How is it possible to value bitcoin?

Patrick Cairns Moneyweb

The sharp rise in the price of bitcoin and some other cryptocurrencies since the start of 2017 has created enormous interest in this market.

But plenty of sceptics argue bitcoin can’t be a real currency, there’s no rational place for it in an investment portfolio and that it’s a fraud.

However, at a recent Old Mutual Tomorrow event, venture capitalist Vusi Thembekwayo said with cryptocurrencies people shouldn’t get stuck in “second industrial complex” thinking.

“That thinking assimilates value to a specific world. A world that is industrialised, that functions on a balance sheet, and that values a thing based on an asset pegged to a currency value.”

The argument is that the world of cryptocurrencies is part of the fourth industrial revolution, where value must be viewed differently because this is a world where value is created differently.

However, if you’re going to put money into bitcoin, how do you know whether the price you’re paying is reasonable? That’s a question even the experts struggle with.

“Bitcoin is the world’s first digital currency, or first digital commodity,” Civic co-founder Vinny Lingham argued. “So how is it any different from any country that issues its own currency? How do you value the rand? Any currency is an index of the underlying economic activity in that country. Bitcoin is an index currently of all the other cryptocurrency activities in the digital economy.”

It’s worth considering Lingham’s broader point: there’s a new kind of economy emerging. Maybe bitcoin should be seen as a proxy for it.

Thembekwayo said this alternative system “will take off, because it is able to create value at lower marginal cost”.