What is the market value of Bitcoin based on? How is it different from the Internet bubble?

Photo by Dmitry Demidko on Unsplash

Bitcoin’s $440 billion market cap now exceeds Visa’s market cap, and far exceeds JPMorgan’s $380 billion. Of the two companies, Bitcoin is more comparable to Visa, which serves a global network for clearing credit card transactions and is focused solely on that business. JPMorgan is a full-service banking company. And most importantly, it is the largest commercial bank in the United States.

This suggests that the market has developed a global consensus on the value of bitcoin.

In other words, the market already thinks that Bitcoin is worth more than these two companies. What is particularly important to point out here is that if it was just the average retail investor around the world who had a consensus on the value of Bitcoin, it would be hard to push Bitcoin’s market cap to the heights it is now. The reason Bitcoin has reached this current market cap is that institutional money has started to enter Bitcoin. The recent significant institutional buying of bitcoin in the US market is a testament to this.

A common view that still exists in the market is that the value of bitcoin is the result of market speculation and that such value led by speculation is not sustainable. This view often compares bitcoin’s value to similar bubbles in history, such as the recent Internet-era bubble. But the current consensus on Bitcoin’s value is fundamentally different from the consensus on the value of the Internet.

Bitcoin valuation is fundamentally different from traditional valuation

The valuation in the Internet period is still based on the traditional valuation method, which is to judge the existing value of a company based on its expected future profits. If the company’s revenue and profit development did not meet the market’s expectations, then the company’s valuation would definitely fall down quickly. The value bubble of the Internet era was burst because the companies did not achieve the rapid growth in profits that people expected. But the value of Bitcoin is based on something completely different.

The value of Bitcoin is not at all dependent on the underlying ownership or the expected return. The characteristic of bitcoin value is that it is its own value. The magnitude of that value is entirely up to the market and is entirely a subjective determination by people. So the value of Bitcoin will never be falsified.

In this respect, it’s very similar to religious beliefs. When more and more individual and institutional users believe that bitcoin has value, then bitcoin does have value. And when the market starts to think the opposite, its market cap will naturally go down. There are many indirect factors that affect bitcoin’s market cap, but ultimately it’s the result of people’s subjective judgments. So it’s very possible that its market cap will exceed that of companies like Visa and JPMorgan, and it’s also possible that it’s just a minority consensus on value. In this respect, it is based on a consensus of the value of collections such as art.

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The consensus-based value of Bitcoin can be sustainable

A corollary to the bubble theory is that the value of bitcoin is not sustainable. But such a judgment may not be correct. As already stated, the market value of Bitcoin is the result of subjective judgments or beliefs. And faith-based religions have existed throughout human history. The history of religion is even much longer than the history of various modern trading products. On the other hand, since the value of Bitcoin cannot be falsified, this feature also contributes to the longevity and growth of its value.

If we compare bitcoin to religion, then we can see that there are very similarities between the two. First, both are unfalsifiable. Second, there needs to be a strong community of believers. Third, there are regular gatherings of believers who work together to maintain the faith. Fourth, there are regular and ongoing activities to maintain this faith. Fifth, a consistent commitment to the faith by the believers, including financial, operational, and time commitments. If we look at the above items in the context of bitcoin-related activities, then we can conclude that the value of bitcoin as faith can be sustained as well as a religion.

Is there a solid foundation for the belief in the value of bitcoin?

Fiat currency can base its value on the future taxes of the issuer. Gold can base its value on its potential payment function, as well as its scarcity. So is bitcoin can fully based on faith and without its use value? The answer is no.

Bitcoin’s immediate use function is as a store of value and a value transfer tool. Due to its limited quantity, free circulation, ease of use and the existence of great liquidity, bitcoin is now being used as a store and transfer of value instrument. So in any area where fiat currencies are devalued and the economy is in turmoil, bitcoin is popular in the market. In this respect, it has the same effect as some digital currencies. But Bitcoin has its own unique characteristics compared to digital currencies, and it will be popular in the market.

If we take a look at regions where currencies are currently being devalued, such as Venezuela, Lebanon and Argentina, we can see that the price of bitcoin is climbing rapidly there. Of course, ultimately it is in the economically developed regions that the global price of bitcoin will be influenced, even though there is no direct market demand to use bitcoin as a store and transfer of value. But clearly, the market is not very optimistic about the current mechanism for generating currency, which is why people are potentially using bitcoin as a store and transfer of value, which also leads to the rising price of bitcoin.

Article from Gu Yanxi, Founder of Liyan Consulting

Translated by Yang(Mengyan Finance)

To translate some latest policy and issues on blockchain and fintech happened in China