Bitcoin's Fundamental Value

If you are just starting with exploring the world of crypto and Bitcoin or if you’ve been around for some time, you surely came across many stories, opinions and misconceptions about the largest digital asset. In many cases, as in all markets, emotions and feelings play a major role in the price-setting of this now world-renowned financial asset.

While the volatility and incredible growth of Bitcoin since its inception in 2008 has contributed to the difficulty of determining accurate pricing models, we believe it is crucial to maintain a clear and objective framework of thought around the fundamental value of bitcoin. 

In the course of this article, we will outline our key arguments for the fundamental value of bitcoin — leave the charts aside for a few minutes and get back to the roots of the peer-to-peer revolution with CoinShares. 

Spoiler alert: it’s all about money.

At the foundation of investing, from corporate stocks to commodities, lies a universal idea: try to place one's bets on the most promising assets.

When considering Bitcoin from an investment perspective, it makes sense to assess its potential for its very nature and primary use — just as you would if you wanted to assess the success of another investment — and not just from a chartist perspective. You probably wouldn't invest in Apple or Tesla if you didn't believe in the growing adoption of their flagship products, and indeed in their success.

So ask yourself this simple question: do you think bitcoin is likely to be more or less widely used as a monetary unit in the future? Savings, spending, economic calculation — do you think bitcoin’s global share of these functions will increase or decrease over the next decade?

The fact is that over time, if the use of Bitcoin as money continues to grow, its scarcity characteristics and the laws of supply and demand have continued to add value to each unit, meaning that the price of a Bitcoin mathematically increases. Whether Bitcoin is or is not money now is something you can argue about until you’re blue in the face, but the only thing that is important is whether Bitcoin is closer to being used globally as money right now than it was one year ago, two years ago, three years ago etc.

In other words: Is bitcoin monetising or not? Has development stagnated and adoption reversed, or is the trend still progressing towards increasing usage? As an investor, how can you best make up your mind on whether people will further adopt it as money or not?

To assess bitcoin’s potential as a money, it’s worth to keep in mind that money, used to save or to facilitate transactions between individuals or entities, can take many different forms. These range from commodity money, such as quantities of gold or silver, to representative money based on government certifications of commodities, to fiat money with no intrinsic value other than being a legal tender, all the way to non-sovereign digital money. 

Whether people choose to use one item or another for the functions of money depends a great deal on whether the item in general is suitable for use as money. So why would people adopt bitcoin as a money, more than existing currencies or even other emerging digital ones?

To put it simply, people adopt bitcoin as money because it has unmatched monetary properties. Unlike physical currencies or other digital currencies, bitcoin is explicitly designed to optimise security, decentralisation, predictability, trust minimisation, and censorship resistance. The predominant design purpose is maximising its monetary properties. 

Its monetary properties are what make it useful to people across the world, and as more people accept it in exchange, its usefulness grows, adding to the virtuous cycle of network effects. This distinguishes bitcoin from other digital currencies or emerging cryptocurrencies, which may have different purposes or utility beyond being used as money, like Ethereum which was designed to be a platform for decentralised applications. Bitcoin’s unprecedented level of decentralisation, its groundbreaking freedom from the need to trust any central authority or intermediary, and its fixed supply are all feats that continue to make it a monetary revolution in the making.

At this point, you might have heard some of the following narratives for why you should invest in Bitcoin: it’s uncorrelated; it’s an monetary inflation hedge; it’s a store of value. The list is long.

It’s not necessarily that any of these narratives are wrong, it’s just that they are not by themselves sufficient to explain bitcoin’s investability. It’s not because of the narratives that bitcoin is investable, rather, it is because of bitcoin’s properties that these narratives are interesting and likely to be true over long stretches of time.

Bitcoin is likely to be an uncorrelated asset because its properties are not similar to most other assets. Bitcoin is likely to be an inflation hedge because one of its monetary properties is absolute scarcity. While the supply of other monies will inflate forever, bitcoin’s supply will never exceed 21 million. Bitcoin is likely to be used as a store of value because it is extremely secure, imparts global, state-independent bearer asset rights on its holders, cannot be confiscated, and is very easy to transport or transact anywhere in the world.

It is not the individual progression of any particular subset of bitcoin usage that should interest investors evaluating bitcoin’s progress towards global monetary usage, it is the sum of all of them combined.

In conclusion, bitcoin's potential can be evaluated objectively based on its properties, rather than individual narratives or emotions. Bitcoin's fundamental value is rooted in its potential for increasing usage as a monetary good. 

As more people adopt it, its scarcity characteristics intersecting with the laws of supply and demand will continue to add incremental value to each bitcoin. We believe that bitcoin's unique characteristics make its increasing adoption as money likely enough that its current price versus its possible terminal value is a bet that makes sense.