Bitcoin has intrinsic value — but it is not where you might think

Two are looking into an open briefcase.

The most puzzling aspect of bitcoin is the high price. Is there real value that leads to it or is it pure speculation? The question is probably as old as bitcoin itself but a good answer seems not to be widely known.

In the legendary debate from 2018 “Is Bitcoin the future of money?” Peter Schiff and Eric Voorhees exchanged a lot of arguments. One was about the value of Bitcoin.

Peter Schiff argued that Bitcoin has no real value at all. It could be zero or a million worth.

Eric Voorhees on the other hand dismissed the overall concept. But he also said that if there is value it will be in the network.

I believe both are wrong: There is intrinsic value in bitcoin and (most of) it is not in the network.

What is intrinsic value?

Intrinsic value is a measure of what an asset is currently worth. It is useful to detect overpriced or underrated assets. Estimation is typically done from the buyer side: what would a rational investor pay?

Unfortunately, this approach fails for bitcoin as there is no second usage besides storing some value in it, yet. Therefore people tend to come to the (wrong) conclusion that bitcoin does not have intrinsic value at all.

However, a failed attempt to estimate the intrinsic value does not necessarily mean there is none. It may just be the wrong approach chosen.

Is there a better definition?

I therefore suggest a different approach: lets look from the seller side. Ignore the holders that does not influence the price and the buyers that speculate.

Instead look at the miners that keep the operation running. Those miners must sell there produced bitcoins for a sustainable price to stay in business. If the demand for bitcoin is low they simply will sell less and therefore keep the price above zero.

The following definition helps with that: Intrinsic value is the price to pay if no speculation happens. Intrinsic value in bitcoin is therefore the costs of miners divided through the number of bitcoins they produce.

Interestingly, Adam S. Hayes has published a similar result already five years ago and successfully rechecked his model with real prices in 2018.

What about the network or the brand?

There are likely other aspects that increase the value of bitcoin.

First, there is some value in the network as Eric Voorhees argued. However, the network is only relevant if bitcoin is used as a payment system. But in a payment system the “intrinsic value” of the medium is irrelevant as seen by our paper money.

On the other hand the underlying value is important if the asset is used as store-of-value. But the network of nodes to interact with the system are of little importance in this scenario.

There is also some value in the branding itself. It surely helps in good days to attract new investors but probably not much in bad days when a bubble ends. And it is unlikely that a lot of miners will loose money by just following the brand.

What are the implications?

Bitcoin’s intrinsic value has significant positive effects:

  1. the price will never be zero — as long as miners are mining
  2. one can get a good estimate of the mid-term price of bitcoin — it is proportional to the miner’s income
  3. halving the supply as done every four years will double the price — if everything else is equal.
  4. bubbles are important to raise the price to a new level— as the additional money allows the miners to increase their operation

Nevertheless, there is also a flip side of getting the intrinsic value from the miners. If someone would take the miners he will drag most of the value with him. This is intriguing as it can be validated with surprisingly little effort. If this holds true, bitcoin is not as robust as a trillion dollar market cap suggests.



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