In 2013, when I was first introduced to Bitcoin and how it works, its price was around 300 Dollars.
At the time, not having understood the phenomenon, I wondered what reason a currency could have for being worth 300 times more than the queen of all currencies, namely the Dollar.
So I let it go and focused on something else, only to come across bitcoin again in late 2016 and after about six months of study I decided to invest in it, not only personally, but also as the future direction of my company.
It has been several years and two full cycles that have led me to learn about bitcoin understood as a network, very well, and bitcoin, understood as a digital asset with an associated price, perhaps even better.
Diaman Partners' research centre has studied the phenomenon in detail, creating models, simple but effective, to understand the long-term growth dynamics, but also why the price tends to rise and why Bitcoin actually has a well quantifiable intrinsic value, a concept still little known or completely unknown to many people.
Let us start with a concept of micro economics: any good or service, in order to make sense, must have a utility and a cost of production and distribution that is lower than the cost of sale.
If one of these assumptions is missing, the good may well be produced by someone, but it has no value because no one wants it or is willing to buy it.
In the case of Bitcoin, can we consider the possibility of transferring value safely and without an intermediary a utility? Can we consider a scarce asset that is not easily pledged a utility? Can we consider the Bitcoin Network an inviolable transactional protocol?
Yes, Bitcoin has a utility, beyond the price which can rise or fall.
So it remains to be understood how to estimate its intrinsic value.
If we consider a proxy of the intrinsic value of an asset, its cost of production, we can estimate the intrinsic value of Bitcoin based on its cost of production and see how it moves over time relative to price.
If you understand how the Bitcoin network works, there are nodes, also called Miners, whose job it is to validate transactions through what is known as Proof of Work, i.e. computational work that costs energy.
Without going into how Proof of Work works, it is enough for us to know that these miners have to process Hash (strings of alphanumeric data) until they can find the right hash that allows the block of transactions to be added to the previous blockchain, the so-called Blockchain.
The lucky one who finds the correct hash is rewarded with new bitcoins issued in the block itself.
So to simplify we could say that those new bitcoins represent the energy spent by all the miners in the world competing to find the winning hash.
Consequently we can say that the value of bitcoin is at least proportional to the energy consumed by Miners to mine it.
Exactly like gold.
Some argue that bitcoin is in fact energy money, i.e. money generated by energy and intrinsically linked to it, and indeed following this line of reasoning, how can one argue against it?
But then, if we know the growth trend of energy consumption of miners around the world, we could also estimate what the trend of bitcoin's fair value price is over time.
Knowing exactly how much energy is spent is impossible, because the Miners' industry has become more and more competitive over time, but we do have an estimate of the Hash Rate, i.e. how much computational power has been spent on each block.
Another easy figure to calculate is the remuneration (in dollars) for each individual block mined as time and the price of bitcoin change; in the graph below the values are monthly for the purposes of overall model estimation.
Having the amount of hash rate per month and the remuneration given to the miners for each month, one can easily derive the remuneration per hash rate over time which as can be seen in the graph below is steadily decreasing, a sign of an increasingly competitive and complex industry.
By creating a power curve of remuneration per hash rate and multiplying it by the power curve of hash rate growth, one can find the remuneration per block, which divided by the number of new bitcoins issued in each block, creates the blue line.
In this graph below, the effect of halving the number of bitcoins issued every 210,000 blocks (about four years) is evident.
I hope after this article it is clear that bitcoin has an intrinsic value that can be well estimated and quantified.
I am sorry for the critics of bitcoin who claim that it has no intrinsic value or even a fair value price.
I always use the example of women's cream: the fact that I don't use it doesn't mean it has no value to someone else, and the same is true of bitcoin: if people in the world use it, whether as a store of value, an investment, a speculative tool or a currency of exchange, the fact that I don't use it doesn't mean it has no value.
And the fact that there are tens of thousands of people or companies around the world who are willing to spend electricity to get bitcoin in return is a clear sign that bitcoin has a value that they understand well; and given that there are Nasdaq-listed companies that have been doing this profitably for years, it means that if there is a black sheep among the people, it is certainly not them.