Is it Gold? Cash? Or a Ponzi Scheme? Three ways to value Bitcoin.

Economists are just beginning to wrap their heads around the economics of Bitcoin. During the next ten years, useful models will emerge, and there will be Nobel prizes awarded to those who can teach us how to best think about this new world. Until th

I majored in Economics back in college. I used to half-jokingly tell people that I was a religious studies major, because a lot of the macro-economic theories we were learning felt more like voodoo than actual science.

Not surprisingly, my major proved to be pretty useless after I graduated (sorry mom and dad, should have gone to med school). It seems that understanding Economics doesn’t really prepare you for business, technology, or for that matter, really anything besides being an Economics professor. So, in studying crypto, I was pleasantly surprised to find out that my background in Economics was finally going to be useful for something!

My major proved useful last week, when Bitcoin found itself enmeshed in an outright civil war. The two sides in this war, Bitcoin and Bitcoin Cash, are arguing about a lot of things, but perhaps the most fundamental disagreement is that each side believes in an economic worldview that is fundamentally incompatible with the perspective of the other side.

The Bitcoin Cash issue has given me the opportunity to dust off some old textbooks. I even called my parents to let them know that they didn’t totally waste their money on my college education (just mostly).

A bit of background if you haven’t been following things for the past week: on August 1st of this year, the Bitcoin codebase was forked, and Bitcoin Cash was born. The fork was motivated by a desire to increase block sizes, which would speed up the rate at which transactions can be cleared, allowing the forked product to more easily be used as a medium of exchange.

For a few months, the Bitcoin Cash hard fork seemed like a minor event. The Bitcoin community was debating plans to do something similar (SegWit2x) anyway, which would have effectively eliminated the need for Bitcoin Cash. When support for these plans dried up, there was a sudden (and highly orchestrated) jump in the value of Bitcoin Cash, to the point where it briefly became the second most valuable cryptoasset in the world (a much simpler and rather ingenious plan, just called Segwit, has already been approved, but its adoption has been painstakingly slow...and many argue that it doesn’t fully address the problem Bitcoin Cash was trying to solve - if you want to learn more, head over to Medium and read everything you can by Jimmy Song).

All of this drama basically took place over the weekend, and if you spent any time watching the drama unfold on Twitter, you saw a level of passion and aggression on both sides that can fairly be characterized as religious zealotry. (You can still see some of the fires burning on Twitter, but I recommend you do so after business hours ).

So why is this an argument about Economics?

Those who love Bitcoin the way it is (and fight against any changes to it) often feel strongly that Bitcoin’s main purpose is as a store of value, like gold. These HODLers, as they are often called, also tend to be fans of what they believe to be the Austrian school of Economics, which looks to the individual (vs. the state) as the key actor in an economy. Austrian economists have more of a “microeconomic” focus. Austrians also favor tight control of the money supply, emphasize secure savings, and tend to focus on the long-term, organic growth of an economy (even if the short run is a little painful).

The Austrian School of thought believes in keeping savings mechanisms highly secure. This is why many of them oppose any forking of Bitcoin at all; they believe this fundamentally reduces its security. They also aren’t very concerned with increasing block sizes, since they feel that Bitcoin already accomplishes its primary purpose (serving as a store of value) very well.

Proponents of Bitcoin Cash feel that bitcoin needs to become more of a medium of exchange and feel it is necessary that Bitcoin adapts to make this happen. Whether they know it or not, Bitcoin Cash proponents would favor the views of economist John Maynard Keynes. Keynesian economists stress the role of the state in managing an economy, which gives them more of a “macroeconomic” focus. Keynesians believe in government intervention (usually cutting taxes and increasing spending), tend to focus mainly on the short run, and most importantly for this debate, stress the rapid movement of money (aka “demand generation”) as the key driver of economic recovery and success.

These are two fundamentally different views of economic reality, and for one of the first times in history, we’re going to be able to watch them play out...without having to be around for a revolution or the founding of a new country.

These two schools also give us useful ways to think about how to value Bitcoin, which is the main purpose of this post. Should Bitcoin be thought of as a store of value (Austrian school) or as a medium of exchange (Keynesian school)?

We’re going to look at both valuation methods, and we’re also going to look at a third school of economic thought around Bitcoin: that it is a mania....a big Ponzi scheme. Economists who believe this (and there are quite a few) reference previous manias like the supposed Tulip Bulb crisis in the Netherlands.

(I’ll link to a number of sources that I've used for this piece, but the main one is the book Cryptoassets, which really helped me wrap my head around cryptoeconomics for the first time. My valuation examples were pulled directly from Cryptoassets, so you can get more in-depth explanations of them in this excellent book.)

The Austrian School: Bitcoin is the greatest store of value in the history of the world.

This may sound like a revolutionary claim, but I’d argue that we already have nine years of evidence for it, which is a small, but compelling sample size. Due to its ingenious design, inherent control of scarcity, decentralized history, and the passionate belief of its community, Bitcoin may very well prove to be the greatest store of value in human history.

Typically, stores of value need to have two fundamental characteristics:


Gold works as a store of value because it is in short supply and incredibly difficult to mine. The dollar has value because the US government prints a limited supply (though it can increase this supply whenever it chooses, which is actually one of the reasons Bitcoin was invented).

Bitcoin will issue a total of 21 million coins during its lifespan, making it a deflationary currency (a currency that actually becomes more expensive over time, rather than an inflationary currency like the dollar, which loses value over time). There is no un-mined region of Africa where we will suddenly find more bitcoin one day, and there is no government that can suddenly decide to create more bitcoin. The supply is fundamentally scarce in a way no previous asset has ever been.

However, scarcity alone cannot give something value. My baseball card collection is pretty much worthless now, even though many of the rookie cards (in mint condition!) I had were scarce. The issue wasn’t scarcity, but rather belief, which collapsed during the course of a few short years.


In addition to scarcity, gold and fiat have value for another reason: because we believe they have value. Storytelling is one of the key things that made homo sapiens the world’s dominant species, and “money” just might be the most powerful story we’ve collectively decided to believe. Ben Thompson explains this well in a Stratechery post:

Compare cryptocurrencies to, say, the U.S. dollar. The U.S. dollar is worth, well, a dollar because…well, because the United States government says it is. And because currency traders have established it as such, relative to other currencies. And the worth of those currencies is based on…well, like the dollar, they are based on a mutual agreement of everyone that they are worth whatever they are worth. The dollar is a myth.

Of course this isn’t a new view: there are still those that believe it was a mistake to move the dollar off of the gold standard: that was a much more concrete definition. After all, you could always exchange one dollar for a fixed amount of gold, and gold, of course, has intrinsic value because…well, because us humans think it looks pretty, I guess. In fact, it turns out gold — at least the idea that it is of intrinsically more worth than another mineral — is another myth.

A large group of very smart people believed in Bitcoin for the last 9 years, which is the main reason it is worth what it is worth today. Bitcoin could very well become the next baseball card, but let’s assume this belief continues (which is where the evidence currently points)...if it does, this gives us a simple method for determining Bitcoin's value.

Today, the US gold market is worth $2.4 trillion. Will Bitcoin grow that big as a store a value? All we can do is guess, since no one has any idea how much of that value Bitcoin will actually gain. Accepting that any percentage we choose is arbitrary, let’s look at the value if Bitcoin gains 10% of the gold market. That means that 21 million total coins will have a collective value of $240 billion, giving each unit of bitcoin a value of $11,430. There you have it: the Austrian methodology for determining the value of a bitcoin.

There are many places to learn more about this approach, but I recommend checking out the work of Saifedean Ammous. He's a Lebanese economist and outspoken proponent of the Austrian view of Bitcoin. I recommend this thirty minute interview with him where he compares Bitcoin to gold, criticizes Keynesian economics (“it shouldn’t even be taught in schools anymore”), and explains why he thinks every other coin besides Bitcoin is worthless (he calls all other coins “s***coins"). Saifedean doesn’t tend to pull punches, but I find his views on Austrian Economics to be very compelling.

The Keynesian School: Bitcoin can be a medium of exchange.

The primary goal of a Keynesian is to keep money moving. When things slow down in an economy, they use tools like tax cuts and government spending to spur demand and get things back on track.

If you think about the block size debate, the Keynesian view starts to make a lot of sense. Smaller block sizes slow down the velocity of money, so they would obviously support something like Bitcoin Cash, which (theoretically) speeds it up significantly.

To understand this approach to Bitcoin’s valuation, we are going to use a basic macroeconomic equation, known as "the equation of exchange", which was initially stated by the economist John Stuart Mill:



M = the nominal supply of money in an economy

V = the velocity, or the total number of times all the money is spent (how many times is the average dollar bill spent during the course of one year?)

P = the price of an average basket of goods

Q = the total number of baskets

You don't need to understand the equation in detail. Here is a simpler way to understand what we need from it:

(Total Number of bitcoin) * (Average frequency of use in one year) = (Total spend in $$$$)

In a normal economy, you would look at the the total of all domestically produced goods (GDP, the PQ side of the equation), from lattes to automobiles. In the case of Bitcoin, there is no current evidence that it will ever be used to buy lattes or Teslas.  So, if we’re going to be disciplined economists, we need to look at something that Bitcoin is already being used for: international remittances. Sending money back home is a proven use case for Bitcoin (sell your Western Union stock ASAP). Even in China, where the government has cracked down on Bitcoin, people are using giant WeChat groups as a way to buy and sell Bitcoin efficiently, showing just how far people will go to use this far more efficient method for international remittances.

The US remittance market is about $500 Billion annually. This is our potential total spend in $$$. If Bitcoin eventually has the same velocity as the US dollar, this means that the frequency with which one bitcoin will be used for remittances is about 5, which gives us our V. So, if Bitcoin one day takes over the ENTIRE remittance market, that means that its total annual value is $500 Billion/5, which is $100 billion. If you divide $100 billion by 21 million bitcoin, you get an estimated value for bitcoin of $4,762.

Of course, Bitcoin is not going to own the entire remittance market, so let’s instead assume that it’s compelling to enough people to just take 20% of the market, which gives it a value of $20 Billion, which now leaves us with a valuation of $952 per bitcoin.

Finally, let's accept that both the Austrians and the Keynesians have a solid argument. If they do, Bitcoin is going to have value as both a store of value and as a vehicle for remittances, so we can simply add these two values together ($11,430 + $952) to get a final valuation of $12,382. As other use cases emerge, we can use similar methods to calculate their value and add them to our total valuation.

Note: do not take this as investment advice! These are arbitrary calculations based on arbitrary theories of Bitcoin’s value. If you read on, you’ll find that there are many economists who disagree with all of the above.

The Mania School: Bitcoin is a Ponzi scheme

According to the Economist, Bitcoin’s meteoric rise can best be explained by the Greater Fool theory:

People are buying Bitcoin because they expect other people to buy it from them at a higher price; the definition of the greater fool theory. Someone responded to me on Twitter by implying the fools were those who were not buying; everyone who did so had become a millionaire. But it is one thing to become a millionaire (the word was coined during the Mississippi bubble of the early 18th century) on paper, or in "bits"; it is another to be able to get into a bubble and out again with your wealth intact.

If everyone tried to realise their Bitcoin wealth for millions, the market would dry up and the price would crash; that is what happened with the Mississippi and the contemporaneous South Sea bubbles. And because investors know that could happen, there is every incentive to sell first. When the crash comes, and it cannot be too far away, it will be dramatic.

This viewpoint confuses me. The reason why anyone invests in any asset class is because they expect someone else to buy it from them at a higher price. I don't buy Apple stock or government bonds because the certificates have some fundamental use to me. No, I buy them so I can sell them at a higher price. The article seems to discount a lot of the proven value of bitcoin in favor of reducing the whole thing to a Ponzi scheme.

However, the Economist is not alone in this view. Nouriel Roubini, an economist who became famous for correctly predicting the 2008 recession, has this to say:

(Bitcoin) is neither a serious method of payment nor a good way to store capital. The bitcoin feeds on itself. There are no fundamental reasons for its price to reach such levels. What’s more – it is also used by criminals, for their shady business. I think that more and more countries will start to make cryptocurrency exchanges illegal like China did. New regulations will be adopted. So, this will find its end.

It's tough to say much more about this mania school of thought, because the argument just seems to boil down to "it's not a real thing, unless you're a criminal." That said, a lot of smart people seem to feel this way.

You know nothing, Jon Snow.

Economists are just beginning to wrap their heads around the economics of Bitcoin. During the next ten years, useful models will emerge, and there will be Nobel prizes awarded to those who can teach us how to best think about this new world. Until then, invest at your own risk.



Sandeep: Tell me a bit about the early part of your career.

Tom: I spent a decade helping to build start-ups focused on application and database software. This was where I learned how to sell and do business development. I was fortunate to be part of one company going public and another being sold to IBM.

Sandeep: What is something you learned during this time that helped you with consulting?

Tom: I began to appreciate how different customers achieved varying levels of success with the same foundational technology. This made me understand just how critical getting your team and process right can be.

Sandeep: This is something I only came to appreciate years into consulting, especially after the sale of my first consultancy to Capital One.I saw teams in different parts of the company trying to solve challenges like real-time messaging. Same corporate culture, same technology, same internal support mechanisms. Night and day outcomes.

Tom: We saw a lot of the same thing after selling our practice to EMC (sold to Dell in 2015). This is probably the thing I'm most proud of when it comes to the teams I've helped to build: the ability to perform well in a variety of contexts, sometimes in ways that inspires the client team to up their game as well.

Sandeep: Yes. It's particularly cool to see your team succeed in individual ways after an skills definitely translate into the corporate environment.

Tom: Totally. We have people who've stayed on at Dell and risen up the ranks, while others took the opportunity to become successful executives at other Fortune 100 companies....or to start their own agencies and startups.

Sandeep: We've both been around a while. My first consulting project was a Y2K thing for Cisco back in 1998. You've been around a little longer than that :). How do you think consulting has changed most during the past five years?

Tom: I think because there is so much infrastructure available now, consulting has become more delivery and outcome-oriented. A better blend of strategic and tactical. Public Cloud has also enabled velocity to increase at a pace unfathomable 5 years ago.

Sandeep: What has stayed the same?

Tom: It's still mostly about people. People who thrive on change and are focused on their personal and professional development. I love that this has not and will not's what I love about consulting.

Sandeep: I know you're adjusting your work style to COVID. You're still a dude who clearly prefers to drive an hour for a socially-distanced hike or outdoor meeting over Zoom any day of the week :) But personal styles aside, what is specifically compelling about a remote agency during the era of COVID?

Tom: Kunai has been remote for years, which gives them an inherent advantage. There is something about the communication and management styles that just works in a way that other organizations are still figuring out.

Sandeep: Yeah, I think what a lot of people fail to realize is that remote work isn't just office work over Zoom. it's an entirely new paradigm. There needs to be an understanding for asynchronous efficiency...and this just takes time and effort to develop. How do you approach remote work and family? What are you learning about separating work and personal time?

Tom: No matter what the form of interaction, Focus. Be present. Quality over quantity. The best weeks are the weeks where I proactively schedule work and personal time. Neil (Kunai's Head of Delivery) shared a great quote with me "With discipline comes freedom." When I am proactively addressing the majority of my professional and personal commitments, I find I earn a little flexibility. A little freedom.

Sandeep: Tell us about a business hero of yours that I may not have heard of before.

Tom: Paul O'Neill is someone you may not know. His work in both the public and the private sector created a profound impact

Sandeep: We are both over forty years old :). How have you learned how to work smarter during the past decade or so? What do you wish you knew about consulting when you were 25 that you know now?

Tom: Consultants want to make lasting change. Lasting change is often not the act of a single person. Today I work much harder bringing others along on the journey.

Sandeep: Last question. What are you doing here? :) Why join a small consulting company this late in your career when you could have a cushy job somewhere else?

Tom: I love a good challenge personally and professionally. When I turned 40, I decided I would run a 10K every Thanksgiving weekend and try to have my finishing time be less than my age. With the exception of one year where I did not run due to a health issue, I have met the goal. I also recently completed the Leadville 100 Mountain Bike race. So, I guess I'm here because I'm a glutton for punishment :) Jokes aside, our customers have a job to do and I intend to put Kunai in a position to execute flawlessly on their behalf. I love committing jointly to audacious goals for our customers and our business.

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