Fair value of Bitcoin: This is how much the cryptocurrency is really worth

Fair value of Bitcoin: This is how much the cryptocurrency is really worth

When investing in stocks, people often talk about “fair value”. With Bitcoin, however, this actual value is not so easy to calculate. However, these approaches can help determine the metric.

Calculation for Bitcoin

But how can the fair value of cryptocurrencies, especially Bitcoin, be calculated? After all, there is no single company behind the largest cyber currency weighted by market capitalization, whose assets are distributed across the tokens. As the stock market portal “Investopedia” writes, some analysts and investors have already addressed this question in the past. In order to determine the “true” value of Bitcoin, there are four different factors that must be taken into account: supply and demand, network effects, the expected value and production costs.

Supply determined by scarcity

With stocks, the supply and demand dynamics cannot be transferred to their fair value, but with Bitcoin, finiteness comes into play. The cyber motto is designed to ensure that there will never be more than 21 million Bitcoin. This quantity cannot be shaken either. While companies about new shares The architecture behind Bitcoin is designed to create a fixed number of tokens. All tokens should be mined by 2140. Therefore, there is a connection between the Bitcoin price and the scarcity of the cryptocurrency – in addition to market demand. If there is such a strong buying enthusiasm on the market that exceeds the number of newly minted tokens, the fair value of the cyber currency also increases, according to Investopedia.

View as a network instead of an asset

Another evaluation option relates to the network status of the Bitcoin or the blockchain technology on which the token is based. The fair value of the network can also be derived from the number of users or nodes involved in the mining process. According to Metcalfe’s law, developed to determine the economic viability of telecommunications networks, the value of a network is proportional to the number of its users or nodes squared. If U denotes the potential utility value and n the number of participants in the network, the following formula applies:


U = n²

If this law were also transferred to the blockchain, it would mean that the fair value of Bitcoin increases as the number of users increases.

Expectation of future potential

According to the portal, if you compare Bitcoin with an investment in stocks or bonds, you cannot avoid the expected value. In the stock market, this refers to the “discounted value”, i.e. the value of a future payout, such as dividends or interest. However, since these do not arise when investing in cryptocurrencies, the expected value here is based on the expectation that blockchain technology will continue to offer great, even revolutionary potential in the future – similar to the valuation of tech startups that are not yet profitable. According to Investopedia, a current fair value of Bitcoin can be derived from an expected value.

Production costs at a glance

Furthermore, the costs incurred when mining Bitcoin can also provide an indication of a fair value, according to Investopedia. Prices for raw materials such as oil and silver are therefore mostly determined by production costs, although this approach can also be applied to Bitcoin. Accordingly, competition between several producers of the same raw material can depress the selling price, with producers being the same as Bitcoin miners. This means that even if demand exceeds supply, manufacturers do not sell below production costs.

However, while manufacturers of raw materials can boost production when demand is higher, the mining rhythm for Bitcoin is also predetermined. The ten-minute period in which new blocks are generated on the chain cannot be adjusted. Without increased supply, Bitcoin production costs rise. According to the portal, the costs incurred during production can predict the Bitcoin price over time relatively reliably.

Volatility makes calculation difficult

Due to its special status, it is difficult to clearly determine the fair value of Bitcoin. And even when you take the above factors into account, cryptocurrency is still one of the most volatile assets on the market, as Investopedia points out. There is therefore no guarantee of a successful investment. Nevertheless, approximating the fair value could help to better assess the market for Bitcoin.

Editorial team finanzen.net

This text is for informational purposes only and does not constitute an investment recommendation. finanzen.net GmbH excludes any claims for recourse.