The Valuation of Bitcoin

Fast rising markets are quick to catch the attention of financial news. Here I present my views on Bitcoin and how to possibly invest in or speculate in it.

In summary, I think bitcoin has no fundamental value and therefore no true pricing because bitcoin is an exchange of value (currency) and in itself is almost useless (not an asset or commodity). As a currency, the value is dependent on the demand for the assets it can buy, but there is a negligible amount of assets that only bitcoin can buy. The price of bitcoin can take any number - in fact, as a means of exchange, a smaller number is more convenient. My opinion is that people in general are pricing it as though it has value and that the value is increasing.

To profit from bitcoin, you have to estimate how people will 'price' bitcoin, which is incredibly complex because it's an endeavour in human psychology within the context of finance.

However, by looking at past prices, you can position yourself favourably (if the past is representative of the future). Buy in drawdown periods, not when the market is making new highs or is frothy. Expect to lose up to 80% of your investment, so allocate your funds accordingly. Hold the investment for a long enough time, say one year, and then maybe hopefully you will see some returns. How much the returns are is beyond the scope of modelling.

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