What is one bitcoin actually worth?
Bitcoin, the world’s most known and traded digital token, has now lost more than 40% of its value since touching nearly $70,000 in November. In early trading Friday, it once again dipped below $40,000, down about 8%, with Ethereum, Solana, XRP, and other digital currencies in hot pursuit.
Declines across the cryptocurrency market have followed a rough start to the year for stocks as investors reassess where the economy is at and what the Federal Reserve is going to do about it.
Expectations are that the Fed will lift interest rates sooner than later, possibly as soon as March, to slow the economy by deterring people and businesses from borrowing.
What that has to do with bitcoin, ether, the world's second-biggest cryptocurrency by valuation, Solana, XRP, Polkadot, and other cryptocurrencies and digital assets, and in particular bitcoin’s massive drop since November, depends on who you talk to.
Mike Novogratz, cryptocurrency billionaire and founder of brokerage firm Galaxy Digital, believes that bitcoin could find a bottom at the $38,000-$40,000 level as those who believe in its finite nature and its ability to act as “digital gold” – and hence its ability to be a hedge against inflation – find a new comfort level.
Venerable, 153-year-old investment bank Goldman Sachs, which has been through just a few different iterations of markets being driven by investor predictions in what something's value will be in the future, sees bitcoin hitting $100,000 -- and pushing out gold's place in the store-of-value market.
Bitcoin: Not Your Average, Run-of-the-Mill Currency
At the same time, the theory that bitcoin serves as a hedge against rising inflation and falling stocks continues to be put to the test, especially given that a 40% drop in other types of assets like stocks or bonds would have spurred global panic by now.
So what gives a bitcoin its value?
Bitcoin is a cryptocurrency developed in 2009 by Satoshi Nakamoto, the name given to its unknown creator (or creators). Transactions are recorded in a digital ledger called a blockchain, which shows the transaction history for each unit and proves ownership.
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Unlike traditional currencies, bitcoin is not issued by a central bank or backed by a government, whose currency is given a market value based on a variety of things like how much debt it owes, how able it is to pay that debt back, and how secure people feel about that equation.
And buying a bitcoin is different from purchasing a stock or bond, because bitcoin is not a corporation.
Indeed, bitcoin, in theory, is not subject to things like rising consumer and producer prices (inflation), the level of interest rates and other monetary policy and fiscal policy changes that governments use to direct the broader economy – and which in turn influence the value of a currency.
Like Gold and Collector Baseball Cards, Bitcoin's Value Lies In Its Scarcity
Bitcoin believers say the main source of its value is its scarcity. The argument for bitcoin's value is similar to that of gold: there’s only so much of it out there to be mined, and the more people want it, the higher its worth becomes.
Bitcoin specifically is limited to a quantity of 21 million; the final coins are projected to be mined in the year 2140.
Other factors that influence bitcoin’s price include the cost of producing a bitcoin through the “mining” process, the rewards issued to bitcoin miners for verifying transactions to the blockchain, the number of other competing cryptocurrencies, regulations governing its sale and use and the overall state of its internal governance.
Ether is also verified on the blockchain but is used as “gas” for transactions on its network. On Oct. 13, Ethereum accounted for almost 18% of the overall market cap of cryptocurrency markets, according to CoinMarketCap.
But How Do You Actually Calculate the Value of One Bitcoin?
Ripple’s XRP and Cardano’s ADA also have surged in popularity, while growth in stablecoins attracted investor attention toward Binance’s BNB token.
None of that answers the real question of what a bitcoin or any other non-physical asset is actually worth, and how that value is determined by markets.
There is a technical way to calculate the intrinsic value of one bitcoin: by computing the average marginal cost of production of a bitcoin at any given point in time, based on the so-called block reward, the price of electricity, the energy efficiency of mining hardware, and mining difficulty.
At the same time, and like any asset, be it gold, real estate or rare baseball cards, something is only ever worth what someone else is willing to pay for it.