A pair of analysts at Goldman Sachs attempt to assess the fundamental value of a Bitcoin.

When it comes to cryptocurrencies no truer saying was there than that the cryptocurrency market is full of people who, "know the price of everything but the value of nothing," to borrow a phrase from the legendary stock investor, Phillip Fisher, who once famously said the same thing about the stock market.

In the case of Bitcoin, however, it is, literally true - for what fundamental value could a virtual currency possibly have?

To assess the value of a country's currency analysts look at the growth rate, trade balance, interest rates to name but a few - but for cryptocurrencies, no such fundamentals exist, because it is global, virtual medium of exchange. 

That doesn't stop people trying, however, as evidenced by a recent paper: "Bitcoin as Money," from Goldman Sachs, in which two analysts: Zach Pandl and Charles P Himmelberg make an attempt at establishing Bitcoin's fundamental value.

They start with establishing principles of value borrowed from classical economics, that argue Bitcoin, like any other type of money, should gain value from its usefulness and relative performance vis-a-vis other forms of exchange, first as method of carrying value, or 'transaction value', and then as a method of storing value, or 'portfolio value'.

It is by assessing Bitcoin's value in relation to these uses that the rest of their article is concerned.

One problem for Bitcoin right from the get-go is that it has a lot of work to do to catch up with the current king of currencies, the US Dollar.

The Dollar seems, on all fronts to have vast advantages as a medium of exchange.

For starters, the Dollar is a stable medium which means it meets the second criteria, in particular, which is that of storing value, particularly well.

"To a modern American observer, cryptocurrencies can seem like a solution in search of a problem. In recent decades the US Dollar has served its purpose relatively well: consumer price inflation has averaged 2.1% over the last 30 years, and the real trade-weighted exchange rate is about 3% above its average of the same period," say Pandl and Himmelberg.

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Even during its greatest existential threat in the financial crisis the Dollar appreciated by, 16% between June 2008 and March 2009, as it became a safe-haven for investors. 

Not only that but the Dollar is liquid, relatively cheap to acquire and dispose of and in widespread use, fulfilling the first criteria of transactionality.

"The Dollar accounts for about 65% of global foreign exchange reserves and is the denominate currency in global trade—about 30% of global trade flows excluding the US are invoiced in USD. In other words, transaction and portfolio demand for the Dollar are very high," say the Goldman analysts.

The US Dollar is also particularly useful as a method of storing value in countries whose own currency is dysfunctional, such as where the local currency is subject to extreme depreciation and a more stable proxy is required, or where there is intense regulation limiting individuals' freedom to conduct exchanges.

Indeed, "Dollarization" of foreign economies whose currencies are failing, is a familiar phenomenon in the developing world.

In many ways Bitcoin shares some of the Dollar's international characteristics and advantages, however, since Bitcoins are also available to people all around the world as an alternative currency to their own local currency, and in times of economic crisis, Bitcoin has, in the past, benefited from demand from countries with dysfunctional domestic currencies.

"A Google Trends search shows that the highest search intensity for “Bitcoin” over the last five years (scaled to overall search volumes in the country) came from Nigeria, South Africa, and Ghana, all countries with currency instability and/or restrictions on the use of foreign exchange— places where alternative forms of money might see natural demand," say Pandle and Himmelberg. 

Another obvious criteria for Bitcoin to succeed, is that it can be widely transacted, as this too, is one of the advantages of the Dollar, which is widely accepted as a medium of exchange around the globe.

Just under a year ago, in February 2016, the number of merchants accepting Bitcoin surpassed the 100k mark, according to payments processor Bitpay, including almost all the big major e-sites - and those who are optimistic about the future of the currency see a potentially limitless growth potential, since unlike the US Dollar Bitcoin is truly international and bypasses borders.

As a store of value Bitcoin struggles due to high volatility.

The chart below compares the volatility of Bitcoin to other major assets and shows how much more volatile it is.

This makes it less attractive to investors as a store of value.

"The recent fluctuations in Bitcoin and its relatives suggest they are much too volatile to serve as money. Volatility would likely need to come down dramatically (either naturally or through the widespread adoption of cryptocurrencies designed to better stabilize purchasing power via supply adjustments) before we see broader adoption," says Goldman.

Bitcoin's wild swings make it a most volatile currency

Of course, the one major advantage Bitcoin has over other forms of currency - and a source of its notoriety - is its ability to be used by criminals to launder illegal money or avoid tax.

The criminal element is also a liability as shown by recent research which appears to foot the blame for the wild swings in price to fraudulent activity by criminal-owned trading-bots.

"The manipulation happened primarily via two bots, Markus and Willy, that seemed to be performing valid trades but did not actually own the bitcoin they were using. During the Mt. Gox hack a number of these bots were able to create fake trades and make off with millions while manipulating the price of BTC," says John Briggs on Techcrunch, commenting on the manipulation that may have been the root cause of the jump higher from $150 to $1000 in 2015. 

Yet regardless of the cause, volatility could be seen as a potential advantage - or double-edged blade at least - especially to those seeking it, such as speculators.

In fact, recently the profile of Bitcoin investors has changed from those of investors seeking a store of money, particularly if their own local currencies are dysfunctional, to those in countries such as Japan where the currency is stable, who only want to invest in Bitcoin to speculate because more orthodox investment routes offer such low returns.

So what are Goldman's conclusions about the future of Bitcoin and other's of its crypto-breed?

"So could Bitcoin succeed as a form of money? In theory, yes, if it proves to be more useful than the alternatives—in terms of facilitating transactions at a lower cost and/or providing better risk-adjusted returns for portfolios," say Pandl and Himmelberg.

In practice, however, this could be difficult in developed economies where existing currency transaction costs are already low and banks offer an insured safe-store for cash.

The cryptos are also likely to come under attack from government's who will start to impose greater regulations and restrictions on their uses.

Meanwhile, it seems Bitcoin's greatest advantage appears to lie in its greatest weakness - and the thing all trader's crave -  volatility.

But even this may become a thing of the past and investors may only have a temporary window to capitalise on the crypto's huge leaps and jumps as Goldman's sees Bitcoin eventually settling down, and trading at a level more in line with global growth estimates:

"We should also stress that, as money, cryptocurrencies should have low expected returns in the long run, despite their high returns recently. Our working assumption is that long-run cryptocurrency returns should be equal to (or slightly below) growth in global real output—a number in the low single digits."

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