With Bitcoin falling rather sharply over the past few days, perhaps it is time to make some postulations as to what a Bitcoin "should" actually be worth.
First, keep in mind that this post in not inteded to base your buying or selling decisions on but more of a fun thing I decided to do based on a couple articles I have read in the past.
This being one of them:
https://medium.com/@dsquareddigest/how-i-guesstimated-the-value-of-bitcoin-in-2014-e64f327753c8
Now that we have gotten that part out of the way, lets dive in!
The first thing we must consider, does Bitcoin have any use cases?
Most people might say "nope or yes it does but very little" upon first thought. However, after doing some digging, I can conclusively say that Bitcoin does have one very strong use-case indeed.
That of purchasing illegal goods, specifically drugs.
Now, before I go any further I'd like to point out that I do not support that use nor am I happy that one of my main investments is used for illegal purchases, but keep in mind that the US dollar is also used for many nefarious activities and that doesn't make it in of itself, bad.
Further more, this same use that is frowned upon by myself and many others is actually what gives Bitcoin the investment a floor, at least potentially.
You see, if every government around the world were to all of the sudden outlaw Bitcoin and make it illegal to use, there would still be an underlying market that uses it.
By the way we already know that every country won't do that as we have already seen some legalize it as official legal tender and others have allowed taxes to be paid in it, which is basically the same thing.
However, for coming up with a price floor for our model, lets assume that Bitcoin has been made illegal and has no other purpose other than that of the Black Market and purchasing illicit drugs.
Which is a rather large market by the way...
The global drug industry was estimated to be somewhere between $425 and $652 billion USD annually.
Using that number perhaps we can take an age old equation and rework it a bit to get a reasonable price for Bitcoin, what do you say?
Lets try using the famous (infamous?!) MV=PT equation.
It was created by Irving Fisher in 1911 and it was known as the "Equation of Exchange". It is now known mostly as the "Fisher Equation" and is based around the Quantity Theory of Money.
It is actually part of the thought process behind QE that so many countries around the world have been implementing over the past decade or so.
In this equation:
M = Money Supply
V = Velocity of money
P = Price
T = Transactions
Is it possible that we can use this equation and the information above to come up with a reasonable value for Bitcoin?
Sorta, kinda, maybe.
In this instance:
M = The number of Bitcoins (just under 17 million currently)
V = For this example we will use 10 as our number (though the velocity of money is rarely a constant)
P = This is the number we will be trying to find
T = Any number between $425 and $652 billion (as those were the numbers given for the illicit drug trade).
Bear with me here as I am going to use some magic mathematical wizardry to get the equation set up in the way we need it to be in order to solve for P.
Now, if we take MV and multiple them together, we get 17,000,000 X 10 = 170,000,000.
Then lets say we use $500 billion as our drug market number as a conservative number based upon the range we were given, we can then take our reconfigured equation and divide $500 billion by that 170 million number from above.
Which would give us $2,941.
That would mean that in our example if all the illicit drug trade were to be priced in terms of Bitcoin, it would give Bitcoin a price of roughly $2,941 per coin.
With Bitcoin currently trading around $3,800 per coin, that number does't sound all that unreasonable now does it?
Again keep in mind that this number is mostly taken out of thin air, though not entirely, and mostly intended for fun and entertaining purposes.
If nothing else I hope the thought process behind the pricing was interesting to you and perhaps opened your eyes about the possibility of there indeed being a price floor in Bitcoin.
Stay informed my friends.
Sources:
https://www.nolanchart.com/article5583-mvpt-a-classic-equation-and-monetary-policy-html
https://medium.com/@dsquareddigest/how-i-guesstimated-the-value-of-bitcoin-in-2014-e64f327753c8
Image Sources:
https://bravenewcoin.com/news/bitcoins-value-altcoins/
http://www.investopedia.com/articles/05/010705.asp
https://blockchain.info/charts/total-bitcoins
Follow me: @jrcornel