By Grant Ferowich
The meteoric rise of the price of bitcoin in recent years has prompted the question of bitcoin’s “value.” As New York University finance professor Aswath Damodaran points out, looking at valuations in the traditional sense of the word doesn’t apply to bitcoin.
Bitcoin’s price jumped back above the $5,500 level as of press time after sustaining a vertigo-inducing drop from $6,000 last Friday to $5,400 early Wednesday.
Cryptocurrencies can’t be valued like companies or projects because they don’t have cash flows – there’s nothing to discount. Bitcoin is “not an asset, but a currency, and as such, you cannot value it or invest in it,” Damodaran wrote in a Musings on Markets post Tuesday.
Instead, the guru argues cryptocurrency can only have nominal value, the price. This argument flows from the notion that the US dollar cannot be valued per se, but it does have a a price relative to the Japanese yen, Indian rupee, Chinese renminbi.
Just because bitcoin “cannot be valued” doesn’t mean it actually is worthless or a “fraud,” as JP Morgan’s Jamie Dimon has suggested. The tools and methods used to value an oil drilling project or innovative pharmaceutical product don’t work with bitcoin.
“You can play either the value or pricing game well, but being delusional about the game you are playing, and using the wrong tools or bringing the wrong skill set to that game, is a recipe for disaster,” the professor observes.