Alan Greenspan, former chairman of the Federal Reserve, had something to say about the ever-rising price of Bitcoin.
On Bloomberg TV, Greenspan called Bitcoin "a bubble."
Greenspan's problem with Bitcoin
Why would Greenspan-- who is largely blamed for starting a bubble in real estate -- call Bitcoin a bubble? He noted that one would have to "really stretch your imagination of what the intrinsic value of Bitcoin is."
That's been a common theme when the financial world meets the online currency -- how can you really value a Bitcoin?
Many have tried to work out what a Bitcoin "should" be worth. A Bank of America analyst, David Woo, said that "Bitcoin has clear potential for growth, in our view." But he stopped short of giving Bitcoin a valuation to match its supposedly clear potential for growth.
His analysis led him to ascribe a valuation of $1,300 per 'coin, based mostly on its reputation as a store of value, and a player in e-commerce. His fair valuation is not much higher than Bitcoin's most recent trading range of $850-$1,100.
How can you value Bitcoin?
Arguably, Bitcoin does have some value, so long as someone else is willing to trade cash for digital coins. In its most valuable use, Bitcoin allows an individual to send money anywhere around the world with fees that measure in pennies.
For instance, you could buy Bitcoin with U.S. Dollars, send them to a friend, and have your friend sell the Bitcoin on an exchange for local currency -- pesos, pounds, euros, or Chinese yuan.
The money transfer abilities inherent in Bitcoin represent somewhat of a problem for companies like Western Union (NYSE:WU) and MoneyGram (NASDAQ:MGI), which rely on their own proprietary networks for moving money. Western Union and MoneyGram have fees well in excess of costs of sending Bitcoin.
Of course, there are risks with using Bitcoin as a currency. For one, it frequently rises and falls more than 10% in a single day. Holding on to Bitcoin is something few -- other than speculators -- are willing to do.
Pinpointing a value for Bitcoin
The most rational way to value Bitcoin is like any other currency. Its value should come from the amount of value necessary to confer payments and exchanges. For example, if Bitcoin were used in $20 billion of transactions, and each coin changed hands daily, the total market value should probably be in the $20 billion range. All Bitcoin in existence, if valued at the current price per coin, is worth just under $14 billion.
But that's the difficulty in ascribing value to Bitcoin -- how can you really know how many people will use them?
And even then, how can you know how many are in actual circulation? Untold thousands, perhaps even millions, of Bitcoin are sitting in old wallets, long forgotten by their owners. Those 'coins will sit dormant, presumably forever out of circulation, increasing the value of each usable Bitcoin.
Finally, how can you price the risk that governments will attempt to regulate an individual's ability to buy or sell Bitcoin for currency?
Realistically, you can't. Bitcoin is something we've never really seen before. There's no historical precedence for its adoption, acceptance, or regulatory future. For now, Bitcoin is pure speculation, but if speculators can be trusted as a rational way to price something, Bitcoin is worth all of $1,020.
Fool contributor Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Western Union. The Motley Fool owns shares of Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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