Most current iterations of cryptocurrencies are, at their core, meant to operate as currencies. However, currencies have, for many centuries, needed to meet a number of specific criteria to be recognised as such – namely, acting as a unit of account, a medium of exchange, and a store of value. Despite fulfilling most of the characteristics of a traditional fiat currency, cryptocurrencies are largely being utilised as speculative investment assets, leading to considerable volatility in their value. This lack of stability, together with soaring valuations, means they are rarely used for payments. In order to achieve status as a legitimate currency, the public must spend cryptocurrencies widely to determine a credible benchmark for their actual value, encouraging businesses to accept them as a medium of payment (hence making them more liquid in the long run). Until then, most cryptocurrencies, including BTC, will continue to exist in a speculative capacity, with all the undertones of being a bubble.
2017 saw the price of BTC surpass the asset price inflation of the 17th century tulip mania, while rendering “bubbles” such as dotcom a mere blip by comparison. Its strong – albeit slowly unwinding – correlation to alternative cryptocurrencies also indicates a collapse in the price of BTC could lead to a rapid downfall for the broader non-fiat cryptocurrency market.
A number of factors underpinned BTC’s price rise in 2017. In the earlier part of the year, many of the gains could be tied to ongoing discourse around its potential regulatory legitimacy. Since then, however, its popularity – and infamy – has appeared to fuel a widespread “fear of missing out” (FOMO), a classic characteristic of most bubbles. Yet, consensus regarding its future value remains literally non-existent, with valuations ranging from USD 0 to as high as USD 1,000,000. Moreover, the majority of these predictions do not appear to be based on any robust, quantitative methods, but are more a reflection of individual opinion.
To determine whether BTC is indeed a bubble, we looked to calculate its value using two overarching approaches: (1) as an asset; and (2) as a currency.
As an asset, we valued Bitcoin using a cost of production approach and a store of value approach, resulting in values of USD 2,161 and USD 687 respectively. To value BTC as a currency, we estimated its utilisation for both legal, retail transactions payments, as well as payments in the black market. After significant testing, we calculated the price of BTC 1 to be USD 1,780.
Irrespective of the valuation methodology employed, we found the price of BTC deviates significantly from its current price of ~USD 14,000. For the longer-term, we are even less optimistic around the future price of BTC and believe it will ultimately be ruled out as a mainstream form of payment. We see this exerting greater downward pressure on its price and forecast it to trade at ~USD 810 by 2020, if not even lower. We therefore believe that BTC, at its current valuation, is a bubble waiting to burst.
While our views on the price (and future applications of BTC) remain muted, our outlook for the broader cryptocurrency industry remains much more sanguine.
Read complete article here: