This past year Bitcoin and other cryptocurrency has received a lot of attention. There has been a lot of discussion of what the value of Bitcoin is. I don’t profess to actually understand Bitcoin, but it did get me thinking about the intrinsic value of any asset.
Certainly the market value could be defined as what someone is willing to pay. And market forces can be fickle, on a day by day, week by week, month by month basis the price of an asset may swing greatly influenced by news, regulatory action, euphoria, and outside forces. We saw this in the “Great Recession”. Whereas real estate prices had been artificially high due to over-aggressive lending practices, real estate prices plummeted due to lack of available capital to fund transactions and new projects. Neither state (bubble or recession) represented the intrinsic value of the asset.
Assuming there is a demand for an asset, the intrinsic value should be anchored by the cost to produce the asset. The theory is that if there is a demand for an item, at some point new items will need to be produced. The value of that item will set the high mark and all other assets will be valued in relation to the new item. Think about cars. If a new car is $40,000, the used car market will fall in line. Used cars may be cheaper, but demand will absorb the supply of used cars until for some people the new car is the reasonable option. For real estate, the costs of construction, land acquisition, and complying with regulations tend to increase with time, making real estate an appreciating asset. Even during the recession, the cost to build a new building did not fall relative to the transaction prices of existing assets. This was an indication to me that the transaction prices were artificially low.
It is worth mentioning that in some areas of the country where there is not demand because the population is shrinking, the intrinsic value is diminishing and there is no reason to build new projects. Therefore it is likely not a good place to invest. In Texas, and in Austin especially, the demand is strong and driven by population growth. This gives the asset an intrinsic value. But if prices for existing building stock start to exceed the cost of building new, then this should be viewed as a temporary condition due to supply constraints. Prices will return to their intrinsic value once supply catches up with demand. Anchor your perceived value of your asset on the replacement cost and you will be OK.
So… back to Bitcoin. It appears there is a demand for Bitcoin. People do want it and have uses for it. What is the value? Well, it is hard to say, but perhaps based on the above, it is not less than the cost to mine a new Bitcoin. I understand that it takes considerable electricity and computing power to mine a Bitcoin, and this must set a baseline for the value. If there was not a profit available after mining a Bitcoin, the mining would cease. So even a virtual currency can have a baseline production cost.
More to come soon. If you want to get in touch please let me know! Thanks for reading!