In what is the penultimate of my crypto and Bitcoin coverage, I’ll answer the question of its ‘valuation’.
You only need to look at the wildness of its price to see that no-one knows the answer to that – other than the market makers creating it probably. There can clearly be no efficient pricing structure.
A normal share is calculated by looking at current earnings and profit, and also where that earnings and profit might go to. You have the accounts and the business plan to help you with that. It’s pretty easy stuff, so shares don’t really hop about too much unless the forward pricing of earnings disappoints.
Crypto’s price? There are many reasons (sorry, I spelled excuses wrong there) given for the price and pricing, most of which are flawed and very scientifically talking a load of twaddle.
Remember Sam Bankman-Fried (FTX) saying on a podcast that he would create a box of crypto tokens and assign it spurious value and sell shares in it? That’s how some are valued.
The pastor who sold $3.2 million to his congregation and said that God told him to do it also said: “God told him to build it and give investors 10 times the money they put in”. “We did. We took God at his word.”
“The Lord … took us into this crypto currency ... well, that crypto currency turned out to be a scam.... And I said Lord ... you told me to do this”. He also said he insisted to God before the project began: “I don’t have any experience in this industry. I don’t know what I’m doing.”
Valuations! He now states: “I don’t know how God is going to turn this around.”
Crypto isn’t like a normal currency because there is no central bank/authority. Without that, there aren’t any sustainable reasons for it to change in value. The Bank of England states clearly that ‘parties to transactions need to have ‘faith’ in the value of a banknote and what it represents’, and that ‘public trust and confidence in the currency is essential to the functioning of the economy’.
The real reason it moves in value is that when some agree crypto is valuable, it becomes valuable. The complex structure around who can move those values was explained in a column here a few weeks back. That takes some trust.
They will shortly be saying the ‘cost of mining’ a Bitcoin has gone up because of energy costs and other excuses. They will probably go for a $65k price tag. So, the cost of ‘mining’ a thing that isn’t a thing, has gone up, so the price must go up?
Naturally if it’s being used, and has global use, you can see how the value would rise, but as I said back in 2017, if Amazon used it, with near 50 per cent of the USA’s e-commerce, it would rocket. The reality, as I said, was that they could just announce their own ‘coin’. Bubble burst.
Naturally Bitcoin prices rise based on media coverage and ‘tweets’. That won’t change and with the absence of regulation, pump and dump schemes will be rife. Pump and dump are when a share, a crypto or other ‘matter’ is openly talked up. The purpose? So that those who own it can get it off their books. There are countless examples.
We still don’t know who invented Bitcoin by the way. What’s the secret?
If Coinbase, the crypto currency exchange goes bankrupt, your balances could become the property of the company. If they are hacked and someone steals the bitcoin, they are gone forever.
The greatest risk, is indeed that governments simply ban them, using risk, money laundering or whatever, and your value is gone. The solution to that may be the plan I mentioned in early 2021, which is to then introduce central bank digital currencies (CBDCs).
- Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a financial or investment question call 028 6863 2692.
