The New York University professor known as the “dean of valuations” for his expertise in assigning a value to various assets is stymied by bitcoin. “It cannot be valued,” wrote Aswath Damodaran on his blog yesterday.
Here’s how Damodaran gets to that conclusion. First, he says, prospective bitcoin buyers must decide whether it is one of the following:
Asset: Something that generates cash flows, such as bonds, stocks, or options. Cash flows can be used to derive a fundamental value for that asset.
Commodity: Something that is used as a raw material, such as oil, coal, or gold. Its utility as a raw material is used to derive a value.
Currency: A medium of exchange that does not generate cash flows. As a result, it can’t be valued.
Collectible: Something with aesthetic value but no cash flows, and no function as a medium of exchange. Examples are baseball cards, or a painting. As a result, it can’t be valued.
Damodaran says bitcoin isn’t an asset, because it doesn’t generate cash flows; nor is it a commodity, because it’s not a raw material. So it’s either a currency or a collectible, and he comes down on the side of the former, because it fulfils the three characteristics of money.
Although currencies and collectibles can’t be valued, they can be priced, Damodaran says. Whereas valuing something depends on analysis of cash flows, growth prospects, and risk, pricing something depends on market psychology, news, and instinct.
Bitcoin’s long-term price will depend on whether it turns out to be one of three things, Damodaran argues: It could become a widely used, global, currency; a kind of digital gold favored by millennials; or a modern-day tulip bulb craze.
Here’s Damodaran’s big letdown: he says can’t price bitcoin, because he’s a lousy trader. But he does offer one piece of pricing advice, from an earlier piece published in August. Based on the theory that the fair exchange rate between two currencies can be determined by equalizing their purchasing power: As of Oct 25, if you pay $5,529 for a bitcoin, will you be able to spend that bitcoin for $5,529 in goods and services? If you believe bitcoin will become a generally accepted currency, then maybe it’s worth the price, he says.