What is Intrinsic Value?

What is Intrinsic Value?

In the world of finance, intrinsic value is the true, inherent, and essential value of a specific asset independent of its quoted price in a market. In speculation prices can become far removed from the real actual value of a stock, tulip, Beanie Baby or cryptocurrency. 

Here is a list of the ways to quantify the intrinsic value of different asset classes:

An option contract has intrinsic value if the option is in-the-money. An in-the-money option’s intrinsic value is calculated as the value of the difference between the current price of the underlying asset and the strike price of the option. If an option is out-of-the-money, it’s intrinsic value is zero. 

Gold’s value as money comes from being a precious metal and being a preferred medium of exchange. Gold has been valued for its ease in divisibility, storability, rarity, ability to move, and how hard it is to counterfeit. Historically, as an instrument of trade its value is in its efficiency over bartering and is a proven hedge against inflation. Its primary utility comes from its valuation in contrast to fiat currency. 

“[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” – Warren Buffett 

Gold has a small intrinsic industrial value but that is far below its price. 

Bitcoin or any other cryptocurrency derives its current price from its utility as a medium of exchange and as thought by some to be a store of value and a hedge against inflation due to its limited set supply. As a fiat currency backed by nothing it has zero intrinsic value. It is a 100% speculation. 

Fundamental analysis is used to quantify the intrinsic value of a stock in relation to its underlying company. The intrinsic value of a company is derived from the projected future cash flow and the book value of its assets that are a means to production. The intrinsic value of outstanding shares in a company is the current value of all the expected future net cash flows plus asset values. 

A bond is valued by calculating the current value of a bond’s interest payments projected into the future, or its known future cash flows, along with the bond’s maturity value, this is a bond’s intrinsic value.

Intrinsic value is the real value of an asset, not an opinion, and not even the current price it is trading at in the markets.