metals like gold which have a long history, a physical product, and at least some industrial use or even fiat currency which is backed by faith in the government. Bitcoin is just flashes of electricity to which we ascribe a value.

That’s why Bitcoin prices gyrate so much on news and hearsay. Musk tweets it up, prices shoot to the moon. He changes his mind a few days later with no change in the ‘fundamentals’ of Bitcoin, it comes crashing to earth. China bans mining, it’s down even further. In other words, there is nothing available to support the price other than news, tweets, sentiment, and the faith of whales and diamond hands and other such colorful folks.

Is that good enough?

The case for Bitcoin being worth $1M

Well-known investors like Paul Tudor Jones and now Cathy Woods are on the other end of the spectrum, talking up Bitcoin as the one true hedge against inflation due to its scarcity. In fact, Cathy Woods has forecast BTC to $500k in the medium term. Why?

The answer to that I think lies in the past, back when Gold was the one true asset to which all country’s currencies were pegged. Back then a single country’s economy could only grow relative to the value of gold it held. And by extension, the world economy was limited by the total market price of all mined gold in the world.

Well, what if the US goes into an inflationary tailspin, Like Zimbabwe or Venezuela? Only this time it will affect the world because the entire world economy trades in USD and hence all prices are pegged to the dollar ultimately.

In that apocalyptic scenario, we would have to ditch the USD as the single global asset and look for something else. What if that something else were BTC?

If so, the entire economy $84T of it would be pegged to 21M BTC, setting the price of each BTC as about $4M. In that world, $1M BTC would be fair and perhaps even conservative

Is there a ‘real’ value of Bitcoin?

So if BTC could be anything between $0 and $1M and there is no way to value it other than on tweeted sentiments, is there even a true or reference value that we can use?

Yes, kind of. We know that BTC mining consumes a lot of power and that consumption will rise as mining gets harder in the coming years. So, each existing coin could be considered worth the cost of all the power used to mine the very next bitcoin. As of the end of 2019, it was estimated at around $12k or so. It might be a bit more now, but certainly, nowhere near the $35-$60k, it’s been trading in all of 2021 so far.

Summary

Bitcoin derives its value from the fact that it is scarce but also because of great branding vs other similarly scarce cryptocurrencies.

There are good arguments to be made for it being worthless or being worth quite a lot – and there are pretty big names on both sides of this argument.

Because it is sentiment driven there is no way to tell what the right price of BTC should be. The closest is based on energy consumption and that is around $12-$13k, well below current prices.

So do your own due diligence and make up your mind. Only time will tell whether you were wrong or right and by how much. That’s why a lot of BTC purchases I know of are on a ‘just-in-case’ basis where individuals put in 1-2% of their net worth into BTC – enough to be pleased if it goes big but not so much as to lose their shirt if it flatlines.

Takeaway

Discuss Bitcoin with your family and agree on a strategy/ plan for if, how, and when to invest. If you are planning to go in, you may want to cap your investment at around 1-2% of your net worth and perhaps even spread out the spending over time so you ease into the market rather than going all in at potentially the wrong time. And yes, don’t forget to open an account asap with Coinbase or Binance or Gemini any of the other exchanges so you’re ready when your plan materialises.

Thanks for listening. If you liked this episode, please do subscribe. And if you have friends thinking about BTC, please share it with them.