Bitcoin Valuation: Analyzing Transactional Demand vs. Speculative Bubble

The recent surge in Bitcoin prices has sparked renewed discussions about whether it’s a solid investment or just another bubble waiting to burst. Some experts have called it a Ponzi scheme, while others see it as the future of finance.

Traditional asset pricing theories don’t quite apply to cryptocurrencies like Bitcoin because they don’t pay dividends. Unlike stocks, you can’t send a fraction of Apple shares as payment. Cryptocurrencies like Bitcoin can be used for transactions, creating demand for them as a means of payment.

Transactional demand plays a crucial role in determining the value of cryptocurrencies. A recent study by Van Oordt (2024) introduced a model that looks at the beliefs driving both sides of the bubble debate. This model adapts the traditional framework for analyzing rational bubbles to the world of cryptocurrencies.

In this model, the baseline equilibrium of a cryptocurrency’s exchange rate is calculated based on current and future transactional demand. Investors buy coins with the expectation of selling them at a profit to future users. The exchange rate depends on investors’ views of the future demand for the currency.

Critics who claim cryptocurrencies are worthless are missing the point. The baseline equilibrium model shows that as long as there is some demand for a cryptocurrency, its price won’t drop to zero. Investors’ expectations of future transactional demand prevent the price from plummeting.

So, is Bitcoin the future of finance or a speculative bubble? Only time will tell. The key lies in understanding the role of transactional demand in determining the value of cryptocurrencies like Bitcoin.