Translation:
Organizing 7 Valuation Models for Bitcoin, Analyzing the Potential Value of Bitcoin under the Same Model. This article is sourced from Web3Brand and compiled and translated by BlockBeats.
(Previous summary: Bitcoin fell to $67,000, how do analysts view the next step?)
(Background supplement: Bitcoin surges warning “the great liquidation is coming”, analyst: the entire network’s open positions, high-risk borrowing rates are too high)
Table of Contents:
Valuation Model 1: Substitute for Gold
Valuation Model 2: Substitute for Global Assets
Valuation Model 3: Stock to Flow Model
Scarcity is necessary for a commodity to better store value and serve as currency
Scarcity can be quantified through the Stock-to-Flow Ratio
Final modeling
Valuation Model 4: Long Term Power Law Predictive Method
Valuation Model 5: Celebrity Endorsements
Valuation Model 6: US 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 continuous release of positive news about cryptocurrencies in the US election and the economic stimulus measures, it has become a growing consensus that it will break the $100,000 mark next year.
MicroStrategy CEO Michael Saylor stated in a recent interview that Bitcoin will 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 more curious about the valuation models for Bitcoin. What will be the long-term trend in value? So I have collected and organized 7 common valuation models to provide theoretical support for the “HODL” behavior.
If you are also interested in valuation models for Bitcoin, 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 Predictive Method
Valuation Model 5: Celebrity Endorsements
Valuation Model 6: US Dollar Inflation Model
Valuation Model 7: Based on Production Costs
This is also the most common valuation method for Bitcoin. With a constant supply and resistance to inflation, Bitcoin has become a new medium for “value storage” and is the digital version of gold.
Gold, as a long-term “value storage” target, is widely accepted worldwide and has become a cross-border asset. Bitcoin, as digital gold, started with a geek community and has gained some consensus among many young people, new money, and wealthy asset systems (the approval of BTC ETF this year further strengthens the consensus), replacing some of the “value storage” functions previously borne by gold.
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 number of mined Bitcoins is close to the total supply of 21 million). It ranks as the tenth largest asset in the world, accounting for 7.3% of gold. Below, 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 point of the Bitcoin/gold market value ratio. If the penetration rate increases further, it may reach 15%. In other words, the high point of this round may be around $140,000.
Why is the 33% proportion mentioned? Because the value of gold is not entirely for “value storage,” in fact, more than half of it is used for decoration purposes, and only 1/3 is used for investment and reserves. Since Bitcoin does not have decorative and industrial uses, in the absence of other variables, 33% may be the maximum proportion, and at this proportion, Bitcoin will reach around $300,000.
If one day Bitcoin reaches the same market value as gold, the price will reach nearly $1 million.
Is $1 million the end point for Bitcoin? Of course not.
Apart from gold, we also have currency and real estate as forms of value storage. The following estimates come from the famous Nine Gods’ “Hodl Bitcoin” (estimated in 2018, can be downloaded 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, demand and time deposits, and securities company customer margins. Except for cash (8% for circulation), the rest is used for value storage.
The primary use of real estate should still be for living and usage, but there is definitely a significant proportion used for value storage. If it weren’t for Bitcoin, I would probably use most of my funds to buy houses. Since there is no proportion to check, let’s 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 + 90.4 × 92% + 217 × 20% = $134 trillion.
The total supply of Bitcoin is only 21 million, with approximately 3 million permanently lost. Considering the relative advantage of Bitcoin in storing value 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 will be 1.8 times the current amount, and after 20 years, it will be 3.2 times. Therefore, assuming that 20 years later (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 share. If it reaches a 10% market share, the price of Bitcoin in 2038 will reach $2.4 million or 16 million RMB.
For the most aggressive version of 160 million RMB, Nine Gods also created linear and exponential price models:
“Linear Growth” (mathematically not linear): the multiplier for each period of growth is the same
“Exponential Decay”: high growth multiplier at the beginning, and low growth multiplier later
The above predictions were made in 2018, and by the end of 2021, the price of Bitcoin had reached $64,863, which is approximately 450,000 RMB, which is quite close to Nine Gods’ prediction. Will this cycle reach the 3.4 million RMB / $500,000 mark in the table?
In addition, Nine Gods’ other major contribution is the invention of the famous Nine Gods’ Hodl Index, which guides regular investments and buying opportunities (I use this indicator myself):
ahr 999 = (Bitcoin price / 200-day average cost)*(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)
According to backtesting the indicator, it may be suitable to buy at low points when the ahr 999 index is below 0.45, and it may be suitable to invest in BTC when it is within the range of 0.45 and 1.2. If it is above this range, it may not be a good time to invest.
In 2019, Twitter user PlanB added consideration of “scarcity” to the “substitute for gold” model and proposed the Stock to Flow Model.
We use three parts to explain this model:
1. Goods with scarcity are better for storing value and serving as currency.
2. Scarcity can be quantified through the Stock-to-Flow Ratio.
3. Final modeling.
This point should not require much explanation. Let me quote Nick Szabo, a pioneer in the crypto community:
“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 type of expense. Precious metals and collectibles have an unforgeable scarcity due to their expensive production costs.
This has provided value to money, which is largely independent of any trusted third party. Therefore, if there is a protocol that can establish unforgeable expensive bits online and minimally depend on trusted third parties, and can securely store, transfer, and verify them with minimal trust, that would be very good. It would be bits of gold.”
By the way, Nick Szabo has been suspected of being Satoshi Nakamoto due to his professional background and writing style, but he has repeatedly denied it.
Bitcoin scholarSaifedean Ammous further introduced the concept of Stock-to-Flow Ratio to quantify scarcity. “For any consumable good, doubling production will lead to a relative surplus of existing stock, causing prices to plummet and harming holders. For gold, a price surge that doubles annual production is insignificant, as it would only increase reserves by 3%. It is the continuous low supply rate of gold that has allowed it to maintain its role as currency throughout human history. The high Stock-to-Flow Ratio of gold makes it the most inelastic commodity. In 2017, the existing supply of Bitcoin was about 25 times the newly generated Bitcoin. This is still less than half of the gold ratio, but by around 2022, the Stock-to-Flow Ratio of Bitcoin will surpass that of gold.”
Stock-to-Flow Ratio (SF) = stock / flow
Stock refers to the total quantity of the current commodity
Flow refers to the annual supply of the current commodity
The author provided the Stock-to-Flow Ratios of 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 SFs almost higher than 1. Existing stock is usually equal to or lower than annual production, making production a crucial factor. It is difficult for commodities to achieve higher SFs because once they are hoarded, prices rise, production increases, and prices fall again. It is challenging to escape this trap. Bitcoin’s current supply is 17.5 million coins, with an annual supply of 700,000 coins, resulting in an SF of 25. This makes Bitcoin belong to the category of monetary commodities, similar to silver and gold. Bitcoin’s market value at the current price ($4,000) is $700 billion. From the table above, it can also be seen that SF is directly proportional to the value of such commodities. The halving of Bitcoin will continuously increase its SF, thereby enhancing its value. Indeed, according to Biteye’s statistics, “Bitcoin’s SF is approximately 120.1 (August 2024), and gold’s SF is approximately 59.7 (2023).” The SF of gold has not changed significantly from 2019, but Bitcoin has increased by more than three times and is currently twice that of gold! In other words, Bitcoin’s scarcity is approximately 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 the value of Bitcoin. Skipping the derivation process, the final formula is: Market value = exp(14.6) * SF^3.3 (a power-law distribution)
https://charts.bitbo.io/stock-to-flow/
It can be seen that the Stock-to-Flow model proposed by PlanB in March 2019 was accurate in its predictions until May 2021, after which the predicted price was significantly higher than the actual price. “According to this model, the current predicted price is $250,000.” However, the author did predict that after the halving in May 2020, the price would reach $55,000 within one to two years, and Bitcoin’s market value would exceed $1 trillion (as of March 9, 2021), which made Plan B famous on Twitter. He also predicted that all the funds needed to reach a $1 trillion Bitcoin market value would come from silver, gold, negative interest rate countries (Europe, Japan, and the US soon), predatory governments (Venezuela, China, Iran, Turkey, etc.), billionaires and millionaires hedging against quantitative easing (QE), and institutional investors discovering the best-performing asset in the past 10 years. Plan B still insists on his prediction: “After the halving in 2024, Bitcoin will reach $500,000 by 2028, and the market value will exceed $10 trillion.”
Will it 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. He earned a PhD from the Max Planck Institute and is now an artificial intelligence expert. On September 3, 2019, he published an article titled “Bitcoin’s Natural Long-Term Power-Law Corridor of Growth,” which made long-term predictions for the market tops and bottoms of Bitcoin prices:
Bitcoin prices will reach $100,000 per Bitcoin between 2021 and 2028. After 2028, the price will never be lower than $100,000.
Bitcoin prices will reach $1 million per Bitcoin between 2028 and 2037. After 2037, the price will never be lower than $1 million.
This model is easy to understand: by examining the price-time distribution of Bitcoin, taking the logarithm of both the y-axis (price) and x-axis (time), we can fit it with linear regression. Moving the fitted line slightly downward (without changing the slope), we get the support line for Bitcoin prices. By performing linear regression on only the three highest points in 2011, 2013, and 2017, we obtain a 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 the three market tops.
Data source: https://hcburger.com/blog/powerlaw/
The strength of this model is that after it was proposed, the data for the next five years (2019.9-2024.9) remained within its predicted range, indicating that the $100,000 mark is not far away.
I must admit that 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 CEO Michael Saylor stated in a recent interview that Bitcoin would reach $13 million by 2045, with an average annual growth rate of 29% over the next 21 years.
Although these predictions are entertaining, the crypto market does have strong reflexivity, and celebrity endorsements can indeed affect regional prices at certain times.
Data source: https://www.tastycrypto.com/blog/bitcoin-price-predictions/
If we make price predictions in 10-year intervals, 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’s inflation target at 2%. However, we are not robots, and complete control of the economy is challenging. Central banks often print more money by lowering interest rates to stimulate economic growth, especially during difficult times like a pandemic. This is why we have seen a surge in inflation, with an annual inflation rate reaching 8%, the highest in about 40 years.”
Data source: https://www.macrotrends.net/global-metrics/countries/USA/united-states/inflation-rate-cpi
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, the current price of Bitcoin is $69,400 (April 2024), and it may reach around $200,000 by 2050, without considering other fundamental factors. (I believe many celebrity predictions also consider the factor of inflation)
In fact, if the US dollar loses its status as the world’s 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 is also easy to understand. For miners, Bitcoin is a business that generates cash flow and profits. Shutting down mining machines often marks a bottom price for a period of time and can be used as a guide for buying low (but it is difficult to guide price increases).
Well, these are the seven valuation models for Bitcoin. If you’re interested in the details, I have provided links within each section for you to deep-dive. If there are any important valuation methods that have been missed, please feel free to comment.
I hope these valuation models can help you better understand, invest in, and hold Bitcoin.
Data source: https://charts.bitbo.io/stock-to-flow/