The real value of a currency depends on the value of the goods that can be purchased with it. If we assume the majority of bitcoin transactions for 'real' goods (not currency speculation) are on silk road we can do the following calculation.

The demand in USD is about 1.9 million per month (http://arstechnica.com/tech-policy/2012/08/study-estimates-2-million-a-month-in-bitcoin-drug-sales/) which works out to be $63,333 per day (the demand)

There are currently 10118337 bit coins that have been created and each coin is spent on average once every 399.357 days (http://abe.bitcoinstats.org:2750/)

This means that each day there are 10118337 / 399 = 25,359 bitcoins available to use for transactions each day (the supply)

The price of 1 BTC should then be supply / demand = $63,333 / BTC 25,359 = $2.49 USD per coin

Does anyone have alternative suggestions for calculating the price or is Bitcoin in a bubble?

  • It appears you are trying to come up with the valuation based on the velocity of money, but aren't making a clear case. The largest number of transactions are for online gambling, so that's one instance of demand for coins. – Stephen Gornick Oct 8 '12 at 21:27
  • Thanks Stephen, how would I find out the largest number of transactions are for online gambling? All the reading I've done points at silk road being the main place coins are spent. – UpDwD5gN Oct 8 '12 at 22:49

As famous as it is, I believe Silk Road isn't the reason for Bitcoin's existence or its success.

There are plenty of private individuals who value Bitcoin for international money exchange, its low cost trading capability, its irreversability, its lack of a central authority and its upper limit on the number of bitcoins.

If you analysed the transactions over time and experimented with deposits to various exchanges and traders, you would be able to build a partial picture of who is holding the existing bitcoins. You might be able to determine an upper limit on how many bitcoins are being held by speculators.

However, the value of Bitcoin as a system is dependent on its popularity, so current events can have a strong effect on the value.

Realistically, the best way to value a bitcoin is to look at the market price over time on a major exchange.

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