Bitcoin presents a new type of nontraditional, highly technical, experimental, and global digital instrument to our already complex world. That fact should not conjure fear. It should engender excitement.

When I caught wind of Bitcoin as a newly minted MBA in the summer of 2012, I immediately scoffed. At the time, one bitcoin was trading at around $10, with a total market cap of about $50 million, which I thought was outrageous. It was a new, unregulated, "imaginary" Internet currency. Even though I initially rejected the idea as utopian, it stuck with me for some time thereafter.

Fast forward to early 2013, when the European banking crisis was reaching a fever pitch and Cyprus was on the verge of the first modern bank "bail-in." As the bitcoin price began to rise rapidly on a daily basis, and the situation in Europe continued to deteriorate, I decided to remove my "I know everything" MBA grad cap for an "I know nothing" crypto dunce cap. And, boy, am I glad I did.

The more I read, watched, and listened to bitcoin experts attempt to explain the most confusing and thought-provoking advancement since the Internet, the more fascinated I became, not only with the idea of frictionless transactions, but also by the idea of stateless currency.

Given the complexity of bitcoin (economic, financial, political, ideological), there are many topics of discussion that deserve specific attention in their own right. The Digital Currency Council does an excellent job of providing an overview of these issues in its free courses. In today's piece, we will focus on one of my favorite, and most misunderstood, topics: bitcoin valuation.

Valuing bitcoin: A traditional perspective First, I think it is important to give readers an idea of just how difficult it is to categorize bitcoin for valuation purposes. Unlike equities, bonds, and real estate, bitcoins create no cashflow. Most traditional financial analysis is based on terminally valuing an asset's or entity's discounted cashflows in order to determine a fair present value price for those future cashflows. In the case of equities, the earnings of a particular company that are distributed as dividends can be theoretically extended in perpetuity and discounted at current "risk-free" interest rates, thus creating what is knows as a discounted cashflow (DCF) valuation. Since bitcoin has no cashflow, this method of valuation is not useful.

With regard to stocks, thousands of companies in hundreds of industries provide a pool of potential comparables to value companies from a comparative and/or historical perspective. Again, there is only one bitcoin (and it is the first of its kind), so there is no use for this methodology, either. There are "altcoins," but they are not proper comps for bitcoin. (That is a topic for another day).

Moving to bonds or other interest-bearing instruments, they too provide steady and somewhat predictable cashflows due to the interest coupons that holders of the securities collect at set periods of time. Once again, we run into a problem with bitcoin due to the lack of regular cash payments, though this can be programmed into the blockchain as an added protocol layer. (Again, that is for another time.)

Lastly, real estate projects -- at least those purposed for investor profit and not for proprietor dwelling -- also produce steady cash revenue in the form of rents and homeowners' fees that act just as dividends and interest payments. No surprise that bitcoin cannot fit into this category, either, given its currency/commodity-like properties.

So the obvious question is still "What is the value of a bitcoin, and how do we derive it?"

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Why There's Confusion Over Valuing Bitcoin