At the time of writing, a single bitcoin is worth $42,355. By the time you read this – actually, by the time I'm done writing this – the price in US dollars will have changed.
Regardless of the price of bitcoin in fiat currency, one bitcoin will still equal one bitcoin, worth exactly one hundred million satoshis.
1 BTC = 1 BTC
Bitcoin Axiom
Why do people say that 1 BTC = 1 BTC? As with all great memes, truth is revealed through humor. It's undeniable that one bitcoin will always be one bitcoin. That much is obvious. The deeper meaning behind this meme is that when you try to value bitcoin in dollars, you are looking at the valuation process through the wrong lens. To figure out how much bitcoin is worth, you have to see beyond how much fiat money it can purchase.
For example, I hold bitcoin because I understand that there is no other asset like it. I have to put my money into something, and bitcoin is simply the best asset out there in my opinion. What would be the point of cashing out the best asset available into a melting ice cube that loses purchasing power every year? Why would I trade bitcoin for any other asset with historically lower returns and its own set of tradeoffs?
Bitcoin is censorship and seizure resistant. It's a globally recognized brand. It's digital and programmable. It's inflation-proof with zero counter party risk. I can pass it down to my children and future generations without it being inflated or taxed to nothing. These are some of the things that give bitcoin value to me.
For me, how much bitcoin is worth is more than just a dollar number on a screen. That being said, it would be silly to say that the dollar value of bitcoin doesn't matter – it does. There are just some other ways to expand on how you perceive bitcoin ownership. Here are three ways to value bitcoin if you are thinking of buying some.
3 Ways To Value Bitcoin
1. Bitcoin Priced In Dollars
The most typical way to value bitcoin is to look at its price in dollars. I have to “pay” some amount of dollars to acquire some amount of bitcoin.
When thinking about how to value bitcoin versus dollars, it's important to consider that how much a dollar is worth will continually go down, no matter what. Inflation is literally baked into how the dollar works, and that's not going to change any time soon. This is, in part, why a house that used to cost $50,000, could now cost $2,000,000.
Most mainstream economists hold the view that a mildly inflationary currency provides the best economic stability over time, so dollar dynamics are crafted to do exactly that. The tradeoff for “stability” is a loss of purchasing power over time.
Any dollars sitting in your bank account right now are losing value, and that compounds year after year. The Fed's goal of 2% inflation per year means that after 10 years, your dollar accounts lose 20% of their purchasing power. After 20 years? That's almost a 50% loss thanks to compound interest. After 30 years, which is the typical working lifetime of most people, your dollars have lost almost all of their purchasing power, especially in hard asset markets like real estate where cost increases exceed inflation rates.
It's literally impossible to retire just by saving money in the bank when you consider that savings accounts pay less than 1% interest on deposits and won't keep up with the inflation rate. What's even more shocking is that the USA is currently experiencing a high inflation period, making the situation worse. At 7%+ inflation, the purchasing power of the dollar gets cut in half every 7 years.
Bitcoin, on the other hand, does not have its value regulated by a centralized entity. Free and open markets across the world put a dollar value on Bitcoin based purely on supply and demand. Also, unlike the dollar, bitcoin is famous for its volatility. The price of bitcoin in dollars can go up or down 20% or more in a single day. Year to year, it can be down 90% or up 1,000%.
Even though it's volatile in the short term, bitcoin is always worth some amount of dollars. Only the most extreme bitcoin haters would say that it's going to zero.
If you've kept your money in bitcoin for more than a few years, you would have seen the purchasing power of your bitcoin go up over time. So, when you price bitcoin in dollars, is the price of bitcoin going up or is the price of dollars going down? These days, it's hard to tell.
2. Bitcoin Priced In Assets
The way to get rich is to use debt to buy assets. Assets go up in value over time, and thanks to inflation, the dollar-denominated debt you acquired goes down in value over that same time period.
For example, let's say 30 years ago you borrowed $50,000 to purchase a house. Over that time period, the price of the house would have gone up at least 3x-5x (or more in some areas!). Your house would now be worth $250,000, but you only paid $50,000 plus interest to acquire the asset. Inflation is good for debtors.
Like other types of assets, the purchasing power of bitcoin also tends to go up over time. When you think about how much a bitcoin is worth, you should be comparing it to other potential assets you could own, such as real estate, precious metals, and stocks.
What's the real estate market like in your area?
Do you see opportunities in holding precious metals?
Have you done some research on publicly held companies and want to buy their stock?
There are pros and cons to every type of asset option.
With stocks, an investment in the right company could certainly outpace bitcoin's growth, and it's a more traditional way to invest money for a return on your capital. However, publicly held companies are also subject to their own headwinds like changes in consumer preferences, leadership issues, and regulation.
Real estate has a long history of providing stable returns, offers cash flow opportunities through rentals, and has many opportunities for creative financing solutions. However, the cost to entry is very high, the market is more illiquid than assets that can be traded online, and there are a lot of costs involved in maintaining a property.
I'm not a huge fan of gold, so I find it hard to make a case for it. Even if you are expecting a catastrophic breakdown of society, I think bullets would make much better money. Still, lots of people choose it as a method of storing value across time.
So, when selecting an asset to store your wealth, you have to think about the tradeoffs of each one. How does bitcoin compare?
Bitcoin is highly liquid, programmable money. It allows for ownership of money outside of traditional financial infrastructure and censorship-resistant payments. Bitcoin cannot be printed by governments or seized by corporations. Bitcoin is known and accepted in all countries around the world. There are a lot of reasons to buy bitcoin instead of other assets.
As an amusing thought experiment, imagine that Bitcoin is successful and becomes the dominant payment system in use throughout the world. Then the total value of the currency should be equal to the total value of all the wealth in the world. Current estimates of total worldwide household wealth that I have found range from $100 trillion to $300 trillion. With 20 million coins, that gives each coin a value of about $10 million.
Hal Finney
3. Bitcoin Priced In Opportunity
Personally, I think the most important way to value bitcoin is via the opportunity cost of owning versus not owning bitcoin. In other words, what value does bitcoin provide you when you own it? What are you missing out on by not owning it? What opportunities are you giving up by storing your wealth in bitcoin?
If you own bitcoin, that means your capital is locked up in a savings account. It's sitting there, waiting for a rainy day in case you need it. This emergency fund provides you with peace of mind. Holding money into the future also gives you optionality. Bitcoin specifically is a hedge against the crumbling of the dollar infrastructure as well and is extremely unique in that it sits outside of the current financial system.
However, money is a tool, and when that tool is being “stored”, it's not being used productively. Maybe you have a business idea you want to try, or maybe you want to cross off some items from your bucket list. If you put all your money into bitcoin and just let it sit in cold storage, it just sits there. you are missing out on those opportunities.
When you don't spend money, you are passing up on some kind of opportunity.
That's not to say you should spend all your money though! There's an opportunity cost in not holding bitcoin as well.
I have a friend who spent $12,000 USD on massage chairs instead of buying bitcoin. If he had bought bitcoin like I recommended, that 12 grand would now be worth 50 grand. As a long time bitcoin holder, I've seen what price appreciation can do over several years. Every time I want to spend money, I think to myself, is this thing worth 10x the price I'm paying now? Do I want this thing, or do I want more bitcoin?
Of course, there should be a balance. You don't have to save 100% of your excess earnings in bitcoin and sit in a dark cold house waiting for hyperbitcoinzation, and you don't have to spend all your money living each day like it's your last on Earth. Where you find your balance of how much to save and how much to spend is an individual choice. That is opportunity priced in bitcoin.
Final Thoughts
Ultimately, the most powerful way to value a bitcoin is in the opportunity cost of putting your money into something else. Whether you put your money in dollars for the stable but decreasing purchasing power, assets with illiquid price appreciation, business investment, or you just want to experience life to its fullest potential, everything has tradeoffs.
For me, bitcoin provides value on multiple levels. I love that it helps me to get closer to my own personal goals – I'd like to live a quiet life with a few hands-on hobbies and spend time with my family. I like that bitcoin is a financial asset outside of the traditional financial system. I like that it's highly liquid and digital, so I can quickly and easily sell it for dollars or trade it directly for goods and services. I like that it's a community project, open source, permissionless, with no single leader or gatekeeper. The satisfaction of owning an asset like this I the value I ascribe to bitcoin.
How much is bitcoin worth to you?
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