Since the creation of the first bitcoin in January 2009, many have wondered about its true value. Warren Buffet, one of the world’s most powerful investors, says bitcoin is worth “not much”.
This question can solve using two economic and financial concepts: minimal or residual value and Ponzi schemes. This last concept, minimal or residual worth, is prudent. Using this method, one can determine the worth in the event of a market or economic catastrophe.
Currency and Investment Values
First, determine whether a bitcoin is a currency or an investment. For some users, it is their principal payment method, leading to the definition of bitcoin as a currency unattached to a country or central bank.
The two currencies, which are the Yen and the US dollar, are the stable main currencies for bitcoin exchange. Bitcoins measures depending on their exchange rate.
Now, using the minimal-value approach, what will be the value of a bitcoin?
For example, the central bank monitors all major currencies’ exchange rates against the US dollar. However, bitcoin lacks a central bank or an entity to manage the currency exchange rate. As a result, the bitcoin to dollar or yen exchange rate may drop to zero.
The same applies if bitcoin sees as an investment rather than a currency. In finance, an investment’s intrinsic value calculates as the sum of its future revenue. But bitcoins generate no current or future earnings. As a result, looking at it as an investment, bitcoins have zero minimal value.
New Gold Standard
One of the most popular unproductive assets is gold. It’s an asset that doesn’t generate income. Bitcoin is compared to gold because it treats it like an investment that generates no revenues. Using the minimal-value concept, gold may have a low market value due to its industrial usage. Even if it doesn’t have a price as a financial investment, its worth as an industrial good is negligible. Bitcoin currently has no industrial purpose and hence cannot be termed worthless.
While it is debatable as an investment, the financial technique views it as a benefit in diversification. Asset managers believe that one bitcoin value might reflect the fact that bitcoin is not entirely dependent on financial markets.
A Ponzi Scheme
After all of the results, many people still feel confused as to why bitcoins have a market value.
Warren Buffet stated that users only depend on the next person who will be paying them more. On this account, the answer almost answers the Ponzi scheme definition.
Ponzi schemes see as untruthful investment schemes, where, in the past, holders were paid by new investors. For this kind of scheme to work, a continuous stream of investors is a must. In this system, only one manager is working on getting new investors. In the case of bitcoins, their quality only relies on the fact that all owners have the possibility to become bitcoin managers without knowing it.
Providing solid grounds for an asset’s value is not a Ponzi scheme. Assets being valued by this scheme could end up having no value once Ponzi schemes deteriorate. Ponzi schemes renown for failing in times of crisis, especially when new investors are indifferent or withdraw.
If bitcoin shows to be a Ponzi scheme, its value will plummet, bringing it down to its bare minimum.