• Bitcoin is a superior store of value due to its portability
  • The offshore banking market can be viewed as proxy for store of value
  • Given the such valuation metrics Bitcoin can still appreciate significantly 

What is the fundamental value of Bitcoin? It’s difficult to provide the answer using traditional valuation metrics because Bitcoin does not generate any streams of income and is therefore impossible to value on a discounted cash flow basis. However in a recent Market Hive podcast with Bilal Hafeez, Ari Paul co founder of crypto firm BlockTower provides an interesting approach to viewing Bitcoin on a fundamental basis.

Paul argues that if we think of Bitcoin as essentially a “Swiss bank” in your pocket then there is an objective way to value the economic worth of the crypto currency. If you accept Bitcoin as a store of value – and given its near universal adoption all across the globe – it’s reasonable to say it has achieved that status, then Bitcoin becomes a far superior form of gold. Just  as gold Bitcoin is permissionless and allows the bearer of the asset to convert it into any good or service anywhere in the world. To be sure this is nothing but a social convention, but so is gold as it carries no intrinsic value and generates no cash flow. Bitcoin’s key advantage over gold is its portability. 

Unlike the owner of gold, the owner of Bitcoin can store billions of dollars in assets in nothing more than a flash drive or a phone app. The portability advantage of Bitcoin is so immense that it may ultimately replace gold completely as a store of value. Although just like fiat, Bitcoin is a digital rather than a physical asset, unlike fiat Bitcoin’s supply is constrained. In fact conceptually Bitcoin is in fact a superior store of value to gold because its supply can never be expanded. 

Even if we accept that Bitcoin is a store of value – a modern day version of digital gold – the question of valuation still remains open. However, Paul proposes a novel way of determining the possible fundamental value  of Bitcoin. If we accept the offshore banking market as the proxy for the value of all assets that investors seek to protect from the arbitrary seizure of the state, then that market is currently estimated at approximately 35 Trillion dollars. Most of those assets are not just fiat cash and gold, but productive economic assets such as stocks and bonds, so a simple one for one comparison  would not be accurate. Nevertheless if we accept the general valuation metric then Bitcoin which currently carries a market capitalization of less than one trillion dollars has plenty of fundamental upside. If we simply assign a 10% value of the offshore banking market to Bitcoin then the cryptocurrency has the potential to triple in the foreseeable future.