Seven Valuation Models for Bitcoin and its Potential Value
This article, sourced from Web3Brand and curated by BlockBeats, analyzes the valuation models of Bitcoin and its potential value.
Table of Contents:
Valuation Model 1: Substitute for Gold
Valuation Model 2: Substitute for Global Assets
Valuation Model 3: Stock to Flow Model
Valuation Model 4: Long Term Power Law
Valuation Model 5: Celebrity Endorsement
Valuation Model 6: US Dollar Inflation Model
Valuation Model 7: Based on Production Cost
Would you be willing to hold Bitcoin for 4 years until it reaches $500,000? In the past 10 years, Bitcoin has increased by 90 times. Where will it go in the next 10 or even 20 years?
With recent increases, Bitcoin has surpassed $69,000. Due to factors such as positive news about cryptocurrencies in the US election and monetary easing, it has become a consensus that Bitcoin will break the $100,000 mark next year.
MicroStrategy CEO Michael Saylor stated in a recent interview that Bitcoin is expected to reach $13 million by 2045, with an average annual growth rate of 29% over the next 21 years.
As a long-term investor/hodler, I am curious about the valuation models for Bitcoin and the long-term trend of its value. Therefore, I have collected and organized 7 common valuation models, providing theoretical support for the “HODL” behavior.
If you are also interested in Bitcoin’s valuation models, then enjoy!
Valuation Model 1: Substitute for Gold
Valuation Model 2: Substitute for Global Assets
Valuation Model 3: Stock to Flow Model
Valuation Model 4: Long Term Power Law
Valuation Model 5: Celebrity Endorsement
Valuation Model 6: US Dollar Inflation Model
Valuation Model 7: Based on Production Cost
This is the most common valuation method for Bitcoin. With a fixed supply and resistance to inflation, Bitcoin has become a new medium of “value storage,” similar to gold in the old world.
Gold, as a long-term “value store,” is accepted worldwide and has become a cross-border asset. Bitcoin, as digital gold, has gained some consensus among geeks, young people, and wealthy individuals (the approval of BTC ETF this year further strengthens this consensus), replacing some of the “value storage” functions previously performed by gold.
As of October 18, 2024, the market value of gold is $18.3 trillion, while the price of Bitcoin is $67,819, with a market value of $1.34 trillion (the mined quantity is close to the total supply of 21 million at 19.76 million), ranking as the tenth largest global asset, accounting for 7.3% of gold. I have listed the corresponding prices of Bitcoin when this proportion increases:
10%: $92,523
15%: $138,784
33%: $305,325
100%: $925,226 (reaching the same market value as gold)
10% is the historical high of the Bitcoin/gold market value ratio. If the penetration rate further increases, it may reach 15%. In other words, the peak of this round may be around $140,000.
Why is 33% mentioned? Because the value of gold is not entirely for “value storage.” In fact, over half of it is used for decoration, and 10% is used for industrial purposes. Only one-third is used for investment and reserves. Since Bitcoin has no decorative or industrial use, 33% may be the maximum proportion. At this proportion, Bitcoin may reach around $300,000.
If Bitcoin one day reaches the same market value as gold, its price will be close to $1 million.
Is $1 million the end point for Bitcoin? Of course not.
In addition to gold, we also have currency and real estate as forms of value storage. The following estimates are from the famous book “Hodl Bitcoin” by Jiu Shen (estimated in 2018, available for download here):
The total market value of global gold is $7.7 trillion, the broad money supply is $90.4 trillion, and real estate is $217 trillion.
Broad money includes cash, current and savings deposits, and securities company customer margins. Except for cash (8%) used for circulation, the rest is used for value storage.
Real estate is mainly used for living and usage, but a significant proportion is definitely used for value storage. If it weren’t for Bitcoin, I would have used most of my funds to buy houses. Since there is no data available, we temporarily assume that 20% of real estate is used for value storage (this proportion does not affect the final result significantly).
So, how big is the global total value storage market? $7.7 trillion + $90.4 trillion × 92% + $217 trillion × 20% = $134 trillion.
Considering that the total supply of Bitcoin is only 21 million, with approximately 3 million permanently lost, and considering the relative advantages of Bitcoin for value storage compared to gold, currency, and real estate, the price of each Bitcoin will rise to $7.5 million.
$134 trillion / 18 million = $7.5 million
Is that the end? Of course not.
The total global wealth is growing at a rate of 6% per year. In 10 years, the total wealth will be 1.8 times the current amount, and in 20 years, it will be 3.2 times. Therefore, assuming that in 20 years (2038), the value storage function of Bitcoin is widely recognized, its price should be $24 million, or 160 million RMB.
Of course, this is under the assumption that Bitcoin occupies 100% of the global total value storage market. If it reaches a 10% market share, the price of Bitcoin in 2038 will reach $2.4 million or 16 million RMB.
Regarding the most radical version of 160 million RMB, Jiu Shen also created linear and exponential price models:
“Linear growth” (which is not actually linear in mathematics): the growth multiple is the same for each cycle.
“Exponential decay”: high growth multiple at the beginning, low growth multiple later.
The above predictions were made in 2018, and by the end of 2021, the price of Bitcoin had reached $64,863, approximately 450,000 RMB, which is quite close to Jiu Shen’s prediction. Will this cycle reach the 3.4 million RMB / $500,000 in the table?
In addition, Jiu Shen’s other major contribution is the invention of the famous Jiu Shen Accumulation Index, which guides dollar-cost averaging and bottom fishing (I personally use this indicator):
ahr 999 = (Bitcoin price / 200-day cost of averaging) * (Bitcoin price / exponential growth valuation)
Exponential growth valuation = 10^[5.84 * log (coin age) – 17.01]
Coin age = number of days from the current date to the creation block of Bitcoin (January 3, 2009)
Based on backtesting the indicator,
when the ahr 999 indicator is below 0.45, it may be suitable for bottom fishing.
Within the range of 0.45 to 1.2, it may be suitable for dollar-cost averaging BTC.
If it is higher than the range, it may not be a good time for dollar-cost averaging.
In 2019, Twitter user PlanB added considerations of “scarcity” to the “substitute for gold” model and proposed the Stock to Flow Model.
We will explain this model in three parts:
1. Goods with scarcity are better for value storage and can play the role of currency.
2. Scarcity can be quantified through the Stock-to-Flow Ratio.
3. Final modeling.
There is no need for further explanation on this point. I will directly quote Nick Szabo, a pioneer in the crypto punk community:
“What do antiques, time, and gold have in common? They are all expensive, either due to their original cost or their unpredictable history, and it is difficult to forge this expense. Precious metals and collectibles have an unfalsifiable scarcity due to their expensive production costs.
This has provided value to money, and its value largely depends on any trusted third party. Therefore, if there is a protocol that can establish an expensive bit online that is unfalsifiable and minimally dependent on trusted third parties, and can be stored, transferred, and verified with minimal trust, that would be great. Bit gold.”
By the way, Nick Szabo has been suspected of being Satoshi Nakamoto due to his professional background and writing style, but he has denied it multiple times.Saifedean Ammous has introduced the concept of Stock-to-Flow Ratio to quantify scarcity. He explains that for any consumable, doubling the production would lead to a significant decrease in price and harm the holders. However, for gold, doubling the annual production would only increase reserves by 3%, which is insignificant. The continuous low supply of gold throughout history has enabled it to maintain its role as a currency. Gold’s high Stock-to-Flow Ratio makes it the least elastic commodity. In 2017, the existing stock of Bitcoin was approximately 25 times that of the new Bitcoin generated that year. This is still less than half of the gold ratio, but by around 2022, Bitcoin’s Stock-to-Flow Ratio will surpass that of gold.
The Stock-to-Flow Ratio (SF) is calculated as the ratio of stock to flow. Stock refers to the total quantity of the current commodity, while flow refers to the annual supply of the commodity. The author provides the Stock-to-Flow Ratios of various commodities as of March 23, 2019:
– Gold has the highest SF of 62, which means it would take 62 years of production to obtain the current gold reserves. Silver ranks second with an SF of 22. These high SF values make them monetary commodities.
– Palladium, platinum, and all other commodities have SF values almost above 1. Existing stocks are usually equal to or lower than annual production, making production a crucial factor. It is difficult for these commodities to achieve higher SF values because hoarding them would increase prices, which in turn would increase production and cause prices to fall again. It is challenging to escape this trap.
– Bitcoin’s current stock is 17.5 million coins, with an annual supply of 700,000 coins, resulting in an SF of 25. This places Bitcoin in the category of monetary commodities, similar to silver and gold. Bitcoin’s market value at the current price of $4,000 is $70 billion.
The author also mentions that according to Biteye’s statistics, Bitcoin’s projected Stock-to-Flow Ratio will be approximately 120.1 in August 2024, while gold’s will be about 59.7 in 2023. This means that Bitcoin’s scarcity will be about twice that of gold.
The author discusses PlanB’s model, which assumes that scarcity represented by SF directly drives Bitcoin’s value. The market value is calculated using the formula exp (14.6) * SF ^ 3.3, where SF follows a power-law distribution.
The Stock-to-Flow model has been fairly accurate in its predictions since its introduction in March 2019, up until May 2021, when the predicted price significantly exceeded the actual price.
The author acknowledges that this part is more for entertainment purposes and provides predictions from notable individuals, such as Cathie Wood, Jack Dorsey, and Michael Saylor, regarding Bitcoin’s future price. However, the author believes that these predictions should be considered in the context of inflation.
The author explains that unlike Bitcoin, the U.S. dollar is an inflationary asset, and the inflation rate has been increasing. Due to inflation, the purchasing power of the dollar is diminishing over time. Taking inflation into account, the author suggests that Bitcoin’s current price of $69,400 (as of April 2024) could reach approximately $200,000 by 2050.
The author concludes by mentioning the possibility of the U.S. dollar losing its status as the world reserve currency, which could lead to hyperinflation and astronomical pricing for Bitcoin. However, this is highly unlikely.
In summary, the article discusses various valuation models for Bitcoin, including the Stock-to-Flow Ratio and the power-law corridor of growth. It also highlights the potential impact of inflation on Bitcoin’s price and mentions predictions from notable individuals. The author hopes that these valuation models will help readers better understand, invest in, and hold Bitcoin.