How to Determine the Value of Bitcoin

What Determines the Value of Bitcoin?

Understanding what determines the fundamental value of Bitcoin is a prerequisite when looking at valuation methods that aim to determine the cryptocurrency’s fair value.

Why Bitcoin has a value

Before we look at the most popular Bitcoin valuation methods, let’s first discuss why bitcoin has value.

  • hard-coded monetary policy;
  • censorship resistance;
  • ability to process near-instant borderless payments;
  • and its network effect.

Limited Supply

Bitcoin has a fixed supply of 21 million units of bitcoin. No one can print or mine more coins than that. Unlike fiat currency, where more money can be printed into the circulating supply with the push of a button at the central bank, Bitcoin has hence a fixed supply that has been met with increasing demand.

Hard-coded monetary policy

Bitcoin also has a monetary policy written in code that ensures that new coins are brought into circulation at a decreasing rate to reduce supply pressure over time, helping to push up the digital currency’s price thanks to growing demand.

Censorship resistance

Moreover, Bitcoin provides a censorship-resistant store of value that allows individuals to truly own their money. When someone holds Bitcoin in a personal wallet to which only they have the private keys, they are the only person who can then access the coins. As a result, no bank, regulatory authority, or government case easily freeze or seize funds held in Bitcoin.

Ability to process newar-instand borderless payments

Additionally, Bitcoin enables users to send and receive near-instant borderless payments at a minimal cost. For individuals relying on remittances to feed their families, for example, Bitcoin provides a much-needed remittance rail that doesn’t require a bank or payment processor.

Network effect

Finally, Bitcoin has been able to benefit from the network effect, boosted by its first-mover advantage and brand recognition.

How to Value Bitcoin: 5 Valuations Methods Explained

Network Value-to-Transactions (NVT) Ratio

The Network Value-to-Transactions Ratio compares the dollar value of Bitcoin transaction activity to its network value, measured using the digital currency’s market capitalization.

Token Velocity

Token velocity is calculated as a function of transaction volume and average network value. Velocity can be measured over any time period but is often measured annually.

Daily Active Addresses (DAA)

Daily active addresses are used to estimate the number of users conducting transactions on a blockchain network on a daily basis. It’s the equivalent of daily active users.

Metcalf’s Law

Metcalfe’s law, which originally intended to measure communication networks, is another prominent valuation tool for crypto assets. The law says that the worth of a network system is equivalent to the square of the number of the network’s nodes or end-users.

Store of Value (SoV)

The Store of Value (SoV) thesis suggests that a digital asset’s value depends on its ability to act as a store of monetary value for its investors. The better a digital asset acts as a store of value, the more valuable it will become in the future.

About Iconic Funds

Our mission is driving the adoption of crypto assets. As the bridge for investors to gain exposure to Crypto Assets, Iconic Funds’s licensed and regulated vehicles offer investors a menu of investment choices ranging from passive index exposure to actively-managed strategies. We are removing the technical risks of crypto investing by offering investors trusted and familiar means to invest in crypto at industry-leading low costs.

Recent Research Reports

  • Analyzing the Primary Value Drivers of Leading Cryptocurrencies: Download here
  • How Effective are Common Investment Strategies with Bitcoin? Download here
  • Investigating the Myth of Zero Correlation Between Crypto Currencies and Market Indices: Download here

Important Notices

This article represents solely a non-binding preliminary information which serves exclusively advertising purposes and is not a prospectus in the sense of the Regulation (EU) 2017/1129 — Prospectus Regulation) and the German Securities Prospectus Act (Wertpapierprospektgesetz — WpPG).

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Iconic Holding

Crypto Asset Management. Bridging Capital and Crypto Markets https://iconicholding.com