The NYSE Bitcoin Index is up another 189 percent so far in 2017, as bitcoin continues to rise in popularity among traders. Some bitcoin investors see the cryptocurrency as a safe haven against inflation and pricey stocks and bonds. Others see it simply as a short-term momentum trade. But does bitcoin actually have any intrinsic value at all?
The short answer is no.
Bitcoin's Value Problem
But that doesn’t necessarily mean bitcoin is a bad investment. Gold also has no intrinsic value. Gold cannot be eaten. It has minimal usefulness as a building material or weapon. Gold is only valuable because humans have treated it as such for centuries.
Like gold, bitcoin’s price fluctuations are dictated by supply and demand. Unlike centralized global currencies, such as the U.S. dollar, bitcoin’s supply is fixed and capped, leaving demand as the sole variable in the equation. But even that one variable is extremely unpredictable.
Bitcoin bulls often point to the fact that the cryptocurrency is free from central bank manipulation as a positive for the currency. However, central banks often step in to support centralized currencies in times of weakness. Without anything to support the value of bitcoin other than market demand, the cryptocurrency is completely at the mercy of the whims of the market.
Alan Greenspan, former chairman of the U.S. Federal Reserve, recently said bitcoin’s lack of intrinsic value or backing from a centralized agency makes it difficult to understand as an investment.
“You have to really stretch your imagination to infer what the intrinsic value of bitcoin is,” Greenspan said. “I haven’t been able to do it."
Business Insider CEO Henry Blodget agrees.
“There is no intrinsic value,” Blodget recently said. “If anybody is persuading you that it should somehow be related to some GDP or gold ... put down the Kool-Aid and back away.”
Even Warren Buffett, one of the most successful and iconic investors of all time, has warned investors about bitcoin.
“Stay away from it. It’s a mirage, basically,” Buffett said of bitcoin.
Placing A Price On Utility
Others see bitcoin’s true value in its utility. Bitcoin’s “programmable” nature, blockchain technology, cryptography and pseudo-anonymity are all qualities that no centralized currency can offer.
Reggie Middleton, founder of Veritaseum, has said the true value of bitcoin is in the usefulness of its platform rather than the currency itself.
Related Link: Battle Of The Cryptos: Bitcoin Vs. Ethereum
“The biggest threat to Visa et al is not the digital currency application, because money remittance through this is going to be very low-margin, close to zero margin and then negative margin soon,” Middleton said. “As they gain in popularity, you’ll see the functionality easily surpass the Visas and the physical cash and coin parameters.”
Middleton believes the bitcoin blockchain could eventually make the traditional centralized currency model obsolete.
The B Word
But just because bitcoin may or may not hold long-term utility value doesn’t mean investors are safe buying bitcoin at its current price. Aberdeen Asset Management venture capitalist Peter Denious is one of many experts who believe bitcoin is currently displaying all the textbook signs of a market bubble.
“A lot of lessons will be learned and a lot of money will be lost before a lot of money can be made,” Denious said in June. “It’s a gold-rush mentality.”
Billionaire Marc Cuban also recently weighed in on bitcoin on Twitter.
“When everyone is bragging about how easy they are making $=bubble,” he wrote.
Takeaway
Bitcoin and rival cryptocurrency Ethereum are difficult to compare to traditional centralized currencies, which is both a good and bad thing for cryptocurrency bulls.
On one hand, there is no intrinsic value in a bitcoin, which doesn’t even exist in the physical world. Bitcoin’s value isn’t backed by a powerful central government, and it's only worth what a buyer is willing to pay for it. However, bitcoin’s utility as a technology may carry its true value over time if the blockchain model becomes the new standard for value exchange around the world.
But regardless of whether bitcoin holds long-term value, the price surge in the bitcoin market has all the tell-tale signs of a bubble. After all, the amount of bitcoin used to order two Papa Johns Int’l, Inc.
PZZA
pizzas back in 2010 is now worth well more than $20 million.
Perhaps Cuban put it best: “#crypto is like gold. More religion than asset. Except of course, gold makes nice jewelry.”