It’s a question that’s been asked a million times by a million people. Some people say $100,000 is the peak while others say it could get up to $1 million or more. Others still say it’s worth nothing. It’s hard to say how much Bitcoin is really worth, but here’s the best way I can explain it.
How do you classify Bitcoin?
Bitcoin may have started as a digital currency, but it’s nowhere close to that now. You may be able to buy things using Bitcoin, but the goods aren’t denominated in Bitcoin. They’re denominated in fiat currency.
Same goes for Russell Okung’s “ground-breaking” contract that pays half of his salary in Bitcoin. His salary is for a defined amount of U.S. dollars that is then converted to Bitcoin. He gets paid in USD.
Proponents of Bitcoin now say that it is a “store of value”–like digital gold.
Okay, fine. Let’s go with that. So, if Bitcoin is like digital gold, let’s see if we can calculate the target price of Bitcoin using gold as a proxy.
The price of digital gold
In order to translate the price of gold into the price of digital gold (Bitcoin), we first need to establish some assumptions.
- The price and supply are both fixed.
- The price for the total supply of gold and Bitcoin are equal.
The current price of gold is $1,732 per ounce, and the current price of Bitcoin is $58,000. Both are stated in USD, so they are using the same measure. Perfect.
But the supply of each does not use the same measure. To fix this, we will have to consider the full supply of both assets.
According to BBC News, 190,000 tonnes has been mined in total with 50,000 tonnes left to mine. That brings us to a total supply of 260,000 tonnes, or 9.17 billion ounces.
Multiply the total supply of gold in ounces by the price per ounce, and we arrive at a total price of $15.89 trillion for all the gold in the world. Not too shabby for a bunch of shiny rocks.
The total supply of Bitcoin is 21 million. If we take the total value of gold divided by the total supply of Bitcoin, we get a target Bitcoin price of $756,409. Holy guacamole!
If we assume that the total value of Bitcoin equals the total value of gold, then Bitcoin has a long ways to run.
These calculations are based on total possible supply. If we use the total available supply estimated by Buy Bitcoin Worldwide, the numbers end up like this:
Either way you look at it, if Bitcoin is worth as much as gold, there is a lot of upside.
But gold is not the only store of value. Let’s see how these calculations play out with another precious metal…
Using the same assumptions, a price per ounce of $25, and supply estimates from the U.S. Geological Survey, the value of Bitcoin ends up much different than gold.
Yikes. Comparing the total value of Bitcoin to the total value of silver shows much less upside. Using both the gold and silver estimates, our range for Bitcoin now lies somewhere between $80,000 and $760,000. Not very helpful.
Bitcoin may be marketed as the digital gold, but that’s not really true.
Gold and silver have many uses other than being a store of value. They’re used in the making of jewelry and electronics as well as dentistry and aerospace manufacturing. You’ll never see a Bitcoin necklace or tooth.
But precious metals are also very heavy. They take a lot of time and effort to transport. $1 million worth of Bitcoin can be transferred to the other side of the world within minutes. One point for Bitcoin.
And if the total supply of two precious metals can be this drastically different, the value of cryptocurrencies may not be within the same galaxy.
But in the end, the value of Bitcoin will be derived in the same manner as these precious metals.
Price is based on belief
Gold and silver have similar characteristics and they are used in similar ways. Gold costs so much more than silver because we believe it to be worth more. It’s nothing more than that.
Same will go for Bitcoin. If people find Bitcoin valuable, the price will reflect that. If not, Bitcoin may cease to exist. At this point, either scenario is very possible. Especially if governments step in and make owning Bitcoin illegal.
Gold was illegal in the 1930s. If the world’s oldest currency can be outlawed, the world’s newest asset class can be too.
Only time will tell what happens. In the meantime, I’ll hang on to my Bitcoin and enjoy the ride.
Thanks for reading!