If there is no fundamental value in Bitcoin, how long can it really survive?

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As it hits new highs, there is no shortage of bold predictions that Bitcoin will hit US $ 100,000 or more.

Often these are only based on extrapolations made by people with special interests: the price has increased a lot, so it will continue to rise. If it exceeds its previous peak, it must continue to climb.

There are also “charts” or “technical analysis” – looking at charts and seeing patterns in them. There can be fancy terms such as “resistance levels” and “Tenkan-Sen”. We speak of “fundamentals”.

Let us examine this last idea. Does Bitcoin have a fundamental value?

Calculation of fundamental values

A fundamental value in traditional financial parlance means a value based on the return (or cash flow) generated by an asset. Think of an apple tree. For an investor, its fundamental value lies in the apples it produces.

In the case of corporate stocks, the fundamental value is the dividend paid out of profits. A standard measure used by investors is the price / earnings ratio. In real estate, fundamental value reflects the rent the investor earns (or the owner-occupant saves). For a bond, the value depends on the interest it pays.

Gold also has a fundamental value, based on its use for jewelry or dental fillings or in electronics. But this value is not the reason why most people buy gold.

Fundamentals of cryptocurrencies

National currencies are different. Their value is to be a reliable and accepted unit of exchange.

In the past, gold and silver coins had fundamental value because they could be melted down for their precious metals. This is no longer the case with fiat currencies, the value of which depends solely on whether people trust others to accept them at face value.

Most cryptocurrencies, such as Bitcoin, Ethereum, and Dogecoin are essentially private fiat currencies. They have no corresponding assets or returns. This makes it difficult to determine a fundamental value.

In September, analysts at U.K. Standard Chartered Bank claimed that Bitcoin could peak at around $ 100,000 by the end of 2021. “Said the head of the bank’s crypto research team, Geoffrey Kendrick (a former Australian Treasury official).

Theoretically, this could be possible. Globally, about 1.7 billion people do not have access to banking services. But Bitcoin has been conceived as the future of payments since its invention in 2008. It has made little progress.

There are at least two important obstacles. The first is the computational grunt required to process payments. Technology can overcome this. The second obstacle is more difficult: the volatility of its price.

Digital currencies that can maintain a stable value are more likely to become payment instruments. These include existing stablecoins, Meta’s mentioned Diem, and central bank digital currencies, which are already operational in some Caribbean economies.

So far, the only major company to have accepted Bitcoin payments is Tesla, which announced the policy in March only to roll it back in May.

The only country to adopt Bitcoin as an approved currency is El Salvador (which also uses the US dollar). But the benefits are far from clear. Laws requiring companies to accept cryptocurrency have also sparked protests.

Read more: Can Bitcoin become a real currency? Here’s what’s wrong with El Salvador’s crypto plan

Bitcoin as digital gold

If Bitcoin has no real value as a popular payment medium, what about as a store of value, like digital gold? It has this advantage over most “altcoins”. Its supply, like gold, is (arguably) limited.

A tool used by crypto enthusiasts to compare the scarcity of Bitcoin with gold is called the “stock-to-flow” model. This approach claims that gold retains its value because the existing gold stock is 60 times the amount of new gold mined each year. The stock of Bitcoin is more than 50 times that of new coins “mined” annually.

But that doesn’t explain why the price of Bitcoin halved earlier this year. Nor does it have a theoretical basis in economics: prices do not depend solely on supply.

Some Bitcoin promoters predict higher prices under the assumption that fund managers eventually invest an arbitrary proportion, say 5%, of their funds in Bitcoin.

But such predictions implicitly assume that Bitcoin, as the largest and most well-known cryptocurrency, will continue to maintain its dominant position in the crypto market. It is not guaranteed. And there is no limit to the number of cryptocurrency alternatives.

Do you remember the bank card? This credit card company once had 90% of the Australian market in the early 1980s. It disappeared in 2006. What about MySpace? Prior to 2008, it was a bigger social networking site than Facebook.

Here we go again

In September, The Economist claimed that Bitcoin “is now a distraction” to the future of decentralized finance, with rival blockchain cryptocurrency Ethereum “reaching critical mass.”

Read more: Ethereum: the transformation that could see it overtake bitcoin

There are parallels between the Bitcoin bubble and the dot-com bubble of 2000, driven by overly optimistic assumptions about new technology – and human greed.

Just as a few stars such as Amazon have emerged from the wreckage of the dot.com bubble, it is possible that some applications of the blockchain technology underlying Bitcoin will have lasting use. But I doubt Bitcoin is one of them.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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