Exploring Different Bitcoin Valuation Methods
For more on crypto valuation, read Valuation of Cryptoassets: A Guide for Investment Professionals by Urav Soni and Rhodri Preece, CFA, from CFA Institute Research and Policy Center.
“On behalf of the professional investment community, I am respectfully asking any crypto expert to put together some cogent, coherent concept of how to make buy and sell decisions in a cryptocurrency portfolio.” — Franklin J. Parker, CFA, “Crypto’s Unanswered Question: At What Price?”
Introduction
Valuing Bitcoin poses a unique challenge due to its unconventional nature. Unlike traditional assets, Bitcoin lacks cash flows, dividends, or yields, making it more akin to commodities, which are notoriously difficult to value. However, there are several frameworks to explore this evolving technology.
In response to the call by Franklin J. Parker, CFA, here are four bitcoin valuation methods that shed light on different ways to assess the cryptocurrency’s worth.
1. Compare It with the Alternatives
One way to gauge Bitcoin’s value is by comparing it to asset classes or securities it competes with.
For example, comparing Bitcoin to gold, both fixed-supply assets with desirable monetary characteristics, gives insights into its potential value. If Bitcoin were to reach gold’s market capitalization, its price per coin could exceed $500,000.