Bitcoin Does Have Fundamental Value - But Just How Much?


  • Long-run asset prices, including cryptocurrencies, reflect their fundamental value.
  • Bitcoin does have fundamental value because it allowed people to transact in a way that was impossible before.
  • The fundamental value of Bitcoin is the set of transactions that occur and are expected to occur on the Bitcoin protocol.
  • While Bitcoin is undoubtedly useful to a set of users, it cannot make money as a corporation would or benefit its owners directly through buybacks.
  • Nonetheless, $1B of value moves across the network on a near-daily basis. This means that, analyzing Bitcoin as a currency, it is actually trading close to its fundamental valuation within the 1-year interval.

It's a commonly accepted tenet within the capital markets that assets reflect their fundamental valuation in the long term. Within shorter time frames, it is more likely that assets will deviate from their fundamental value. While it is possible to profit off of mispricings such as these, using quantitative or momentum strategies, it is not a reliable strategy for the retail investor. For a retail investor who has considerations outside of the markets, including a family or completely unrelated career, it is best to stick to strategies which are bets on fundamental value. While this may sound surprising, it is possible to allocate capital on a fundamental basis within the cryptocurrency asset class.

This must mean that there is such a thing as fundamental value within the cryptocurrency space. While fundamental value within other asset classes is based on a set of present and future cash flows, there is no such offering within cryptocurrencies. Since stocks are shares of businesses that make certain amounts of money per quarter, you can value them 'fundamentally' according to a market-defined multiple of these cash flows and the predicted growth in these cash flows. In this way, fundamental valuations take consideration of future predicted cash flows for equities. Again, however, none of this matters for cryptocurrencies.

How can there be fundamental value within an asset class that does not generate cash flows?

The answer is that cryptocurrencies act as a platform, or protocol, for a set of users to transfer cash flows between each other.

The better a cryptocurrency allows users to transfer cash flows (value) between each other, the more fundamental value that cryptocurrency has. Of course, better depends on what your users want. Before Bitcoin was invented, users-to-be wanted Bitcoin: they just didn't know it yet.

When Bitcoin was invented in 2008

This article was written by

Equity long/short, value and growth investing.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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