As I have outlined in several articles already this year, after spending much of 2018 falling, the price of Bitcoin has been rallying in 2019.
The price of the cryptocurrency has risen so much, it is now technically back in a bull market and is starting to attract the attention of investors all around the world once again.
This is good news for the Bitcoin price. Because the cryptocurrency does not generate any cash flows, it is difficult to place a value on the asset using traditional fundamental analysis. Instead, the market has to define how much it is willing to pay for Bitcoin, and for the past six months, this has been around $4,000.
According to Tom Lee of Fundstrat Global Advisors, today Bitcoin is significantly undervalued. He has calculated that it should be worth at least $14,000, based on the present cost of mining each coin. The actual cost of producing each coin is significantly lower than this price target. Lee estimates it is in the region of $5,000 to $6,000. However, Lee’s price target is based on Bitcoin activity per user, which he calculates is worth $14,000.
That being said, this isn’t a concrete price target. He has since gone on to say that a more realistic valuation might be $10,000 — in the near term anyway.
I can’t comment on Lee’s price prediction because I’m not entirely sure of what calculations he has used to come up with this target. However, I do believe that the price of Bitcoin does undervalue the asset at current levels.
It is difficult to say precisely how much each coin should be worth, but as I noted a week ago, looking at the daily transaction volume of Bitcoins, there are many more people using the cryptocurrency today than this time last year.
According to blockchain.com, during the past four weeks, there have been between 350,000 and 400,000 daily confirmed transactions with Bitcoin. In comparison, a year ago the site was recording around 200,000 daily deals. As the Bitcoin price is defined by supply and demand, a 100% year-on-year increase in activity is enough to justify a higher price, but that is not the case. In April 2018, each Bitcoin was changing hands for just over $8,000, that’s 60% above its current level.
Still, even though the number of Bitcoin deals is increasing, without cash flow to support the price, I am hesitant to put a price target out there. But as the price is defined by supply and demand, and as supply and demand is currently at record levels, then I do not think it is unreasonable to say that the Bitcoin price should be heading higher.
It is difficult to tell how much higher the price can go, but if the number of transactions continues to rise as it has done over the past 12 months, Lee’s $10,000 price target might not be that unrealistic.
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Rupert Hargreaves does not own any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.