Markets, prices and a quantity theory of bitcoin

Cables run from a network switch box to graphics processing units at the HydroMiner cryptocurrency mining facility near Waidhofen an der Ybbs, Austria © Bloomberg

Sir, We often read in your pages the view that bitcoin has no value and therefore, in a rational market, would have no price. But that surely is wrong. Bitcoin was developed as a form of money (the clue is in the name), and money has value even though most money, like bitcoin, has no substance other than the electronic.
Bitcoin will retain some fundamental value as long as it is the preferred medium of exchange for some forms of transactions. And on this basis it is fairly easy to calculate, approximately, what its fundamental value is.

The supply of bitcoin increases only slowly towards its famous fixed limit and is now around 15m. The use of bitcoin as a means of payment is currently around $100m per month, or $1,200m a year. Were bitcoin just like ordinary money each bitcoin would be used around four times a year in making transactions.
So we have 60m bitcoin payments supporting $1,200m worth of bitcoin transactions, which requires that each bitcoin is worth $20. This fundamental value is clearly very far below the current price, let alone the peak reached last month of close on $20,000.

Current bitcoin values therefore make sense only if one expects that over time there will be a thousandfold increase in the use of bitcoin in making payments. Of course that is possible; bitcoin currently supports only a tiny fraction of transactions.
But to assume so enormous an increase requires faith not only in the superior cost efficiency of the technology but also in the absence of any effective competition.
And one might expect traditional creators of money (governments and banks) to seek to protect the income it generates for them.
Bitcoin may have value but one can only marvel at the chasm between its market price and any rational measure of its value.
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