According to a recent report by JPMorgan, Bitcoin’s intrinsic value can be defined using the concept of cost of production. The cost of production in the case of Bitcoin is the mining cost.
If that analogy is used for gold, the cost of production of gold is above $1000 per ounce. Since mining is a large scale business, according to laws of economics, it must come to equilibrium as a zero-sum game. It means that the cost of production must be equal to the value so that the average profitability of the industry is zero.
The demand for gold is primarily been due driven by the jewelry industry and in small amounts in the Technology industry. The other demand for gold is as a reserve currency. The Federal Reserves and Trust agencies around the world secure large amounts of gold and use it to control inflation and act as hedge currency fluctuations.
Bitcoin’s Intrinsic Value
Furthermore, the average mining cost per Bitcoin at the current rates is around $4200. It also explains why Bitcoin was trading around that level for almost two months.
Bitcoin is a growing industry, hence, the growth in the price due to positive speculation would either compel the miners to sell their Bitcoins for a higher profit or to buy more miners. Due to the high profitability, fresh entrants to the mining business is also expected which will drive the cost of miners.
The Bitcoin market is highly competitive in terms of price. In the near future, that will extend to mining as well, while the existing miners can benefit due to the economics of scale. Since the Cost of Production must be Equal to Revenue for Equilibrium in a free market structure. Therefore, the overall average cost of mining will eventually fall to equivalence with the market price.
JPMorgan’s intrinsic value argument suggests that speculation is driving the cost of Bitcoin beyond its economic stability into a bubble. Nevertheless, the efficiency and innovation provided by Bitcoin mining could disrupt the large scale and expensive mining business of gold if it continues to being accepted as ‘digital gold.‘
Do you think that a sell-off is the only way to avoid a bubble or we’re heading towards acceptance? Please share your views with us.
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Nivesh from Engineering Background is a full-time Crypto Analyst at Coingape. He is an atheist who believes in love and cultural diversity. He believes that Cryptocurrency is a necessity to deter corruption. He holds small amounts of cryptocurrencies. Faith and fear are two sides of the same coin. Follow him on Twitter at @nivishoes or mail him at nivesh(at)coingape.com