Researchers figure out how to correctly value bitcoin - and they say it is ‘substantially’ overvalued

Bitcoin’s actual level of support is four times less than it should be, they said - and there may be several months of volatility ahead

PUBLISHED : Tuesday, 03 April, 2018, 1:01am
UPDATED : Tuesday, 03 April, 2018, 2:33am

Given bitcoin’s meteoric rise in 2017, and persistent slump this year, it’s easy to wonder just how much the digital currency is really worth.

Researchers at ETH Zurich say they may have found an answer: Bitcoin’s value is based on the network of people who use it.

And they suspect that the currency is overvalued.

Researchers at the Swiss university were able to observe how the cryptocurrency’s value rises with participation.

They used a modified version of a model that assigns networks a value proportional to the square of the number of active users, and an equation that can capture how speculative bubbles evolve and grow.

Bitcoin falls close to US$6,000

Additionally, by pulling from past data, the researchers say they can now better track and spot potential future crashes.

On at least four different occasions – one each in 2011, 2012 and 2013 as well as, most recently, the end of 2017 – the model had determined that a fundamental value was heavily exceeded by bubbles that grew and burst.

Their analysis “indicates current support levels for the bitcoin market in the range of US$22-US$44 billion, at least four times less than the current level,” the researchers said, according to a March 29 MIT Technology Review article.

Bitcoin mania puts cryptos in sight of world finance chiefs

Currently, the bitcoin market looks a lot like it did the year following the Mt Gox trading system crash, according to the researchers.

All of this spells trouble, they concluded: “Our analysis identifies a substantial but not unprecedented overvaluation in the price of bitcoin, suggesting many months of volatile sideways bitcoin prices ahead.”

Bitcoin currently hovers at around US$7,000, having lost more than half its value this year.