You may have heard that the value of BitCoin has hit a number of all-time highs in the last week. Just yesterday (9th May 2017), the crypto-currency made the news when the value of a single BitCoin topped $1,700 for the first time. Less than a day later, it has now passed $1758. You can see from the chart below what a wild ride the last week has been.
Context: on January 1st 2017, BitCoin was trading just under $1,000 USD. Given that the USD does not seem to be depreciating in any meaningful way, the rise in the value of BitCoin has to be attributed to the actual value of the currency. Right?
Determining the value of a good is always a difficult issue. Markets are supposed to be the mechanisms by which we do this in modern societies. But what are market actors basing their valuation work on?
Coindesk has a couple of interesting reads on two types of analysis used in financial markets, fundamental analysis and technical analysis. Leaving aside the latter for now, it is interesting to focus on what an analysis of the fundamentals of BitCoin might look like. Fundamental analysis is the very bedrock of investing*, as it tries to understand the factors that might affect the value of an asset.
The author identifies 3 key factors affecting the value of BitCoin: demand, supply and major events. These choices are interesting in and of themselves. Demand and supply can be characterised as market functioning variables, and they should probably be analysed together. There is evidence of some increase in BitCoin for transactions which involve actual economic activity, while at the same time supply is limited by the Blockchain protocol – it is written into the currency’s design. So there might be something there.
More interesting are the major events. There is some evidence that political and economic upheaval has led to a growth in interest in BitCoin, as people try to protect their money by exchanging some of it into a store of value perceived as being untaxable. The Greek financial and economic crisis is frequently mentioned in this regard. In these circumstances, BitCoin can become a hedge – a bit like gold.
These ideas are fine, of course, but I don’t think they tell us all the story. To me, there is a fundamental question which still needs to be addressed: what is BitCoin for?
*unless you happen to be a High Frequency Trading bot, in which case – hello there!