Leading virtual currency Bitcoin on Wednesday traded above $20,000 (roughly Rs. 14.7 lakhs) for the first time following a sustained run higher in recent weeks.
Just 12 years old, Bitcoin reached a record-high $20,398.50 (roughly Rs. 14.9 lakhs) before pulling back to $20,145 (roughly Rs. 14,81,000), which was still an intra-day gain of nearly four percent.
A number of central banks have meanwhile responded to the rise of cryptocurrencies. And also the dwindling global use of cash by announcing plans for bank-backed digital units.
That’s one of the implications I draw from a new analysis of the various valuation frameworks for determining the cryptocurrency’s fair price. Entitled “Bitcoin Is Exactly Like Gold Except When It Isn’t,” the analysis was conducted by Claude Erb, a former commodities portfolio manager at TCW Group.
I first wrote about Erb’s analysis of precious metals in a February 2013 column for Barron’s. His conclusion at the time, reached jointly with Campbell Harvey, a finance professor at Duke University, was that gold’s fair value was less than half its then-current price.
Gold fell by $600 an ounce over the subsequent 2½ years. That alone inclines me to pay close attention to what he is now saying about Bitcoin.
This cryptocurrency has been on a tear of late, with a year-to-date gain of 170%. In recent days, in fact, Bitcoin has risen to new all-time highs, eclipsing its prior high set in late 2017.
The valuation framework that concludes Bitcoin’s fair price is about $12,000 is based on the thesis that its value derives from what’s known as a “network effect.” That is, a network’s value grows faster than the number of connected users. (This framework is related to what’s known as Metcalfe’s Law. This holds that a network’s value grows according to the square of the number of users.)