Bitcoin objective value is difficult to establish. Actually, like so many other questions in economics, it depends on the perspective from which it is calculated. Therefore, estimates can be found that treasure very different values for bitcoin, from zero to millions of dollars. Likewise, the calculation method used in this article simply reflects the opinion of the author.
Bitcoin is a technological feat. Using cryptographic technology, bitcoin establishes a new inherently digital currency. Like other currencies or commodities, it can potentially be used as a means of payment or as a store of value.
A fundamental characteristic of bitcoin is that the maximum number of bitcoins that will become available in circulation is limited. This characteristic represents a clear contrast with respect to the currencies issued by central banks (for example: dollar or euro). As the monetary mass of the latter continues to increase, the target value of bitcoin tends to grow. Following this perspective, the target value of bitcoin can be estimated by dividing the total world wealth by the number of bitcoins. With this methodology, the objective value of bitcoin is translated into a price of millions of dollars.
2. What is Bitcoin?
Bitcoin (with a capital letter) is the software that makes it possible to exchange the monetary unit bitcoin (with a small letter). The currency, bitcoin, is actually a cryptocurrency, because cryptographic techniques are used to safely regulate the exchange and transfers between accounts.
In brief, bitcoin operation is as follows. Each account has a secret private key and a public key that accompanies transactions. The nodes that are running the program have to write the transactions to the Bitcoin blockchain. For this, they need to make calculations that are difficult to solve, but whose results are easily verifiable by all the remaining nodes. The calculation process is called mining, equivalent to the mining of raw materials. The reward for writing a block to the chain can be double. On the one hand, a percentage of the transfers made and that are immortalized in the blockchain. On the other hand, new bitcoins generated. It is important to emphasize that the maximum number of bitcoins, 21 million, will be reached in the year 2140.
To better understand how bitcoin works, the following reading is recommended:
3. Advantages that raise the Bitcoin Objective Value
- Decentralized: The currencies with which the population traditionally operates, such as the dollar or the euro, are regulated by central banks. These central banks make decisions unilaterally, without asking the citizens who own the currencies. To start with, central banks usually have the objective of causing an inflation of 2% in the economy, which is why they continuously print new currency, reducing the value of citizens’ savings. This is a clear disadvantage compared to bitcoin, whose maximum number of units is limited.
- Universal: being based on a program that can run on any computer, the currency is universal. Transfers can be made anywhere in the world without asking questions such as origin and destination banks, currency exchange fees or additional costs.
- Easy to save: Being a digital asset, bitcoin can be very easily stored on a computer. This gives it an advantage as a store of value over physical gold and silver. Indeed, raw materials can be stolen more easily, especially if they are stored at home. In this sense, bitcoin is not 100% infallible either: it is sensitive to loss of the private key of accounts or to quantum computing.
4. Risks to the Bitcoin Objective Value
- Other cryptocurrencies: being a purely digital asset it is possible to generate new cryptocurrency programs. In fact, there are many other cryptocurrencies apart from bitcoin, each with its own characteristics. So far none have managed to unseat bitcoin. But there is the potential risk of it happening. In that regard, it is sometimes mentioned that the most dangerous cryptocurrencies for bitcoin will be those created by central banks. Not yet knowing the characteristics of these cryptocurrencies, it is difficult to evaluate such a statement. But, in principle, a centralized currency would still be inherently at a clear disadvantage relative to bitcoin.
- Quantum Computing: The first quantum computer to be created and stabilized will be a danger to the known digital world. It will be able to decrypt all cryptography-based protocols, from messaging applications to banking and monetary. Also bitcoin. In this sense, the main risk of bitcoin is that being decentralized it would be more difficult to go back in time and reverse the situation. On a positive note: it is more than possible for bitcoin to update early enough to be resistant to quantum computing.
5. Calculating Bitcoin Objective Value
Before calculating the objective value of bitcoin, it is necessary to review the concept of the world money supply.
5.1 World Money Supply
The money supply is measured by the following terms:
– M0: covers physical currencies (including banknotes as well) and bank accounts deposited with central banks.
– M1: M0 + money in checking accounts.
– M2: M1 + savings and deposit accounts of less than $ 100,000.
According to the following link, the M2 money supply in the world amounts to $ 95.7 trillion ($ 95.7e12) at the time of writing this article. This figure is always increasing, because central banks do not stop issuing currency to a greater or lesser extent.
5.2 Bitcoin Objective Value
Let’s imagine that bitcoin is used as a world reserve of the circulating currency and available money M2. In other words, that each currency issued by central banks has bitcoin as a store of value, in the same way that gold was used at the time. With this criterion, the target value of bitcoin can be calculated as:
M2 = 95.7e12 $
Maximum number of bitcoins = 21 million = 21e6
Objective value of bitcoin = M2 / “Number of bitcoins” = 4,557,142’85$
That is to say, in the aforementioned assumption, the target value of each bitcoin would be more than 4.5 million dollars at the time of writing this article. The above calculation may be subject to debate and multiple interpretations. But the important thing is that it justifies and allows the reader to understand why the potential of the value of bitcoin is in the order of millions of dollars. Value that will not stop growing due to the continuous issuance of currency by central banks. With the calculation method used, the target value of bitcoin would be valid even if it is not used as a means of payment.
Disclaimer of liability
It is important to emphasize that the calculation shown only reflects the opinion of the author. It is not a recommendation to buy or sell bitcoins. Any monetary operation carried out will be the sole and exclusive responsibility of the reader.