Many people try to determine a fair and realistic valuation for Bitcoin and Cryptocurrencies. This is difficult to do as Bitcoin is not a company with earnings to tie a value to. Bitcoin is also not something that has assets and a book value. For these reasons people continually attempt to find a way to value Bitcoin and they often fall short.
Some people claim that the cost of mining a Bitcoin should set the baseline value for one Bitcoin. There are lots of ideas as to how we should value Bitcoin. Although people have not fully settled on how to value Bitcoin, there are some key considerations to take into account when you try to determine how much Bitcoin should be worth.
One of the key considerations is Metcalfes Law. Metcalfes Law states that a network’s value is directly proportional to the square of the number of connected users of the system: n2 (Source: Wikipedia). This is an important concept that applies to communications networks as well as the internet. Metcalfes law also comes into consideration in economics and business, particularly when companies are exploring a merger.
Two telephones can make only one connection, five can make 10 connections, and twelve can make 66 connections (Source: Wikipedia).
Another law to consider when thinking about Bitcoin and cryptocurrencies is Gresham’s law. Gresham’s law ties directly into money and describes the way people value and use their money. Gresham’s law states “bad money drives out the good” (Wikipedia: Gresham’s Law). If there are two forms of commodity money in circulation, and they have a similar face value, eventually the bad money will replace the good money.
This is important for cryptocurrency. If the law holds true we should observe that when coins with different intrinsic value are put into circulation, the coins with the higher intrinsic value will be held onto and accumulated (not spent) while coins with lesser intrinsic value will be spent. If Gresham’s law holds true, this will force the “best” or higher intrinsic value coins out of monetary circulation.
For more information on how this relates to cryptocurrency, check out Daniel3’s article on the topic.
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