How Much Are Bitcoins Really Worth?

At over $400 a bitcoin, the defiant crytopcurrency is bubbling all over again, causing enough buzz that the Senate is having a hearing on virtual currencies. What boils down to some mathematical models and open source code is now worth $4.4 billion.

It might be because of fiscal instability around the world. It might be because of growing interest in China. It might be because you heard some guy is a millionaire now because he, on a whim, bought $50 worth two years ago. The hype machine is in full force. My mom is talking about bitcoin again.

But how much is bitcoin really worth? Believers say the sky’s the limit. It could hit $10,000, or $100,000. The doubters, like Business Insider’s Joe Weisenthal, believe it’s only matter of time before gravity takes over, the bubble pops, and we return to $0. Without a killer app—the Silk Road 2.0 doesn’t count—bitcoin is a purely speculative asset, making its inherent value nearly impossible to calculate. Normally, free markets can do an adequate job of pricing when the fundamentals are unclear, but since there’s still no easy way to short bitcoins, or bet that the price will go down, without actually owning bitcoins themselves, the market price can be misleading.

Part of the problem is, beyond having a difficult time understanding how it works, we aren’t quite sure what bitcoin is, or is trying to be. Though described as such, bitcoin hardly resembles a currency. Its price is too wild, its usage too hipster. Any useful currency needs to be stable and convenient.

Instead, the best argument I’ve heard from the movement’s advocates is that bitcoin, rather than acting as a currency, is better suited as a payment processor, at least in the medium term, which actually holds water. There’s no punk politics here about evil central bankers. It’s fairly easy to start accepting payment in bitcoins. E-commerce platform Shopify recently announced official integration. The math also computes because the fees are cheaper compared to credit cards, PayPal, or Western Union.

Using those companies as a benchmark, a private fund called the Bitcoin Investment Trust is presenting a snapshot of how much bitcoin should be worth if it became a widely used method of making payments or sending money to other people.

Granted, it’s a somewhat weird, if not intuitive, way to value bitcoins. Comparing the market value of a company to the total value of all bitcoins in circulation doesn’t make total sense. But it does give some idea, however imperfect, of what bitcoin might be worth if it ever takes off in a meaningful way, and where it might need to find stability for it to be useful. The point is, even at around $400 a coin, it still has a long way to go.

@sfnuop