Yesterday, JP Morgan Chase & Co released a note on Bitcoin’s intrinsic value.

Their analysis suggests Bitcoin is overvalued at $8000, citing a deviation from the costs of production.

BTC is overvalued, but not because miners are making a profit.

This argument has been floating around the Bitcoin space for a while. The position JPM takes is that “price follows hash.”

It’s also called the Labor Theory of Value and has been popularized by fans of Karl Marx.

The Labor Theory of Value opposes common sense; products are not valuable because they take effort but because they have demand, which implies utility.

Why Price Appears To Follow Hash

Price and hash are strongly correlated, but few take the leap of suggesting an increase in hashrate causes price to increase.

In March, Eat Sleep Crypto newsletter subscribers learned the mechanism behind the seeming causation.

Many Bitcoiners recognize a relationship between price and mining power (hash). The debate has been reduced to “price follows hash” vs “hash follows price.” As usual, the truth is nuanced. In a bull market, hash follows price. Miners choose to mine the most profitable coin. In a bear market, price follows hash as miners with different costs undercut each other. BTC dropped from $6200 to $3200 during the BCH/BSV hash war in November. The drop from $6200 to $5600 saw 30% drop in hash rate from the network. At the time, 70% of Bitcoin miners were in China. It was logical to conclude the 30% became unprofitable and switched off, leaving the rest to sell at whatever price buyers would negotiate. I’d read that the cost of mining in China was around $3200 and placed my bets accordingly. BTC bounced at $3150. This was a confirmation of my theory and spurred further thoughts on how to fundamentally value cryptocurrencies. During this time, we also saw refutations of competing theories – namely that “price follows hash,” or Marx’s Labor Theory of Value. Both Bitcoin Cash (BCH) and Bitcoin (SV) saw a surge in hash power, yet both of their prices decreased over the hash war. Excerpted from the ESC newsletter, 3/27/19

In a bull market, hash follows price. In a bear market, price only appears to follow hash.

This framework explains the seeming correlation of price and hashrate in a bear market. Hopefully, it puts Bitcoin-related discussion of the Labor Theory of Value to rest.

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