What Are Bitcoins Really Worth?

Bitcoins, like all currencies today, are worth what they are exchanged for. There is nothing backing Bitcoins. There is no gold, silver, or value of any kind supporting a bottom level for them.

One possible value for the lowest amount a Bitcoin’s worth is how much computing power and electricity is required to produce one Bitcoin. This value varies based on electricity costs where the mining computers - that do the work for a Bitcoin reward - are located. Electricity costs for mining a Bitcoin calculated by PCPer.com
For a standard Bitcoin mining computer (let's say, an AMD A8-3850 APU), costs range from $.305 per day to as high as $2.50 per day. For more specialized computers, the costs range from $0.55 to $4.05 per day. The number of Bitcoins produced per day depends on several factors.

The lowest level produced is about 0.050 btc and the highest per computer can reach 3.2 btc. Taking the low end on all numbers gives us a value of:

(1btc/0.0050btc/day)*$0.305/day=$61.00 base cost to create or mine a Bitcoin.

The computer's cost is not included here because this level would be for a non-specialized computer.

With a $/BTC price of $50 today, each BTC is costing the least efficient miners $11 to produce. The most efficient miners are still making a lot of money though. Here’s a look at more optimistic mining costs:

Taking the high end production numbers:

1/3.2 BTC/day*($4.05 electricity + $8 computer)=$3.77 base cost for larger scale efficient miners.

Since the $/BTC exchange rate is $100+ (and rising) today, a large scale Bitcoin miner can make money all the way down to a $/BTC exchange rate of about $4.00
This suggests that rarity is the idea backing Bitcoins. With a BTC production limit of about 21 million BTC occurring in 2140, there is very gradual growth built into the system.

A clear understanding of what inflation and deflation is important. Bitcoin is considered to have deflationary properties. Not so fast.

While on the surface Bitcoins can only reach a level of 21 million issued, with about 12 million currently around, the real story is significantly different. About 100 million times different.
Remember the smallest unit of a Bitcoin..the Satoshi? It represents 1/100,000,000 of a Bitcoin.
When we total the available units of Bitcoins relative to other currencies, we see that Bitcoins are not nearly as deflationary as they appear.

The real number of Bitcoin units available now is:

1,200,000,000,000,000 or roughly 1 million billion units.

That is not deflationary number. Still, most calculations are based on the 1 BTC unit, and not the smallest denomination. But there is a possibility, as shown above, for Bitcoin to inflate into numbers most of us cannot pronounce. So far that has not happened.

The key thing is understanding what inflation and deflation mean to us in the real world. We can then understand how Bitcoin - or any currency - will behave over time.

Inflation is the amount of money and debt pumped into a system COMPARED TO THE GROWTH OF PRODUCTS AND SERVICES. Notice what has been emphasized. Many analysts focus on the growth of money and debt and forget about the growth of products and services.

The Bitcoin daily growth rate is roughly 0.46% while it decays at a much lower 0.025%. Decaying refers to Bitcoins being used up or disappearing from the pool of available Bitcoins, somewhat like bad debts cause money in a system to disappear. At a net growth rate of 0.44% per day and slowing down, Bitcoins will generally tend to increase in value compared to the large national currencies such as USD, Euro, or Yen.

Here is a critical comparison:

1. Bitcoin growth rate is approximately 1.5-2% per year.
2. USD monetary growth rate is approximately 5-8% based on ShadowStats.com using the more accurate 1990 methodology and including estimates of M3, the broadest measure of money.
3. Euro monetary growth rate has varied from a rare low of 1%, all the way up to 12%, according to the - European Central Bank (ECB) figures. These official figures are almost always understated. The real growth rate of the currency and debt in circulation could be even higher. Typical growth rates are around 5-8%.

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By checking with the other side of the world, once can find that the Japanese central bankers have been busy! The JCB (Japans Central Bank) has promised to buy trillions of yen in government bonds. This is almost exactly like printing trillions for eventually pumping into the market place. Prices will rise and potentially explode. The JCB statistics do not show this huge and dangerous monetary growth, with only a 2-5% range of growth rate. The truth will be felt on the street for everyone buying real goods and services in the market place.

This brief currency tour shows that Bitcoins will always be more rare than the competing national and central bank currencies. This fact alone brings value to Bitcoins.