A study on the intrinsic value of bitcoin, published by the team of analysts at the cryptocurrency exchange Kraken, examines different approaches to the intrinsic value of bitcoin, the position on this of what it calls believers and skeptics. It also explores how the different definitions of value could be extended to bitcoin.
Among the perspectives used in the Kraken Intelligence report to assess the value of bitcoin are the following: stocks and bonds, intangible assets, commodities, and uncorrelated assets.
Of several definitions of intrinsic value presented in the report, Kraken highlights the aspects that overlap in several of them. For example, the inherent attributes or perception of value of the owner or investor.
The authors of the report propose the following definition of intrinsic value:
If we want to be more specific, we could define intrinsic value as “The perceived value of an asset, considering its fundamental features, its tangible or intangible properties, which may differ from the market value.” Kraken Intelligence.
The above graph shows different scenarios of a portfolio, depending on what an investor in possession of 1 BTC, at the end of 2017, did with the coins received from the Bitcoin forks: sale of these or sale and reinvestment in BTC to 30 days.
The traditional metric of the book price ratio (the price of a stock divided by its book value) is frequently used to value a company. However, Kraken Intelligence points out that if it were applied to Facebook, as the only valuation indicator, it would be missing the most valuable intangible asset of that social network, it’s base of almost 2 billion users.
Similarly, the authors say, there are intangible assets within bitcoin that must be taken into account when assessing its intrinsic value. These include cryptography-based computational security, censorship resistance, and their immutability and verifiability.
Since bitcoin’s security relies on cryptography and an increasing amount of computing power, the reliability and robustness of its network makes it the most secure and decentralized digital asset in existence. Kraken Intelligence.
There are innumerable cases of fraudulent replication of securities, the authors of the report highlight, and also counterfeits of physical and digital assets. Bitcoin, for its part, was designed to ensure that network validators can verify all transactions.
“The immutability of a bitcoin and the corresponding transaction, which cannot be altered or forged, makes bitcoin a highly differentiable, safe, and reliable asset.”
Another intangible that adds value to Bitcoin, according to the report, is that it is a “censorship-resistant non-permissive network.” They highlight that anyone with an internet connection can access the Bitcoin network at any time. As it does not operate centrally, there are no authorities, no single point of failure, and no restrictions on participation.
[…] There is immense value in the decentralized and global Bitcoin network, as it is capable of facilitating its services without any interference. To contextualize the inherent value of network effects, a study conducted by Silicon Valley seed fund NFX found that network effects contributed approximately 70% of the value created in technology since 1993. Kraken Intelligence.
Bitcoin will not succeed just because of the value proposition and underlying technology, but also because people believe it will succeed, the authors note. This is a virtuous circle: participants believe that the adoption, or purchase/use of bitcoin, will continue to accelerate, and that leads to adoption. “This reasoning triggers a wave of adoption that leads others to the same conclusion and the same action.”
Reddit, whose website ranks 19th in global visits, is cited as proof of this phenomenon. The r / Bitcoin section (called the subreddit) has accumulated 16.5 million users in the last 8 years. It ranks 211 out of the 1.2 million subreddits out there.
Kraken Intelligence compares bitcoin with some categories of investments that it calls “alternatives,” to differentiate them from traditional assets. The authors propose to study how these investments derive their intrinsic value and what parallels may exist with bitcoin.
One of these alternative investments is the real estate industry. The three most common methods for calculating the intrinsic value of commercial and residential real estate, the report notes, are comparable property sales, the rate of return, and the cost that would be incurred if the property is rebuilt.
In the same way that it is difficult to apply these methodologies in practice in the case of the real estate industry if the cost of replacing bitcoin is sought by analogy, two options are raised, the purchase in the market or incur the costs of equipment, energy, and computing power to produce it through mining.
In the latter case, there are several variables involved and profitability can vary enormously with a small variation in one of these variables. By choosing specific mining equipment, an Antminer S19, for example, raising the cost of the kWh from USD 0.11 to USD 0.12, the operation would no longer be profitable. It would go from an annual profit of $ 75 to a loss of $ 205, at current bitcoin prices (around $ 10,000 / BTC).
Bitcoin, on the other hand, could be used to offer financial services that commercial banking and offshore banks currently offer. To do this, as already mentioned, anyone with an Internet connection can buy bitcoin and can function as their own bank, says the report.
The conditions that facilitate the possibility of offering Bitcoin-based financial services, Kraken notes, include the existence of at least 1.7 billion unbanked people. Also, 1 in 4 consumers currently have access to digital wallets and nearly half of them use them multiple times a week, the report says.
Finally, the report considers that remittance services sent to developing countries represent opportunities for bitcoin. According to the World Bank, USD 551 billion in remittances were sent in 2019. Banks, the report says, charge between 7% and 10% commission. In addition to being expensive, remittance services are slow — they can take up to a week or more to complete.
Bitcoin can be sent almost instantly to any part of the world, it only requires a service that exchanges it locally for the corresponding national currency. Bitcoin has facilitated transfers of up to $ 1 billion, with a fee of $ 0.48. At 7%, a similar remittance would have cost USD 70 million, using existing services.
In general, payment services could also benefit from the advantages of bitcoin. Kraken’s study indicates that the payments industry grows 6% annually and will rise to USD 2.7 trillion in 2023.
All these services such as Paypal, Venmo, Zelle, Square, or Apple Pay, compete based on the size of their network, the report says. The receiver is required to be on the same network or affiliated with the service chosen by the sender of the payment. Bitcoin, on the other hand, can be sent and received by anyone, at any time, regardless of geographical location.
Skeptics and believers in bitcoin, regarding its role as a store of value. The volatility of bitcoin would be, according to skeptics, an impediment for it to become an effective store of value.
The authors state that, on the one hand, volatility has been gradually declining in general, as can be seen in the following graph.
On the other hand, volatility has worked in favor of bitcoin, says the report, as it is a factor that has favored its success and adoption. Of the 3,961 days that bitcoin has been traded on the open market, it has been profitable in approximately 3,691 days, or 94.7% of that time, compared to the price of $ 10,250.
The report lists the 6 characteristics of money, according to the St. Louis Federal Reserve, one of the 12 regional reserve banks in the United States: durability, portability, divisibility, uniformity, limited supply, and acceptability.
For a multitude of reasons, many of the proponents of bitcoin believe that it meets these characteristics and is therefore money with intrinsic real value. Kraken Intelligence.
Durable. Bitcoin can be lost only if it is sent to the wrong address or if your private keys are lost, but it cannot be destroyed. Private keys can be easily guarded.
Portable. As it exists in bits, any amount of bitcoin can be transferred on a laptop, mobile phone, USB memory, or even on paper. Bitcoin is more portable than any other form of money in history.
Divisible. While existing forms of money are divisible to two decimal places, bitcoin goes up to eight decimal places or one hundred millionth. The smallest bitcoin denomination is 0.00000001 BTC or 1 satoshi.
Uniform. Bitcoins, no matter when they were mined, are all the same. The issue date of coins and bills, for collectors’ purposes, may alter the value of those coins or bills.
Limited supply. The supply of bitcoin is capped at 21 million coins.
Acceptable. In November 2013, the report says, the number of companies that accepted bitcoin was 550. Currently, this number has grown 28,000% to reach 16,000 companies.
Furthermore, the report adds, bitcoin is backed by a robust network. However, for the skeptics, bitcoin is not endorsed by anyone.
This logic fails to recognize that, as with the dollar, which is desirable because of the trust in its sovereign state, bitcoin is desirable because of the strength of its network or ‘ecosystem’. Bitcoin has built its reputation as the most cryptographically secure, decentralized, and widely adopted digital asset ever. Kraken Intelligence.
In its conclusions, the Kraken study notes that those who see value in bitcoin use conventional and unconventional approaches to understand what things make bitcoin similar to traditional assets.
Although they recognize that individuals can differ in the intrinsic value they see in bitcoin, the arrival of this in the current information age allows a methodical reassessment of the concept of intrinsic value and how digital assets are located in the value spectrum of the assets.