Let's go through a simple exercise. This is just to run through a way we might assess the value of cryptocurrencies like bitcoin.
In the following framework, we will see that the bitcoin derives its value mainly as a store of value and as a currency of the informal market.
Let me first credit a book and a podcast as resources for a valuation framework:
What do people think bitcoin can be used for at the moment?
1) store of value
3) Informal economy
Let's take speculation out of the picture. We can assume whatever the price of btc is minus the intrinsic value, is the speculative value.
Also, in terms of time-frame, many valuations uses projections for future value and discount it back. However, I am attempting to measure the current value based on current utility (something we don't really have good data to measure).
First let's assume that the 21 million supply is priced in.
1) Store of value (like gold)
Gold Market Cap: $2.4 Trillion
BTC Penetration: 5%
BTC value as storage (total): 120,000,000,000 (gold market cap x BTC penetration)
BTC Value-as-storage: $5,714 (total BTC value as storage / total supply)
The utility of bitcoin is additive, so let's estimate the value of bitcoin as a method of remittance.
2) International Remittance
Remittance Market in 2017: $600B (estimate)
BTC velocity: 5 (using US M1 velocity)
BTC-Remit-Value (total): 6B (Remittance market x pentration / velocity)
BTC-Remit-Value: $286 (total BTC-remit value / total supply)
3) Informal Economy:
World GDP: $77.99T
if Informal Economy is 10% it is: $7.8T
BTC velocity: 3 (lower than remmittance, because part of this economy is for wealth holding).
BTC-Informal-Value (Total): $26B (Informal economy * BTC-penetration)
BTC-informal-value: $1238.10 (total informal value / total supply)
Adding these together we get: BTC value = $7238.10.
Assumptions and projections:
- BTC velocity = 5 for remittance (based on USD M1 velocity)
- Size of gold market = $2.4T
- Penetration in gold and remittance are both 5% (this might be a bit high)
- Size of remittance market = $600B
- Size of informal economy is 10% of formal economy. This might be a gross underestimation based on the available stats (see sources below).
- Because its commercial application is so insignificant, we assume bitcoin is not used in commerce.
- A key realization is that bitcoin's value could potentially be derived from the informal economy and secondly from bitcoin being used as a store of value.
- Remittance is a rapidly growing market so even though bitcoins value is relatively small as a p2p remittance channel, this value can grow significantly.
- This again is just a simple framework to build a model on top of.
- I know there are a lot of factors missing, which I would love to hear about in the comments below.
BTC/USD reached new lows on the year during the 2/2 session as it dipped below 8K briefly.
For 2018 I think 7K-12K is a "fair" range. Personally I would be looking to add more exposure if price slides to 7K.
USD M1 Money Supply Velocity:
Federal Reserve St. Louis
Valuation and General Assessment:
Cryptoassets by Chris Burniske and Jack Tatar
Podcasts by Trace Mayers