Bitcoin Series 5: What are the elements of valuing bitcoin?

Valuing bitcoin is a complicated exercise because there is no clear valuation method that has been accepted.  

I am not going to attempt to value it here, but I will present some initial thoughts regarding what will drive demand for bitcoins and, therefore their value:

(a)    “Velocity of money”  - how much money is tied up in bitcoin while transactions are being made.

(b)   “Laziness” – A lot of people or businesses that decide to use bitcoin will keep some (small) amounts of money in bitcoin just for convenience.   I certainly did not login to Paypal every time someone sent me money to move it to my bank account and this same logic will apply here.

(c)    “Fun/speculation” – People spend $40 billion annually gambling in Macau and $10 billion annually gambling in Las Vegas.   Day-trading and speculation in bitcoin, something that can be done 24 /7 / 365 from any PC, is not going to go away.

(d)   “Diversification / store of value / disaster planning”:  This is discussed in detail in the ‘Store of Value’ post.   It is perfectly rational for people in certain situations to keep some percentage of their assets in bitcoin.

(e)   “Native bitcoin” – There will be classes of activities (aka machine-based economic transactions) that will be natively in bitcoin and will stay permanently in the bitcoin ecosystem.   These will increase over time.

Demand for bitcoin will be (a)+(b)+(c)+(d)+(e).    How quickly each of these areas develop is really a matter of psychology and regulatory approaches rather than hard finance.   We will delve into the potential for each area later.

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Posted on December 28, 2013 and filed under Bitcoin.