What is Bitcoin Worth?

We all know about social networks. Bitcoin is the money network. It is the internet of money. You can now send value through the internet similar to an email. But you need to understand the origins of Bitcoin. It was borne out of the financial crisis of 2008 when we almost saw the collapse of the global banking system. Satoshi Nakamoto (an individual who had never been found leading people to believe "he" may be a group of people) was outraged at the idea of inefficient and corrupt bankers being able to bring the world to its knees. Without banks, there is no food. Bread companies need to buy flour, yeast, sugar, salt, and oil. They pay using the banking system. Without banks, there is no bread. Satoshi did not want to live in a world where his/her/their survival depended on bankers and hence Bitcoin was born.

Satoshi's fears were further borne out in the 2012-2013 Cypriot financial crisis. The largest commercial bank in Cyprus (aptly named the Bank of Cyprus) got into financial problems. In order to get out of its problems it seized the money of deposit holders with balances over 100,000 euros. The first 100,000 euros were protected by deposit insurance. Many countries offer this protection in order to promote financial stability and confidence and Cyprus is one of those countries. A total of 47.5 percent of all bank deposits above 100,000 euros were seized.

So how do we value Bitcoin? Metcalfe's Law was originally presented in 1980 by Robert Metcalfe stating that the value of a telecommunications network is proportional to the square of the number of connected users. This law has been used to value Facebook. What separates crypto from social networks is that the asset being valued is also the technology being adopted. A Bitcoin user is a stakeholder in the system whereas most users of Facebook are not Facebook shareholders.

So let's put this into action. Bitcoin has between 700,000 and 1 million daily active addresses. If we use the low end of the range, bitcoin is valued as such using Metcalfe's Law:

700,000 × 700,000 = 490 billion. There are 19.1 million bitcoins in circulation which means that each Bitcoin is worth $25,700.

If we use the upper end of the range, Bitcoin would have a market capitalization of $1 trillion each Bitcoin would be worth around $52,000. So Metcalfe's law would place the fair value of the crypto at roughly between 25 and 50 thousand dollars per bitcoin.

Bitcoin was invented for the internet. Credit cards which are the most widely used means of payment on the internet were made by bankers. Credit cards were never purpose-built for the internet. That is a pretty big idea. Add to this the fact that money is the greatest social network of all. So you cannot value Bitcoin in the same way you value normal financial assets - the present value of future cash flows. You need to value the network using Metcalfe's Law. If I am the only person in the world with a smartphone, there isn't much I can do with it. But if 10 people have phones, then the calculation gets interesting. But you have to be careful with comparing Bitcoin with social media platforms. On Twitter, people are vying for retweets. On Instagram, people are vying for likes. On YouTube, people are vying for views and subscribers. In Bitcoin, you are vying for an increase in financial value which is a far more powerful commodity.

There is another interesting feature of Bitcoin. When you buy your first stock, you never look at the stock market in the same way. It focuses your attention. This is another reason that adds stickiness to Bitcoin user numbers. Once you are sucked in, you are unlikely to leave. Having skin in the game is powerful. You need to ask yourself the question on Bitcoin - how does it not work? In order for it not to work, you need to shut down the internet. Governments need to figure out how to work with it because they realized the only way they can stop it is by stopping the internet.

With all this in mind, a valuation of $100,000 is not such are long shot!

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