A few days ago, I watched an entertaining debate about Bitcoin between ShapeShift CEO Erik Voorhees and Peter Schiff, a well-known American financial commentator, stockbroker and the CEO of Euro Pacific Capital. The main question posed in there was whether or not Bitcoin (or some other cryptocurrency) would end up replacing state-issued fiat currency as a medium of exchange.
It’s a good subject for an engaging debate. At least as long as you don’t expect to find out anytime soon whether Bitcoin/Crypto optimist Voorhees or gold advocate/crypto skeptic Schiff will eventually be proven right. The discussion is primarily an intellectual exercise and fun speculation. Only time will tell whether the world’s next financial/monetary system will be based on digital currency, issued and accounted by distributed networks.
Still, one part of the debate was particularly interesting to me, namely the question whether or not Bitcoin has intrinsic value. Schiff heavily denied that. Why? Based on his assessment that Bitcoin lacks any physical properties and, unlike gold, could not be used for anything in the real world (I’m paraphrasing). In his rebuttal, Voorhees argues that nothing has intrinsic value because, according to his view, value always comes down to a subjective assessment. I sympathize with his position from a philosophical standpoint. But let’s assume for a second that intrinsic value exists (a position that your average value investor would most likely share btw).
In finance, intrinsic value refers to the value of a company, stock, currency or product determined through fundamental analysis without reference to its market value. It is also frequently called fundamental value. It is ordinarily calculated by summing the discounted future income generated by the asset to obtain the present value. It is worthy to note that this term may have different meanings for different assets.
Discounted future income is not really an applicable method to calculate Bitcoins intrinsic value – after all, there is no Bitcoin Inc which generates any income. Yet, state-issued currency faces the same problem. And just as you can perform a fundamental analysis on a fiat currency (e.g. by looking at GDP, interest rates, the central bank’s monetary policy etc.), you can also do fundamental analysis of Bitcoin. In order to do so, however, you need to understand what you are analyzing precisely and, from there, identify the critical factors you need to look at. I emphasize this because a cryptocurrency is unlike fiat, tech companies or stock. Cryptocurrency is its own thing (and not every token is a cryptocurrency!).
Even though we developed the ICO360 framework, (which, in essence, is a standardized analytical process to critically evaluate ICOs/cryptonetworks), I don’t have a fully formulated fundamental analysis of Bitcoin in my pocket right now.
I do have some thoughts on the subject. I don’t regard them as particularly original, yet the fact that highly-regarded and smart people like Schiff can publicly claim that Bitcoin has no intrinsic value, in mid-2018 no less, kind of signals to me that articulating them might still be worthwhile.
- Networks are valuable.
If the last two decades of internet business history taught us anything, then the fact that networks have value. #GAFA. Bitcoin is one of the world’s largest p2p networks, certainly the one with the highest valuation ($140 billion market cap today, according to CoinMarketCap), and it has been running for almost a decade. While it’s hard to reliably estimate the number of bitcoin users*, the number should be somewhere in the low two-figure millions. That’s nothing by internet standards but it is quite something for a cryptocurrency that was invented by an online pseudonym that published a whitepaper on a mailing list ten years ago.
How valuable is that network fundamentally? Hard to say. Long-term this question comes down to its ability to attract and retain users and provide utility to them – be it as a store of value, medium of exchange or both. But even as of today it is certainly not nothing. And since Bitcoin, the cryptocurrency, and bitcoin, the network, are inextricably linked, the latter should certainly be considered as part of the former’s intrinsic value.
(I’ll continue tomorrow)
*On that note: it’s even fair to argue whether or not bitcoin owners who rely on third-party services a la Coinbase for their interactions with the network should count as users; I’d personally vouch for yes but it’s certainly up for debate.