The recent upward trend in the rate of exchange between Bitcoin and other currencies has many traders and techies debating the difference between “price” and “value” and wondering where it will finally settle. On December 5th, Bank of America’s foreign exchange strategist David Woo declared a projected market capitalization for Bitcoin of $15 billion and a projected fair value of $1,300. This was a first among major banks and a major nod to Bitcoin’s credibility. However, Woo’s declaration met with some skepticism from Bitcoin advocates, many of whom believe Bitcoin to be a wholly new type of financial instrument and thus not readily comparable to anything else currently known. What is Bitcoin’s true value? Is the current price too high or too low? If the current price is not the “right” price, then how will we know what is?
Economically speaking, price is a term that refers to the amount of another resource or commodity demanded in order to obtain a good or service. Usually, but not always, you will find price expressed in terms of currency (barter transactions would be the exception). For example, the price of one gallon of gas may be $3.50 or the price of one Euro may be $1.85. Price is the most efficient signaling mechanism we know of to keep supply and demand near the point of equilibrium and the most useful means of quickly and objectively assessing “worth.””Value” is somewhat tougher to nail down than price. Value refers to the subjective (rather than the objective) perception of worth. A wrench is valuable to a mechanic because it allows him to tighten or remove nuts and bolts, but its price may be fairly modest.
A master work of art is aesthetically valuable to those who understand and enjoy it. Its constituent parts may cost less than the wrench, but the value may be far more. An item may have sentimental value, aesthetic value or value in use, but rarely will an item have intrinsic value.Intrinsic value is “value in and of itself.” Fiat currency, such as the Dollar, Euro, or Bitcoin (yes, Bitcoin is a fiat currency, too) cannot be intrinsically valuable. The value of Bitcoin derives from the variety, volume, type or quality of goods and services that can be received in exchange for it, as opposed to that of the paper and ink or metal (or computing power) used to produce it. If governments outlawed Bitcoin, taxed it into oblivion, or markets just lost interest in it, then its value would decline accordingly.
Further, if you could find no one to accept Bitcoin in exchange for anything you wanted to buy, it wouldn’t matter how many you had – their value would be zero and they would be worth nothing to you.The only economically appropriate value for Bitcoin is its market value. Market value is usually considered to be the price that you would receive in an orderly exchange under normal conditions between a willing buyer and a willing seller. When an active market exists for an item, its market value is relatively easy to determine because its price is readily apparent and, if not known to all, is at least known to those who need to know. If no merchants accepted Bitcoin and no exchanges existed to convert it into a functional currency, its value would be likely be close to zero, as was the case when Bitcoin was first conceived.
Consider the case of the pizza purchased in May 2010 for 10,000 Bitcoins, the price of which would now be equal to $10,000,000.Is Bitcoin something so new and revolutionary that it defies classification? Perhaps it is, though I don’t happen to think so. Does it really matter when it comes to Bitcoin’s value? I think probably not. I don’t claim to know what the price of one Bitcoin will be next year or even next week, but I do know that I’ll have to take the price that is offered if I want to spend it, whether I like that price or not. That, to me, is the only thing that really matters.
Jason M. Tyra writes about US Federal Income Tax, regulatory and financial accounting issues that affect individuals, entrepreneurs and small businesses using Bitcoin as a means of payment and store of wealth. Jason is a Certified Public Accountant licensed to practice in the State of Texas. Opinions do not constitute tax or accounting advice. Feedback is always appreciated. You can contact Jason by e-mail at email@example.com.