At $7,000, Bitcoin can be both undervalued or overvalued, depending on how the “intrinsic” value of the digital currency is calculated.
After testing the $6000-mark for a while, Bitcoin has staged a big comeback lately. In the last seven days, the digital currency has rallied 6.15%, trading close to the $7,000-mark. Other cryptocurrencies have rallied in sympathy—see table 1 and Table 2.
*As of 8/31/2018, at 4pm.
Number of Cryptocurrencies That Advanced/Declined In The Top 100 Ranks Over The Last Seven Days
*As of 8/31/2018, at 4pm.
The rally in cryptocurrencies have some experts cheering. One of them is Global Blockchain CEO, Shidan Gouran, who sees a ‘hard value’ at$6000. “What this means for the present is that motion is already happening. Because it costs about $6,000 to mine a Bitcoin, it couldn’t go too much lower than that. If no one sees any value in it, it will naturally only command its ‘hard value’ price of about that much. But as we can see, people clearly do see value in it. For example, the efforts to legalize a Bitcoin ETF are persisting. Further, story after story is hitting the news about big-name institutions taking steps to trade Bitcoin. While the idea of these big-time uses of Bitcoin were nothing more than a fantasy about a year ago, the signs are actually starting to emerge that it’s going to happen. So undoubtedly, this is stimulating demand to some degree.”
Clement Thibault, Senior Analyst at Investing.com, doesn’t share Gouran’s enthusiasm. “$7,000 is a level we’ve seen before so I don’t regard it as a particularly noteworthy milestone,” says Thibault. “Psychologically, there might be something to it for speculators but the price is completely disconnected from any meaningful fundamentals. If the level was the result of an event, development, or adoption, that would be something more substantial — but at this point, we’re trying to invent a narrative to explain the price action when there’s nothing to explain.”
What do econometric models say? My co-author of an academic paper on Bitcoin valuation, Greg Giordano, ran three econometric models — the Haye’s model, the Wheatley model, and the Market Model (our own)—see table 3.
On the one side, the Hayes’ model and the Market Model estimate the Bitcoin’s intrinsic value to be $8,778.11 and $8,335.54 respectively. This means that at the current price level the digital currency is undervalued.
On the other side, Wheatley’s Model estimates Bitcoin’s value to be $1,080.58. This means that at the current price the digital currency is overvalued.
Three Estimates Of Bitcoin’s Intrinsic Price*
|Econometric Model||Price Estimate|
*As of 8/28/2018
[Ed. note: Investing in cryptocoins or tokens is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment. Disclosure: I don’t own any Bitcoin. Greg Giordano owns Bitcoins]
Why such a big discrepancy? Because of the premises behind each model. The Hayes’ and the Market Model place more emphasis on the supply side of the bitcoin market, which is expected to grow at an ever-slower pace, as it gets closer to the limit.
On the other side, the Wheatley model focuses on bitcoin use, that is, on the demand side of the bitcoin market. And bitcoin demand has been growing slowly, as evidenced by a recent Gallup survey.
At any rate, investors should take estimates of Bitcoin’s intrinsic value with extreme caution.