Translation:
Sorting 7 Bitcoin valuation models to analyze the potential value of Bitcoin under each model. This article is sourced from Web3Brand and compiled and translated by BlockBeats.
(Background information:
Bitcoin falls to $67,000, how do analysts see the next step?
)
(Supplement:
Bitcoin’s sharp rise warns of “big liquidation,” analysts: high open interest contracts and high risk lending rates on the entire network
)
Table of Contents:
Valuation Model 1: Gold Substitute
Valuation Model 2: Global Asset Substitute
Valuation Model 3: Stock-to-Flow Model
Scarcity is necessary for a commodity to better store value and serve as a currency
Scarcity can be quantified through the Stock-to-Flow Ratio
Final modeling
Valuation Model 4: Long-Term Power Law Prediction
Valuation Model 5: Celebrity Endorsement
Valuation Model 6: U.S. Dollar Inflation Model
Valuation Model 7: Based on Production Costs
Would you be willing to hold Bitcoin for 4 years until it reaches $500,000? In the past 10 years, it has already increased 90 times. Where will it go in the next 10 or even 20 years?
The price of Bitcoin recently reached $69,000 again. With a series of factors such as the release of positive news about cryptocurrencies in the U.S. election and the easing of the U.S. economy, it has become a consensus for more and more people that it will break through the $100,000 mark next year.
Source:
https://coinmarketcap.com/currencies/bitcoin/
MicroStrategy CEO Michael Saylor stated in a recent interview that Bitcoin will reach $13 million in 2045, which means that the average annual growth rate in the next 21 years will reach 29%.
As a long-term investor/hodler, I am more curious about Bitcoin’s valuation models. What will be the long-term trend of its value? So I have collected and organized 7 common valuation models, providing theoretical support for the behavior of “HODL”.
If you are also interested in Bitcoin valuation models, then enjoy!
Valuation Model 1: Gold Substitute
Valuation Model 2: Global Asset Substitute
Valuation Model 3: Stock-to-Flow Model
Valuation Model 4: Long-Term Power Law Prediction
Valuation Model 5: Celebrity Endorsement
Valuation Model 6: U.S. Dollar Inflation Model
Valuation Model 7: Based on Production Costs
This is also the most common Bitcoin valuation method. With a fixed quantity and resistance to inflation, Bitcoin has become a new medium for “value storage”, similar to gold in the old world.
Gold, as a long-term “value storage” target, is accepted worldwide and has become a cross-border asset. Bitcoin, as digital gold, has gained consensus among many young people, new money, and wealthy asset systems, starting with the geek community (the approval of BTC ETF this year further strengthens this consensus), and has replaced some of the “value storage” functions previously borne by gold.
Source:
https://companiesmarketcap.com/assets-by-market-cap/
As of now (October 18, 2024), the market value of gold is $18.3 trillion, and the price of Bitcoin is $67,819, with a market value of $1.34 trillion (the amount mined is close to 19.76 million, close to the total of 21 million), ranking tenth in the world’s assets, accounting for 7.3% of gold. I have listed the corresponding prices of Bitcoin when this proportion rises:
10%: $92,523
15%: $138,784
33%: $305,325
100%: $925,226 (reaching the same market value as gold)
10% is the historical high point of the Bitcoin/Gold market value ratio, and if the penetration rate further increases, it may reach 15%. In other words, the high point of this round may be around $140,000.
Why the inclusion of 33% in this proportion? Because the value of gold is not entirely for “value storage,” in fact, more than half of it is used for decorative purposes, and 10% is used for industrial purposes, with only 1/3 used for investment and reserves. Because Bitcoin has no decorative and industrial use, if there are no other variables, 33% may be the maximum ratio, and Bitcoin may reach around $300,000 at this ratio.
If one day Bitcoin reaches the same market value as gold, the price will reach nearly $1 million.
Source: Bitcoin’s Golden Age
Is $1 million the end of Bitcoin?
Of course not.
In addition to gold, we also have currency and real estate as forms of value storage. The following estimates come from the famous book “Holding Bitcoin” by Jiushen (estimated at 2018, can be downloaded here):
The total market value of global gold is $7.7 trillion, the total amount of broad money is $90.4 trillion, and real estate is $217 trillion.
Broad money includes cash, demand and time deposits, securities company customer margin, etc. Except for cash (8%) used for circulation, the rest is used for value storage.
The main use of real estate should still be for residence and use, but there is definitely a considerable proportion used for value storage. If it were not for Bitcoin, I would probably use most of my funds to buy houses. Since there is no proportion to check, we temporarily assume that 20% of real estate is used for value storage (this proportion does not affect the order of magnitude of the final result).
So, how big is the total global value storage market? 7.7 + 90.4 × 92% + 217 × 20% = $134 trillion.
The total supply of Bitcoin is only 21 million, with about 3 million permanently lost. Considering the relative advantage of Bitcoin’s 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. After 10 years, the total volume will be 1.8 times the current volume, and after 20 years, it will be 3.2 times the current volume. Therefore, assuming that 20 years later (in 2038), the value storage function of Bitcoin is widely recognized, the price should be $24 million or 160 million RMB.
Of course, this is under the assumption that Bitcoin occupies 100% of the global value storage market share. If it reaches 10% market share, the price of Bitcoin in 2038 will reach $2.4 million or 16 million RMB.
For the most radical version of 160 million RMB, Jiushen also created linear and exponential price models:
“Linear growth” (which is not actually linear in mathematics): the same multiple of growth in each cycle
“Exponential decline”: high multiple of growth at the beginning, low multiple of growth later
The above predictions were made in 2018. By the end of 2021, the price of Bitcoin did reach $64,863, equivalent to 450,000 RMB, which is quite close to Jiushen’s prediction. Will this cycle reach the 3.4 million RMB / $500,000 mark in the table?
In addition, Jiushen’s another major contribution is the invention of the famous Jiushen Accumulation Index, which guides periodic investment and buying at low prices (I personally use this indicator):
ahr 999 = (Bitcoin price / 200-day cost of periodic investment) * (Bitcoin price / exponential growth valuation)
Exponential growth valuation = 10 ^ [5.84 * log (age of the coin) – 17.01]
Age of the coin = number of days from the current date to the creation block of Bitcoin (January 3, 2009)
According to backtesting of the indicator, when the ahr 999 index is below 0.45, it may be suitable for buying at low prices. In the range of 0.45 to 1.2, it may be suitable for periodic investment in BTC. If it is higher than this range, it may not be a good time for periodic investment.
Source: Stock-to-Flow Model for Bitcoin
In 2019, Twitter user PlanB added considerations of “scarcity” based on the “gold substitute” and proposed the Stock-to-Flow Model.
We use three parts to explain this model:
Only commodities with scarcity can be better used for value storage and serve as a currency
Scarcity can be quantified through the Stock-to-Flow Ratio
Final modeling
This point should not require much explanation. I will directly quote the words of Nick Szabo, a pioneer in the cryptopunk field, from the article:
“What do antiques, time, and gold have in common? They are all expensive, either because of their original cost or because of their unpredictable history. It is difficult to forge this kind of expense. Precious metals and collectibles have an unforgeable scarcity due to their expensive manufacturing costs.
This once provided value to the currency, and its value largely independent of any trusted third party. Therefore, if there is a protocol that can establish unforgeable expensive bits online, and minimally rely on trusted third parties, and store, transfer, and verify them with a similar minimum trust security, that would be very good. It would be 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 several times.
Note: The translation may contain errors and inaccuracies. No punctuation mark is added at the end.Saifedean Ammous introduced the concept of Stock-to-Flow Ratio to quantify scarcity. “For any consumable, doubling production will deplete existing inventory, causing prices to plummet and harm holders. For gold, a doubling of production due to price surges would only increase reserves by 3%. It is the sustained low supply rate of gold that has allowed it to maintain its role as a currency throughout human history. Gold’s high Stock-to-Flow Ratio makes it the least elastic commodity in terms of supply. In 2017, the existing stock of Bitcoin was about 25 times that of newly generated Bitcoin in 2017. This is still less than half the ratio of gold, but by around 2022, Bitcoin’s Stock-to-Flow Ratio will surpass that of gold.”
The Stock-to-Flow Ratio (SF) is calculated as stock divided by flow, where stock represents the current total quantity of the commodity and flow represents the annual supply of the commodity. The author provides the Stock-to-Flow Ratios for several commodities as of March 23, 2019.
“Gold has the highest SF of 62, requiring 62 years of production to obtain the current gold reserves. Silver ranks second with an SF of 22. This high SF makes them monetary commodities. Palladium, platinum, and all other commodities have SF values almost greater than 1. Existing inventory is usually equal to or lower than annual production, making production a crucial factor. It is difficult for commodities to achieve higher SF because once they are hoarded, prices rise, production increases, and prices fall again. It is difficult to escape this trap. Bitcoin’s current stock is 17.5 million units, with an annual supply of 700,000 units, resulting in an SF of 25. This makes Bitcoin a monetary commodity similar to silver and gold. Bitcoin’s market value at the current price of $4,000 is $70 billion. From the above table, it can be seen that SF is directly proportional to the value of these commodities. Bitcoin’s halving will continuously increase its SF, thereby increasing its value.
Indeed, according to Biteye’s statistics, “Bitcoin’s Stock-to-Flow Ratio is approximately 120.1 (August 2024), while gold’s Stock-to-Flow Ratio is approximately 59.7 (2023).” Gold’s Stock-to-Flow Ratio hasn’t changed much since 2019, but Bitcoin’s has increased more than three times, currently being twice that of gold. In other words, Bitcoin’s scarcity is about twice that of gold. How will this be reflected in Bitcoin’s value prediction?
PlanB’s model assumes that scarcity, represented by SF, directly drives Bitcoin’s value. Skipping the intermediate derivation process, the final formula is: Market value = exp (14.6) * SF ^ 3.3 (a power-law distribution).
It can be seen that the Stock-to-Flow model proposed by PlanB in March 2019 accurately predicted prices until May 2021, after which the predicted prices were much higher than the actual prices. “According to this model, the current predicted price is $250,000.” However, the author did accurately predict that the price would reach $55,000 with a market value of over $1 trillion within one to two years after the halving in May 2020.
The author also predicted where all the funds required for Bitcoin’s market value of $1 trillion would come from: “My answer: silver, gold, negative interest rate countries (Europe, Japan, and soon the United States), predatory governments (Venezuela, China, Iran, Turkey, etc.), billionaires and millionaires hedging against quantitative easing (QE), and institutional investors discovering the best-performing asset of the past 10 years.”
PlanB still maintains his prediction that after the halving in 2024, Bitcoin will reach $500,000 by 2028, with a market value exceeding $10 trillion.
Will this happen? Let’s wait and see.
After PlanB proposed the Stock-to-Flow model in 2019, many people also noticed the time power-law distribution of Bitcoin prices, including Harold Christopher Burger, an AI expert who previously studied for a Ph.D. at the Max Planck Institute.
In September 2019, he published an article titled “Bitcoin’s natural long-term power-law corridor of growth,” making long-term predictions for the market tops and bottoms of Bitcoin prices. According to his model, the price of Bitcoin will reach $100,000 per Bitcoin between 2021 and 2028. After 2028, the price will never be lower than $100,000. Additionally, the price will reach $1 million per Bitcoin between 2028 and 2037, and after 2037, the price will never be lower than $1 million.
This model is easy to understand. When comparing the price and time distribution of Bitcoin, taking the logarithm of both the y-axis (price) and x-axis (time) allows for linear regression. By slightly lowering the fitted line (without changing the slope), we obtain the support line for Bitcoin prices. By performing linear regression only on the three highest points in 2011, 2013, and 2017, we obtain the power-law line for market tops. Bitcoin prices fluctuate between these two power-law lines: the lower support line and the upper line defined by three market tops.
If we consider price predictions in 10-year increments, we must take into account the impact of US dollar inflation, which leads to significant increases in asset prices. “Unlike Bitcoin, the US dollar is an inflationary asset, with the Federal Reserve targeting 2% inflation. However, we are not robots, and complete control of the economy is challenging. Central banks often print more currency by lowering interest rates to stimulate economic growth, especially in difficult times like pandemics. This is why we have seen a surge in inflation, with an inflation rate reaching 8%, the highest in about 40 years.”
Due to the continuous rise in inflation, the purchasing power of the US dollar is weakening. For example, $100 in 1984 is now worth over $300.
Considering this factor alone, Bitcoin’s current price of $69,400 (April 2024) could reach approximately $200,000 by 2050, without considering other fundamental factors. In fact, if the US dollar loses its status as the world reserve currency, which may be due to current structural geopolitical changes, it could lead to hyperinflation (although the probability is extremely low) and price Bitcoin at astronomical levels.
This part is more entertaining and serves as a record of the era. Here are three representative predictions:
ARK Invest CEO Cathie Wood predicted in January 2024 that Bitcoin would reach $1.5 million by 2030.
Former Twitter CEO Jack Dorsey predicted in May 2024 that Bitcoin would surpass $1 million by the end of 2030.
MicroStrategy’s Michael Saylor stated in a recent interview that Bitcoin would reach $13 million in 2045, with an average annual growth rate of 29% over the next 21 years.
Although these predictions are entertaining, the cryptocurrency market still exhibits strong reflexivity, and celebrity endorsements can indeed affect regional prices at certain times.
If we predict prices in 10-year increments, we must consider the impact of US dollar inflation, which leads to significant increases in asset prices.
Unlike Bitcoin, the US dollar is an inflationary asset, with the Federal Reserve targeting 2% inflation. However, we are not robots, and complete control of the economy is challenging. Central banks often print more currency by lowering interest rates to stimulate economic growth, especially in difficult times like pandemics. This is why we have seen a surge in inflation, with an inflation rate reaching 8%, the highest in about 40 years.
Due to the continuous rise in inflation, the purchasing power of the US dollar is weakening. For example, $100 in 1984 is now worth over $300.
Considering this factor alone, Bitcoin’s current price of $69,400 (April 2024) could reach approximately $200,000 by 2050, without considering other fundamental factors. In fact, if the US dollar loses its status as the world reserve currency, which may be due to current structural geopolitical changes, it could lead to hyperinflation (although the probability is extremely low) and price Bitcoin at astronomical levels.
This part is more entertaining and serves as a record of the era. Here are three representative predictions:
ARK Invest CEO Cathie Wood predicted in January 2024 that Bitcoin would reach $1.5 million by 2030.
Former Twitter CEO Jack Dorsey predicted in May 2024 that Bitcoin would surpass $1 million by the end of 2030.
MicroStrategy’s Michael Saylor stated in a recent interview that Bitcoin would reach $13 million in 2045, with an average annual growth rate of 29% over the next 21 years.
Although these predictions are entertaining, the cryptocurrency market still exhibits strong reflexivity, and celebrity endorsements can indeed affect regional prices at certain times.
I must admit that this part is more for entertainment purposes, and it serves as a record of the era. For those interested in the details, I have provided links within each section for further exploration. If there are any other important valuation methods that I have missed, please feel free to comment and supplement.
I hope these valuation models can help you better understand, invest in, and hold Bitcoin.