In the recent past, a policy advisor in Fintech working at the Federal Reserve Bank of San Francisco took a stab at establishing the value of a Bitcoin and we covered that news in our recent post.

While evaluating the Bitcoin as a currency, this cryptocurrency is not extensively utilized for commercial transactions, Bitcoin’s value cannot be evaluated by analyzing factors used to set exchange rates on currencies, including interest rates and currency output levels. “The only applicable monetary determinant is money supply,” writes Joost Van Der Burgt. “Bitcoin’s limited total supply arguably supported its high valuation.”

Like other precious metals, the quantum of Bitcoin that would be predetermined, mined and distributed is finite in number even though divisible to fractional values. Nevertheless, for the past few years, writes van der Burgt, Bitcoin production outpaced the production of gold by slightly more than 3-1. “Supply arguments,” therefore, writes van der Burgt, “cannot explain the recent surge of Bitcoin’s price against gold.”

He then glimpsed at purchasing power. Traditionally, two countries’ GDPs can be compared and used to establish exchange rates.

Bitcoin, however, is borderless, autonomous cryptocurrency generated by a sprawling network of computers spread across the globe. The coin cannot be associated with a single economic zone. Another determinant that often influence’s a currency’s rate of exchange is confidence. High profile hacks on Bitcoin on ramps (exchanges and hot wallets) and persistent news of government crackdowns have battered Bitcoin’s reputation as a secure investment.

Bitcoin transaction levels have also dropped precipitously since 2016, when Bitcoin traded at an average percentage of total volume of 11.7%). Today, it trades at 2.3% of total volume, adds the van der Burgt. It appears that Bitcoiners are no longer spending it on frivolities like pizza; they are ‘hold-ing’ (‘holding on for dear life’) and perhaps showing an exceptional degree of loyalty.

Neither issuance, nor local GDP, nor confidence, nor transaction levels explain the relatively high valuation of Bitcoin, concludes van der Brugt.

Low turnover rates then lead van der Burgt to evaluate Bitcoin as a security. “The 2.3% daily turnover of Bitcoin is more aligned to turnover rates that characterize stock markets,” he wrote.

However, because Bitcoin investing generates no dividends, interest payments or other payments along the way, van der Burgt suggests Bitcoin investors resemble VCs, who often buy into companies only to exit at buyouts.

“Bitcoin’s terminal value, in this approach,” writes the researcher, “would be its expected future ‘monetary base.'”

Snapchat investor Jeremy Liew once estimated that one Bitcoin will be worth $500,000 by 2030, writes the researcher. “This would put Bitcoin’s market value at about 1.5 times that of the world’s current total gold reserve, and on par with the current total M2 US dollar supply,” writes van der Burgt.

“VCs have typically expected returns of 40-60%, but a one million dollar value on Bitcoin by 2020, as predicted by the wild software tycoon John McAfee, would bring an internal rate of return of 350% annually over the next three years. This would put Bitcoin’s market cap above that of the M2 US dollar supply in real terms,” writes van der Burgt. “Although nothing is impossible, one could wonder how realistic these assumptions really are.”

While a few of bitcoiners perceive this cryptocurrency as a commodity, as an “object with use value,” the Chicago Futures Trading Commission (CFTC) has defined Bitcoin as a commodity. The most devoted Bitcoiners – everyone from Tone Vays to Tim Draper to Valery Vavilov- have all attributed Bitcoin’s value to its “censorship resistance” to state monetary interventions.

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