IS BITCOIN OVER OR UNDERVALUED

BY: CHRISTIAN KWASI DARKO

Determining the intrinsic value of cryptocurrencies such as bitcoin is difficult given the lack

of central bank regulations. According to Russolillo (2014), cryptocurrency owns its

currency, making it difficult for financial regulators and government authorities such as the

Federal Reserve to affect or alter its operations. The market value of bitcoin surged more

than 800 percent in fiscal year 2017 and 1,600 percent in just two years. This has resulted

in the high demand for cryptocurrencies such as bitcoin in particular across the globe.

Bitcoins compared to other financial instruments, like shares and bonds have no

fundamental value. When the value of a share of an enterprise goes up, the said increase is

usually linked to an improvement in the fundamentals of the enterprise such as increase in

profits. However, one cannot easily explain the recent surge in the market value of bitcoin.

Most economists and top investors, like Jamie Dimon (the CEO of JPMorgan Chase) have

described bitcoins as having a social cost but no welfare impact, thus a fraud in the money

market. Without a fundamental value, it is literally impossible to determine the intrinsic

value of bitcoin. Therefore value must be determined, by speculation which can only be

sustained by investors’ confidence and trust in the cryptocurrencies.

The recent fall in the market value of bitcoin and other cryptocurrencies around the globe is

a result of fears of increased regulation of the technology and market manipulation. In the

mid-January 2018, bitcoin’s market capitalization fell almost half. The huge fall in its price

has raised a serious concern about whether or not bitcoin is overvalued. According to
D’Alfonso et al. (2016), the recent increase in the volatility of the market value of bitcoin is

as a result of news, hype, insider information, and speculation.

From the CoinDesk bitcoin price index, bitcoin peaked over $19,000 in mid-December,

2017. Since then, its price fell about 50 percent to around $9,500. Moreover, the price of

bitcoin can drop 20 to 30 percent within a single day. In November 2017, bitcoins fell

almost 20% according to CoinDesk data, after hitting a record high in 2017. The big

question here is “Is the market value of bitcoin over or undervalued. What are the

mechanisms driving the market value of bitcoin and how are these mechanisms correlated

with other markets factors? This material offers a brief introduction to these issues and

expresses the writer’s opinion on where or not bitcoins are overvalued or not.

To determine whether a tradable instrument is over or undervalued, one has to first

estimate its true value. Currently, it is not very clear what is the true value of bitcoin. One

possibility is to quantify the easy the currency provides to international financial

transactions and compare the said value to regulated instruments serving a similar

purpose. Unfortunately, this possibility is not in sight, but it is clearly evidence that

investors’ confidence in the currency drives its prices. Since it is usually the case for all

speculative instruments, the cryptocurrencies sector including bitcoin "will eventually meet

the test of times". It is only when these bad/good times come when we will know whether

bitcoin were over or undervalued. But for now, as indicated by Warren Buffet, we have no

idea where bitcoin price will go over the next few years.