The descent of Bitcoin (BTC) towards $20,000 does not surprise me. As you may or may not know, I am one of the naïve dinosaurs who still believes that a cryptocurrency can never become money unless it is centrally backed by a sovereign entity. With year-to-date volatility well over 50%, the market has clearly come to the same conclusion.
So what is Bitcoin’s “fair value”?
Well, if you were to ask JP Morgan, their Bitcoin “strategist” Nikolaos Panigirtzoglou said in May that Bitcoin’s fair value was US$38,000 – a call that now seems to be taken terribly wrong. ““Last month’s crypto market correction looks more like a capitulation from last January/February, and looking forward, we see an upside for Bitcoin and crypto markets more generally” he said on May 29, 2022.
A little ironic, given that JP Morgan CEO Jamie Dimon has always ranked Bitcoin as “worthless” (October 11, 2021). “I am not a bitcoin fan. I don’t care about bitcoin. It doesn’t interest me,” he said last year. “On the other hand, customers are interested and I don’t tell them what to do.”
Last week, the bank said that “Bitcoin’s recent fall has left the digital token well below its fair price, giving the cryptocurrency a significant advantage.”
JP Morgan therefore seems to apply a prediction of the future “fair value” of Bitcoin.
Fair value, in the context of investing, refers to the price at which a buyer and a seller arrive for the transaction value of the asset in question.
Fair value is therefore the price at which the asset is trading at a given time.
Purely from this perspective, the price at which Bitcoin is trading is fair value.
But what about fair value in the accounting context?
According to the definition of fair value as described in Generally Accepted Accounting Practices (GAAP) and International Financial Reporting Standards (IFRS), “Fair value is the price that would be received to sell an asset or paid to transfer a liability in a normal transaction between market participants at the measurement date.”
Ah! The definition is the same. Thus, the fair value price of Bitcoin is the price at which it trades.
Can Bitcoin go to zero?
So under what circumstances, assuming major financial institutions are unable to design a support floor under the first and most valuable crypto, could Bitcoin drop to zero?
Well, consider that the value destruction of this year’s price crash alone from $68,000 to (now) below $24,000, there’s going to be a very sudden surge in bitcoin regulation that could have a profound chilling effect on speculators’ willingness to bet on crypto.
Additionally, given that central bank digital currencies are imminent, it is inconceivable that centrally managed (and more importantly, backed) sovereign currencies could be considered superior to any crypto, given that none of them are backed by anything.
Even so-called “stablecoins” like Tether and Terra have now been shown to be largely fraudulent in their depictions of being backed by US dollars.
So what if Bitcoin is considered a security and new rules to protect investors from the massive losses suffered today dictate that Bitcoin is not allowed to be used as legal tender?
What would be the point of holding it at all?
History will remember Bitcoin as an ambitious experiment that proved, unequivocally, that no currency can survive unless it is both centrally managed and financially backed by a sovereign currency.