The Federal Reserve Bank of San Francisco released a report on May 18 discussing the volatility of the bitcoin price and its impact on the ways bitcoin should be classified, whether as a currency, security, or commodity.
Joost van der Burgt, author of the publication and fintech policy advisor at the Federal Reserve’s San Francisco branch, confirms what many have already said: that bitcoin straddles the properties of all three asset classes. However, he draws interesting points over properties that make bitcoin fit into one category better over others.
Burgt also shows historical evidence that suggests bitcoin is in a bubble, without saying firmly whether it is or not.
Though the price volatility would be an obvious reason why bitcoin struggles as a real-world currency, Burgt looks more closely at the ways it is currently used in the market place alongside central banking structures.
His conclusion comes as no surprise: bitcoin is not traded for goods much at all. In additional to increasingly unfavorable global regulations, he says that bitcoin lacks a corresponding real value, which is a key part in exchange for goods.
“…the exchange rate between two currencies can be regarded as a broad measure of the prices of one country’s goods and services relative to another country. When looking at the Bitcoin ‘exchange rate,’ this category of determinants seems to be inapplicable – there is no current native Bitcoin economy with native Bitcoin prices for goods and services.”
As a security, bitcoin fares better in the current framework, though not great. Securities are either purchases of debt or stakes in a company. Bitcoin doesn’t fit into either of these categories since it does not generate interest, dividends or capital gains.
As a commodity and an oft-mentioned “store of value“, however, bitcoin behaves much like entrenched commodities like gold and oil, at least according to Burgt. Though he argues that bitcoin lacks intrinsic value, he points to mining as the key form of placing value on the asset — a value, he says, that approximates to roughly $1,800 per coin.
“Although Bitcoins do not possess any real intrinsic value, from a commodity valuation perspective, we can estimate a hypothetical value based on its production costs. Recent estimates regarding the energy involved in mining a single Bitcoin by professional energy-efficient mining rigs put it at about $1,800 when mined in China (where 80% of the currently mined Bitcoins originate).
The hypothetical value of $1,800 is far lower than bitcoin’s current price. Burgt only strikes the bubble fear home with a look at the stages of bitcoin’s FOMO and euphoria cycles that pattern previous bubbles in the market place (such as the 2007 financial crisis). In a unique development, however, Burgt mentions John McAfee’s $1 million bitcoin price target as a counterpoint.