Valuing Bitcoin

Valuing Bitcoin

How do you value a #cryptocurrency like a #Bitcoin? My father asked me.

Cryptocurrencies like Bitcoin and #Ethereum have become more popular today as i see more people looking to invest their money in these assets.

For any asset to have an intrinsic value, we need three elements:

1)What are the Cash flows?
2)Growth in Cash flows?
3)What are the risks associated with the cash flows?

If we do not have the above details, the alternative way is to price the assets relatively.

Coming to my father’s question, my response to him was that cryptocurrency does not have an intrinsic value but a relative value like gold. Cryptocurrencies like bitcoin are an alternative to financial assets (paper currencies) due to durability and scarcity (only limited bitcoins can get mined).

The value of a paper currency like the US dollar or Indian rupee rests entirely on trust in central banks and governments, and as people lose faith in them, the price of cryptocurrencies will increase. Thus, cryptocurrencies would gain importance, especially in countries whose currency suffers from high inflation or face sovereign default risk.

However, in the #covid19crisis, where the global stock markets crashed in March 2020, the bitcoin price also hit, indicating that cryptocurrencies have not yet reached a position where they can be considered an alternative financial asset.

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