<p>There are two ways to look at the value of a financial instrument. One is the underlying asset base, the other is the yield.</p>

<p>Bitcoin has no underlying asset base and no yield.</p>

<p>Therefore, its only value is whatever people imagine it to be.</p>

<p>In other words, it's completely overvalued. But that does not mean it is on the verge of massive corrections. There is an old saying (attributed, as they often are, to Keynes) that the market can remain irrational for longer than you or I can remain solvent.</p>

CC BY-SA 3.0
2017-12-10T21:22:26.863Z
Wait, if its value is whatever people imagine it to be why is it "overvalued"? Wouldn't that depend on expectations?
Giskard
CC BY-SA 3.0
2017-12-10T21:23:25.490Z
Also, isn't the ability of anonymous payment a service with some underlying value?
Giskard
CC BY-SA 3.0
2017-12-11T02:02:44.407Z
I get that bitcoin is a fiat currency.  That does not prevent other fiat currency models from predicting a proper valuation. Or is your answer that the skepticism is not based on any models just pure conjecture?
Chad
CC BY-SA 3.0
2017-12-11T06:40:09.270Z
@Chad it's not a fiat currency in the usual sense. A typical fiat currency is backed by a real-world legitimate economy and a government.
410 gone
CC BY-SA 3.0
2017-12-11T11:26:30.543Z
@denesp where the anonymous payment is primarily a facilitator of illegal activity, AIUI that's not viewed as having *positive* value from a social-cost perspective.
410 gone
CC BY-SA 3.0
2017-12-11T13:37:50.637Z
@EnergyNumbers Sure, but that is not what I am asking. Illegal weapons also have negative net social value, but surely you do not claim they have no value?
Giskard
CC BY-SA 3.0
2017-12-12T20:16:13.017Z
@denesp - You've never had unreasonable expectations?
Hot Licks
CC BY-SA 3.0
2017-12-12T20:18:28.053Z
@Chad - Until some reasonably large country or other substantial financial organization recognizes Bitcoin as "legal tender", it is not "fiat currency".
Hot Licks
CC BY-SA 3.0
2017-12-12T20:58:59.877Z
@HotLicks I have no idea why you are asking me that.
Giskard
CC BY-SA 3.0
2017-12-12T21:18:48.433Z
@denesp - You said "Wouldn't that depend on expectations?"
Hot Licks
CC BY-SA 3.0
2017-12-12T21:51:04.130Z
@HotLicks - Maybe but it is analogous to a fiat currency to the point that it should be able to be modeled as such.  If there is a reason that it is not, then an answer that explains why would also be acceptable.
Chad
CC BY-SA 3.0
2017-12-12T22:03:09.650Z
It's not analogous because no credible agency declares it to be valuable (and is prepared to stand behind it with "real" equity of some sort).
Hot Licks
CC BY-SA 3.0
2017-12-12T22:30:28.813Z
@HotLicks I know. I still have no idea why you are asking me. Please make your point clear.
Giskard
CC BY-SA 3.0
2017-12-29T10:14:52.387Z
@denesp - *if its value is whatever people imagine it to be why is it "overvalued"? Wouldn't that depend on expectations?* - I am quite sure that EnergyNumbers is usign "value" in an ordinary way, not in a technical way, here. As far as I can see - I am no expert on the subject - bitcoins have no "value" at all. They have a price, which relates to whatever people imagine it is "value". Since that imagined "value" is bigger than its "actual" null "value", it is (completely) overpriced.
Luís Henrique
CC BY-SA 3.0
2017-12-10T21:07:11.793Z
2017-12-10T21:07:11.793Z
410 gone
<p>I'll draw from <a href="https://johnhcochrane.blogspot.com.ar/2017/11/bitcoin-and-bubbles.html" rel="nofollow noreferrer">John Cochrane's article</a> and <a href="http://faculty.chicagobooth.edu/john.cochrane/research/papers/cochrane_stock_as_money.pdf" rel="nofollow noreferrer">working paper</a>, which provide some great points.</p>

<p>Bitcoin doesn't provide dividends or an interest rate, there isn't any payment or reward for saving in Bitcoins by itself. Therefore, it has 0 expected value of dividends and should have a price of 0. But it has a positive price in real life. There are two reasons for holding a 0-expected value asset:</p>

<ol>
<li><p>Convenience yield. That is, they provide some convenience, like cash for making transactions. The convenience is especially linked to illegal transactions. This already has a model to describe behavior: Baumol-Tobin (which is also a model for storage and logistics). There's a huge lack of information to apply it (who knows enough about money laundering to make a prediction?)</p></li>
<li><p>Rational bubble. This is where all models break apart. Speculators don't care about the future value, just volatility now (because that's how they turn a profit), much like they don't care about a bond's yield but for changes in its price. In the short term, supply is limited: Bitcoins aren't being created fast enough, competitors like Ethereum or even Dogecoin have still to catch up and there are no derivatives that allow betting against Bitcoin prices (Bitcoin futures have only recently started being offered). Demand is also limited because speculators are buying the asset for short-term profit, not for keeping it long-term.</p></li>
</ol>

<p>Add this with huge information asymmetry and you'll get a highly volatile, high-rising price. As long as (1) doesn't change too much, it's a bubble.</p>

CC BY-SA 3.0
2017-12-12T23:24:24.343Z
2017-12-12T23:24:24.343Z
one_teach_wonder
<p>I have seen many economists saying that <a href="https://www.cnbc.com/2017/11/21/cramer-bitcoin-is-a-bubble-but-stocks-are-not-overvalued.html" rel="nofollow noreferrer">bit-coin is highly overvalued</a> and <a href="http://www.zerohedge.com/news/2017-12-12/its-official-bitcoin-surpasses-tulip-mania-now-biggest-bubble-world-history" rel="nofollow noreferrer">on the verge of a massive corrections.</a>  What are the most popular models being used to determine the proper price for bit coin?  </p>

<p>I find it very hard to believe that these economists would base these opinions on this purely on conjecture based on the fact that bitcoin is a new technology, or not backed by a government.</p>

CC BY-SA 3.0
2017-12-11T01:47:31.317Z
https://economics.stackexchange.com/questions/16483/what-does-the-value-of-bitcoins-depend-on
Hot Licks
<commodities><bitcoin>
What are the most common methods of determining valuation used by economists that claim Bit-Coin is on the verge of being a bubble
Chad
# What are the most common methods of determining valuation used by economists that claim Bit-Coin is on the verge of being a bubble

(Asked by: username_0 on 2017-12-10)

I have seen many economists saying that [bit-coin is highly overvalued](https://www.cnbc.com/2017/11/21/cramer-bitcoin-is-a-bubble-but-stocks-are-not-overvalued.html) and [on the verge of a massive corrections.](http://www.zerohedge.com/news/2017-12-12/its-official-bitcoin-surpasses-tulip-mania-now-biggest-bubble-world-history) What are the most popular models being used to determine the proper price for bit coin?

I find it very hard to believe that these economists would base these opinions on this purely on conjecture based on the fact that bitcoin is a new technology, or not backed by a government.

**Tags:** commodities, bitcoin
> **Comments:**
> **username_1**: https://economics.stackexchange.com/questions/16483/what-does-the-value-of-bitcoins-depend-on  

---

## 2 answers

### Answer by username_5 on 2017-12-12. Score: 4 | Accepted answer

I'll draw from [John Cochrane's article](https://johnhcochrane.blogspot.com.ar/2017/11/bitcoin-and-bubbles.html) and [working paper](http://faculty.chicagobooth.edu/john.cochrane/research/papers/cochrane_stock_as_money.pdf), which provide some great points.

Bitcoin doesn't provide dividends or an interest rate, there isn't any payment or reward for saving in Bitcoins by itself. Therefore, it has 0 expected value of dividends and should have a price of 0. But it has a positive price in real life. There are two reasons for holding a 0-expected value asset:

1. Convenience yield. That is, they provide some convenience, like cash for making transactions. The convenience is especially linked to illegal transactions. This already has a model to describe behavior: Baumol-Tobin (which is also a model for storage and logistics). There's a huge lack of information to apply it (who knows enough about money laundering to make a prediction?)
2. Rational bubble. This is where all models break apart. Speculators don't care about the future value, just volatility now (because that's how they turn a profit), much like they don't care about a bond's yield but for changes in its price. In the short term, supply is limited: Bitcoins aren't being created fast enough, competitors like Ethereum or even Dogecoin have still to catch up and there are no derivatives that allow betting against Bitcoin prices (Bitcoin futures have only recently started being offered). Demand is also limited because speculators are buying the asset for short-term profit, not for keeping it long-term.

Add this with huge information asymmetry and you'll get a highly volatile, high-rising price. As long as (1) doesn't change too much, it's a bubble.


---

### Answer by username_2 on 2017-12-10. Score: 4

There are two ways to look at the value of a financial instrument. One is the underlying asset base, the other is the yield.

Bitcoin has no underlying asset base and no yield.

Therefore, its only value is whatever people imagine it to be.

In other words, it's completely overvalued. But that does not mean it is on the verge of massive corrections. There is an old saying (attributed, as they often are, to Keynes) that the market can remain irrational for longer than you or I can remain solvent.

> **Comments:**
> **username_3**: Wait, if its value is whatever people imagine it to be why is it "overvalued"? Wouldn't that depend on expectations?  
> **username_3**: Also, isn't the ability of anonymous payment a service with some underlying value?  
> **username_0**: I get that bitcoin is a fiat currency.  That does not prevent other fiat currency models from predicting a proper valuation. Or is your answer that the skepticism is not based on any models just pure conjecture?  
> **username_2**: @Chad it's not a fiat currency in the usual sense. A typical fiat currency is backed by a real-world legitimate economy and a government.  
> **username_2**: @denesp where the anonymous payment is primarily a facilitator of illegal activity, AIUI that's not viewed as having *positive* value from a social-cost perspective.  
> **username_3**: @EnergyNumbers Sure, but that is not what I am asking. Illegal weapons also have negative net social value, but surely you do not claim they have no value?  
> **username_1**: @denesp - You've never had unreasonable expectations?  
> **username_1**: @Chad - Until some reasonably large country or other substantial financial organization recognizes Bitcoin as "legal tender", it is not "fiat currency".  
> **username_3**: @HotLicks I have no idea why you are asking me that.  
> **username_1**: @denesp - You said "Wouldn't that depend on expectations?"  
> **username_0**: @HotLicks - Maybe but it is analogous to a fiat currency to the point that it should be able to be modeled as such.  If there is a reason that it is not, then an answer that explains why would also be acceptable.  
> **username_1**: It's not analogous because no credible agency declares it to be valuable (and is prepared to stand behind it with "real" equity of some sort).  
> **username_3**: @HotLicks I know. I still have no idea why you are asking me. Please make your point clear.  
> **username_4**: @denesp - *if its value is whatever people imagine it to be why is it "overvalued"? Wouldn't that depend on expectations?* - I am quite sure that EnergyNumbers is usign "value" in an ordinary way, not in a technical way, here. As far as I can see - I am no expert on the subject - bitcoins have no "value" at all. They have a price, which relates to whatever people imagine it is "value". Since that imagined "value" is bigger than its "actual" null "value", it is (completely) overpriced.  

---

