2 economists just eviscerated bitcoin, saying it should be trading at $20

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MI

  • Bitcoin fell to its lowest level in months during Thursday trading.
  • Two economists say that it is still trading at a massive premium, estimating it is worth only $20.

Bitcoin reached its lowest point in more than two months Thursday, but two economists still think the cryptocurrency is trading at a massive premium.

The now-famous digital currency, which captured the attention of the public when it soared beyond $19,000 in mid-December, fell below $8,700 a coin during Thursday’s trading session – a more than 50% decline.

Richard Jackman, an economist at the London School of Economics, and Savvas Savouri, an economist at Toscafund Asset Management, however, estimate the coin is still trading far higher than it should.

“We often read in your pages the view that bitcoin has no value and therefore, in a rational market, would have no price, but that surely is wrong,” the duo said Thursday in the Financial Times. “Bitcoin was developed as a form of money (the clue is in the name), and money has value even though most money, like bitcoin, has no substance other than the electronic.”

That value, according to Jackman and Savouri, is based on its demand as a vehicle of exchange.

“And on this basis it is fairly easy to calculate, approximately, what its fundamental value is.”

That number, according to Jackman and Savouri, is a mere $20. Here’s their logic:

The supply of bitcoin increases only slowly towards its famous fixed limit and is now around 15m. The use of bitcoin as a means of payment is currently around $100m per month, or $1,200m a year. Were bitcoin just like ordinary money each bitcoin would be used around four times a year in making transactions. So we have 60m bitcoin payments supporting $1,200m worth of bitcoin transactions, which requires that each bitcoin is worth $20.

There’s always a “but” with such analysis. And the “but” in this case is that bitcoin could be worth its current value, but it would have to see a 1000-fold increase in its use as a form of payment.

“Of course that is possible; bitcoin currently supports only a tiny fraction of transactions,” the duo said. “But to assume so enormous an increase requires faith not only in the superior cost efficiency of the technology but also in the absence of any effective competition.”