Is $518 the Fair Price of Bitcoin?

Pete Rizzo
Mar 2, 2015 at 18:25 UTC
Updated Mar 3, 2015 at 23:16 UTC
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Ask your average bitcoin enthusiast, and he or she will be quick to list the reasons why the price of bitcoin, even at $260, is undervalued, or at least, not properly reflective of its long-term value.

Now, however, those with a more bullish outlook have a new tool that can help them uncover bitcoin’s ‘intrinsic value’.

Recently launched by ALFAcoins, the ALFAquotes Fair Bitcoin Price indicator aims to illuminate what it considers the true value of bitcoin by factoring for the cost of bitcoin mining, or the production of the commodity itself.

At press time, ALFAquotes contends, while most bitcoin traders are buying and selling bitcoins for $259.46, the fair price is roughly double that, at $518.59.

ALFAquotes

The result, according to ALFAquotes project manager Denis Hertz, is a more accurate indicator that reflects the historical growth of bitcoin and its untapped potential.

Hertz told CoinDesk:

“Venture capitalists assign ‘beyond the clouds’ figures of $100,000. Financiers, that are far away from technology, say bitcoin has no intrinsic value. We decided to do the job of a fair price measurement that will help investors assess the attractiveness of bitcoin.”

ALFAquotes also includes an indicator of bitcoin’s potential, now +99.87%, calculated as the difference between fair price and market price.

Hertz went on to express his hope that the fair price, if widely adopted, would become a useful metric for market analysts, investors and mining companies, among others.

Historical influence

Though focused on the digital currency markets, Hertz indicated that the tool is inspired by the Benjamin Graham formula, a tool first proposed by Graham, the so-called ‘father of value investing’.

The Benjamin Graham formula seeks to calculate the intrinsic value of an asset by including such factors as 12-month earnings per share and the company’s long-term earnings growth estimate, as well as corporate bond yields.

Hertz explained that ALFAquotes uses the formula as a model, though it is perhaps most influenced by metrics for the fair price of gold.

“We decided to assess the fair price of bitcoin as gold,” he explained.

However, such formulas are only models for investors, as evidenced by the ability for gold market analysts to reach varied conclusions on its value that may differ even more greatly than the cost ascribed by the market.

Calculating a ‘fair’ price

Hertz explained that the fair price formula includes two factors.

First, it calculates the changes in the cost of mining equipment and its performance. Next, it attempts to assess the change in difficulty of production, factoring in the electricity costs faced by miners on the network.

In particular, Hertz indicated that the fair value tool should be embraced by miners, as the price today is lower than the fair price – a factor he attributes to the recent string of bankruptcies and closures in the sector.

Hertz predicted that this trend is likely to continue until issues faced by the mining community affect supply to the point it influences demand.

“At the moment, as we can see bitcoin is doubly underestimated and this indicates how good investment attractiveness is toward bitcoin,” Hertz added.

Price image via Shutterstock

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