In the previous post, we had covered why we believed Bitcoin was vastly over priced. We had concluded, assuming that Bitcoin was a money transfer instrument, that 1 BTC = $2 was a more realistic conversion.
One of the objections to the analysis above is that Bitcoin's worth as a store-of-value was completely disregarded. Does Bitcoin's decentralization and limited supply give it enough credibility if it did not have any application other than as store-of-value? Obviously not. If it did, then what is to stop anyone from floating LayCoin with exactly the same properties as Bitcoin. The only reason any coin would have store-of-value is if it had a genuine application driving an inherent value.
As covered in the previous post, the genuine application for Bitcoin that the Bitcoin community was hoping for is its acceptance as an alternate currency. However, that requires an economy that is completely denominated in bitcoins. We had also covered why Bitcoin based economy was not feasible. We had concluded that the only genuine application possible for Bitcoin was as a money transfer instrument.
Then, why are people investing in Bitcoin?
The answer is, it's the same reason as why people invest in companies that have a promise of making future revenues. People are hoping Bitcoin would be widely accepted and it's inherent value will reach what people are paying for it now.
But, how do we compute the inherent value?
A good way to gauge that would be to see what would happen if people holding on to bitcoins as store-of-value suddenly lose confidence and dump them all. The only people in the market buying bitcoins at that time would be the ones using them for its only application as a money transfer instrument and that would mean 1 BTC would settle at $2.00.
If we, indeed, have to take its application as store-of-value into account, then we can assume that a certain percentage of bitcoins would just be held as savings and not put into circulation. If we want to assume a stable value for bitcoins and not the one where the bottom would just fall out, then let's arbitrarily assume a maximum variability of 50% if there is panic in the bitcoin marketplace. That would mean that only 50% of the bitcoins would have to be held as savings and the rest would have to be in active circulation. Therefore, considering that people value 1 BTC at $1000, Bitcoin would have to enable nearly $6B worth of money transfer transaction every 8 minutes. Please see the previous post to understand the reasoning behind this conclusion. That is indeed a very tall order!
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