A Bitcoin is either worth a lot less than the current price, or a lot more.

I don’t know which is true.

The case for BTC being worth zero is straightforward. With no backing, no physical asset to hold on to, no claim to cash flow and no unique usefulness vs. other blockchain schema, skeptics argue that Bitcoin — like tulips, in the 1600’s or internet stocks and Beanie Babies in late nineties — is in the midst of a public mania, sure and soon to fall.

But if BTC is not worth zero, then what is it worth?

Bitcoin Intrinsic Value?

To determine the fundamental value of BTC we must first define some terms. My argument centers around treating BTC as money and then determining an appropriate exchange rate. Money, as defined by Niall Ferguson in his book the Ascent of Money, has three key aspects:

Aspects of Money

Medium of Exchange: That BTC is a medium of exchange is self evident. People trade it in exchange for products and services, and companies like Overstock.com now accept BTC as payment for products on their sites. While some individuals are holding onto it (As I’ll discuss later) the volume of BTC enabled transactions continues to increase. Unit of Account: That it is a unit of account is inherent in its architecture. The distributed ledger concept, the key idea of BTC, relies the accurate record keeping of BTC ownership through a widely dispersed, independent, verification processes. Store of Value: Whether BTC is a store of value, is the trickiest question. Last week Fred Wilson discussed this very question, concluding “…you can’t keep spending something that goes up as much as Bitcoin has. So I don’t spend Bitcoin anymore. I hold it. It’s a store of value now. That much is clear.”

Choosing a Valuation Model

If BTC is money — like the U.S. Dollar, Euro or Japanese Yen — then the next step is to figure out the “exchange rate” and “value” of that currency. To do this some further assumptions are useful:

There is a certain quantity of money which would allow an individual to buy everything in the world. Said another way, we could, given enough information, put a price on everything in the world. This number is finite at a given point in time and grows as we become more productive. The total value of currency (specie, physical bills coins etc.) in circulation is a fraction of this total value. Currencies are easily exchangeable. It is very easy to convert dollars into Euros, Yen and Bitcoin. According to the “Law of One Price,” the price of a given security, commodity or asset must be the same, when exchange rates are taken into consideration. (Essentially restating the principle of Purchasing Power Parity)

If BTC is money — easily interchangeable with all other currencies — and it is both conceptually possible for all the world’s goods and services to be valued, then the value of BTC can be determined in relation to the the total value of the “world”. Said another way, if we can put a USD denominated value on all the world’s assets, then we can put a BTC price on all the world’s assets.

Total Value of the World

Determining the total value of the world is admittedly imprecise. The total value of world stock markets is roughly $70TN. The U.K.’s Telegraph valued all the world’s property at $217TN. Credit Suisse valued the wealth of the world at $250TN. Given the wide range, and to be conservative, I’m using $100TN as the total value of the “world”.

But there are not 100TN dollar bills in circulation, not by a long shot. The Federal Reserve uses two metrics to measure the money supply: M1 and M2. M1 includes physical money, think paper bills and coins, as well as checking accounts and demand deposits. These are the most liquid portions of the money supply, and can quickly be converted into physical cash. M2 includes everything in M1 plus savings deposits, money market funds mutual funds and other time deposits like CDs. These additional inclusions are less liquid but still easily converted into cash. Below is a table of the M1 and M2 money supplies of the Dollar, Euro and Japanese Yen, along with their current exchange rates, and the value of the world in each currency. The limited quantity of M1 and M2 vs the total value of all goods and services means the world can be valued in terms of multiples of M1 or M2.