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Understanding the fundamental value of Bitcoin

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What is Bitcoin’s fundamental value? Well, let’s find out in this article that explains everything about understanding the actual value of Bitcoin.

Answering questions about the fundamental value of Bitcoin has been challenging even for Bitcoin enthusiasts. Bitcoin does not have any assets, cash flow, cost of production, or final consumptive demand, and the traditional basis of most asset valuation techniques.

Also, this digital asset is a form of money that is arguably not a very good one due to its intensely volatile value. Nevertheless, people use it as payment in monetary transactions.

Calculating fundamental values

A fundamental value from a traditional financial aspect is the value based on what an asset generates a return. For example, the real value of company shares is the dividend paid from profits. Investors also use a standard measure which is the price-to-earnings ratio. In properties, the fundamental value reflects the rent investors earn and that of bonds, depending on the interest it pays. Gold also happens to have actual value based on its use for jewelry or electronics.

Fundamental value for Bitcoin

National currencies are different in that their value is in being a trusted and accepted exchange unit. Fiat currencies’ value depends on people counting on others to take them.

This digital asset is private and virtual since it has no corresponding physical support or return, making it hard to determine its fundamental value. However, this digital asset has proved to be quite valuable for certain things. It is a less costly way of transferring value over long distances, and it is pretty anonymous. In addition, it does not require a banking system because anyone with access to a smartphone can use it. People with no bank accounts or who can’t access banks can rely on this digital money. Platforms like bitqh allow individuals to purchase Bitcoins using fiat money. Thus, anyone can quickly access this virtual currency.

Bitcoin as digital gold

People often refer to this virtual currency as digital gold, meaning it can provide a store of value similar to gold. Also, Bitcoin investors see it as a haven that can serve as a hedge against global economic uncertainty and increasing prices, which reduces the purchasing power of valuable currencies like the U.S dollar.

However, Bitcoin is still in its maturity stage to place it firmly in the category of digital gold. However, there is one tool that Bitcoin fanatics use to liken this digital asset scarcity to gold, known as the “stock-to-flow” model. This tactic asserts that gold holds its value because the existing stock of gold is 60 times more than the amount of gold mined each New Year. Bitcoin stock is also more than 50 times the new coins mined annually. However, that does not explain the reasons behind halving, nor does it have any theoretical basis in economics whereby prices don’t just rely on supply.

Why does Bitcoin have value

Bitcoin does not have a governmental authority’s backing, nor does it have a system of intermediary banks to regulate its use. However, it has a decentralized network consisting of independent nodes responsible for approving consensus-based transactions in the network. This digital asset scarcity is one of the features contributing to it being valuable since as the supply decreases, its demand increases.

Its marginal cost of production is also a reason why Bitcoin has value. Bitcoin does not have intrinsic value. Mining this digital asset involves a great\deal of electricity, which imposes an actual cost on miners. That competitive market among producers all making the same product makes the selling price of that product move towards its marginal cost of production.

Parting shot

With the information above, one can quickly tell the fundamental value of Bitcoin. Lots of aspects contribute to determining the value of the asset.

 

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