There is a growing concern that Bitcoin is currently heavily overpriced. (even with the recent drop to $11,200) The price of Bitcoin shot up this year like a rocket and there seems to be a growing number of retail investors chasing Bitcoin’s historical gains.
In response to this influx of public interest, all types of market commentators claim that Bitcoin is a huge bubble that will inevitably burst and burn all those who invested in this cryptocurrency.
They said the same thing when Bitcoin was $250 and $1000, $2000 and so on. The foretold Bitcoin crash hasn’t really happened yet. Keep in mind that 50% corrections are quite normal in the markets.
But why hasn’t Bitcoin crashed completely if it’s such a huge bubble?
Could it be that Bitcoin is not really overpriced? Let’s look at the stock market and the price of one of the most expensive stock in the world, Berkshire Hathaway Inc. (BRK-A)
Under the firm leadership of renown investor Warren Buffet, this international conglomerate holding company based in Nebraska, Omaha, USA, has generated an average annual growth of 19% since 1965. (Wikipedia)
A holding company is basically a company which owns other companies’ shares and it does not produce any goods or services itself.
Holding company’s main purpose is to reduce risk for company owners and benefit from tax-free dividends.
Berkshire Hathaway Inc. owns many big companies such as Fruit of the Loom, Helzberg Diamonds, GEICO, BNSF Railway, etc. and it also has holdings in Kraft Heinz Company, American Express, The Coca-Cola Company, Wells Fargo, IBM, Apple, United Airlines, and few others.
As a result, Berkshire Hathaway is one of the largest public companies in the world with a market-cap of near $490 billion.
Bitcoin’s market capitalisation is currently near $240 billion, which is almost half of Berkshire Hathaway’s cap. (Data from 22.12.2017)
However, we can’t draw any conclusions about the value of a company just by looking at its market capitalisation, because capitalisation is simply the price of a stock times the amount of available shares, or available Bitcoins in the case of Bitcoin.
If we take market capitalisation of Bitcoin and divide it by all the Bitcoins in circulation, we’ll arrive at a current price of Bitcoin.
This, however, does not help us define the true value of the coin.
A true value of a company is measured in its assets, influence, and how useful it is to the world and investors.
For example, the value of Apple is clear, they provide very distinct products and services used by millions of people worldwide. In addition, the company has assets such as land, buildings, patents, research labs, worth many billions if not trillions of dollars in total.
The value of United Airlines is also clearly evident and the same goes for other holdings of Berkshire Hathaway Inc.
But what is the value of Berkshire Hathaway Inc. and how useful is it to the world? More importantly, is it more useful than Bitcoin?
The company is centrally owned and it invests in stocks or buys already existing companies that are usually in need of financial injection or better management and organisational structure.
This helps the companies to survive in the marketplace and prosper in the future, if things go well.
That’s a value that can be directly measured in jobs, assets, and future investments, all of which are important aspect of any economy.
And what is the true value of Bitcoin?
The truth is that great minds are still struggling to answer this question. The reason is that Bitcoin and blockchain technology is still quite young and we don’t really fully know yet what it can become in the future.
(Just a few days ago I read an article by a blockchain expert who claimed that Bitcoin’s blockchain is perfectly suited for a decentralized messaging system.)
Bitcoin is not a privately owned corporation and it is decentralised, which means that there is no central authority that can fully control it or shut it down.
Nobody owns Bitcoin’s underlying blockchain technology. It was released for free and it is essentially owned by everyone in the world and anyone can benefit from its uses, provided he/she has the technical skills to do so.
Bitcoin and its technology have opened up a new type of decentralised digital economy which is will most likely influence the lives of people all over the world.
As a result, there is a whole new market for Bitcoin and blockchain related jobs and it will most likely grow exponentially as more companies begin to adopt blockchain decentralised structures.
Although Bitcoin’s network is huge we can not say that it belongs to Bitcoin itself. Bitcoin is essentially a very unique computer code. It does not own anything. However, it is a quintessential part of the network supporting it.
The network supporting Bitcoin blockchain is made up of individuals or groups with dedicated computer resources and specialist companies called ‘mining companies’. Their sole purpose is to support the network by confirming transactions and to generate (be awarded with) new Bitcoins.
Again, none of those companies and their assets belong to Bitcoin.
So how can we really measure the value of Bitcoin?
Bitcoin as a patent?
I think a good way to value Bitcoin is to look at it as a really useful technological patent. If you are the owner of Bitcoin you could say that you own a piece of the patent to a technology that other people and companies use.
Patents are essential in the development of new industries.
Germany, for example, during the Nazi golden years have produced (and stolen) many technological patents that allowed them to advance their technology in war and other aspects of the renown German infrastructure.
(After the war, some of the brightest German researchers have been covertly and strategically placed in big companies in the USA and other parts of the world to improve and advance the manufacturing process with the use of their technological patents. For example in the production of steel and aluminium.
Some technological patents offer breakthroughs that have an enormous value.
There can only be 21,000,000
Another important aspect of Bitcoin’s value is it’s scarcity as only 21,000,000 coins can be mined in total. Right now, there are almost 17,000,000 Bitcoins already in circulation.
Bitcoin can not be inflated like fiat currency, therefore 21 million really means 21 million.
With anything of value that is also limited in availability, the market demand will always be greater.
Good as safe haven and in emergencies
Gold has been the standard safe haven asset throughout centuries, but is it still a practical solution to buy and hold gold in this day and age?
Recently, the people of Venezuela have experienced a huge devaluation of their local currency and many have turned to Bitcoin to preserve their purchasing power.
Bitcoin and its decentralized structure allowed them to buy food and other necessities from abroad.
Could that be done with physical gold or Berkshire Hathaway shares? Very unlikely. It was a lot faster, safer and more practical to use Bitcoin.
Please share your comments below.
Note. This post is for educational and entertainment use only and it is not an invitation to trade. Trading involves high risk to your capital.