Translation:
Title: Analyzing 7 Bitcoin Valuation Models and Their Potential Value
Summary:
Bitcoin fell to $67,000, and analysts are predicting the next steps.
Background:
Bitcoin’s sharp rise warns of a potential “great liquidation” due to high-risk borrowing and open contracts.
Table of Contents:
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
Valuation Model 5: Celebrity Endorsements
Valuation Model 6: US Dollar Inflation Model
Valuation Model 7: Production Cost-based Model
Would you hold Bitcoin for 4 years until it reaches $500,000? In the past 10 years, it has increased by 90 times. Where will it go in the next 10 or even 20 years?
With positive factors such as the US election and economic stimulus, the price of Bitcoin surpassed $69,000, and breaking $100,000 next year is becoming a consensus.
MicroStrategy CEO Michael Saylor predicts 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 curious about Bitcoin’s valuation models and its long-term trends. Therefore, I have collected and organized 7 common valuation models to provide theoretical support for the behavior of “HODL.”
If you are interested in Bitcoin valuation models, 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
Valuation Model 5: Celebrity Endorsements
Valuation Model 6: US Dollar Inflation Model
Valuation Model 7: Production Cost-based Model
This is the most common Bitcoin valuation method. Bitcoin’s fixed supply and resistance to inflation make it a new medium for storing value, similar to gold in the traditional world.
Gold, as a long-term store of value, is widely accepted worldwide and is a cross-border asset. Bitcoin, as digital gold, has gained consensus among many young people, new money, and wealthy individuals (the approval of BTC ETF this year further strengthens this consensus), replacing some of the value storage functions previously held by gold.
As of now (October 18, 2024), the market value of gold is $18.3 trillion, while Bitcoin’s unit price is $67,819, with a market value of $1.34 trillion (close to the total supply of 21 million as 19.76 million have already been mined), ranking as the 10th 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 peak of the Bitcoin/gold market value ratio, and if the penetration rate continues to increase, it may reach 15%. Therefore, the peak of this round may be around $140,000.
Why include the 33% ratio? Because gold’s value is not entirely for “value storage”; in fact, over half of it is used for decoration, and only 10% is used for industrial purposes. Since Bitcoin does not have decorative and industrial uses, in the absence of other variables, 33% may be the maximum ratio. In this case, Bitcoin would reach around $300,000.
If one day Bitcoin reaches the same market value as gold, its unit price would be nearly $1 million.
Is $1 million the end of Bitcoin? Of course not. Aside from gold, we also have currency and real estate as forms of value storage. The following estimates are from the famous cryptocurrency analyst Jiushen’s “Holding Bitcoin” (estimated in 2018, available for download):
The total market value of 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 margin. Cash (8%) is used for circulation, while the rest is used for storage.
Real estate is mainly used for residence and use, but a significant proportion is certainly used for storage. If it weren’t for Bitcoin, I would have used most of my funds to buy a house. Assuming that 20% of real estate is used for storage (this ratio does not affect the final result), the total global storage market would be $134 trillion.
Bitcoin’s total supply is only 21 million, with around 3 million permanently lost. Considering Bitcoin’s relative advantage in storage compared to gold, currency, and real estate, each Bitcoin would reach $7.5 million.
$134 trillion / 18 million = $7.5 million
Is that all? Of course not.
The total global wealth is growing at a rate of 6% per year. In 10 years, the total amount will be 1.8 times the current amount, and in 20 years, it will be 3.2 times. Therefore, assuming that Bitcoin’s storage function is widely recognized in 20 years (2038), its price should be $24 million ($160 million RMB).
Of course, this is assuming Bitcoin occupies 100% of the global storage market. If it reaches 10% market share, the price of Bitcoin in 2038 would reach $2.4 million ($16 million RMB).
For the most aggressive scenario of 160 million RMB, Jiushen also created linear and exponential price models:
“Linear Growth” (which is not mathematically linear): the multiple of growth is the same for each cycle.
“Exponential Decay”: high growth multiples at the beginning, lower multiples 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 Jiushen’s prediction. Will this cycle reach the 3.4 million RMB / $500,000 mentioned in the table?
In addition, Jiushen’s other major contribution is the invention of the famous Jiushen Accumulation Index, which guides dollar-cost averaging and buying the dip (I personally use this indicator):
ahr 999 = (Bitcoin price / 200-day cost of dollar-cost 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 of the Bitcoin Genesis Block (January 3, 2009)
Based on backtesting the indicator, when the ahr 999 value is below 0.45, it may be a good time to buy the dip, while in the range of 0.45 to 1.2, it may be suitable for dollar-cost averaging Bitcoin. If it exceeds this range, it may not be a good time for dollar-cost averaging.
In 2019, Twitter user PlanB proposed the Stock to Flow Model based on the “gold substitute” concept, adding considerations for scarcity. The model has three parts:
1. Goods with scarcity are better for storing value and can serve as currency.
2. Scarcity can be quantified by the Stock-to-Flow Ratio.
3. Final modeling.
This does not require much explanation. I will quote the words of Nick Szabo, a pioneer in the cypherpunk movement, from the article:
“What do antiques, time, and gold have in common? They are all expensive, either because of their original cost or their unpredictable history. It is difficult to forge this kind of expensive asset. Precious metals and collectibles have an unforgeable scarcity due to their expensive manufacturing 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 with minimal reliance on trusted third parties and provide minimum trust secure storage, transfer, and testing, that would be great. It would be Bitgold.”
By the way, Nick Szabo, due to his professional background and writing style, has been suspected to be Satoshi Nakamoto, but he has denied it multiple times.
Bitcoin scholarsSaifedean Ammous further introduced the concept of Stock-to-Flow Ratio to quantify scarcity. “For any consumable, doubling the production will make the existing inventory pale in comparison, causing prices to plummet and harm holders. For gold, the price increase resulting from doubling the annual production is also insignificant, only increasing reserves by 3%. It is the continuous 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 reserve of Bitcoin was about 25 times the newly generated Bitcoin of 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.”
Stock-to-Flow Ratio (SF) = stock / flow
Stock refers to the total quantity of the current commodity
Flow refers to the annual supply volume 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 inventory is usually equal to or lower than the annual production, making production a crucial factor. It is difficult for commodities to achieve higher SFs because once someone hoards them, prices will rise, production will increase, and prices will 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, just like silver and gold. Bitcoin’s market value at the current price ($4,000) is $700 billion.
From the table above, it can be seen that SF is proportional to the value of such commodities. The halving of Bitcoin will lead to a continuous increase in Bitcoin’s SF, thereby increasing its value.
Indeed, according to Biteye’s statistics:
“The Stock-to-Flow Ratio of Bitcoin is: 19,750,000 / 164,359 ≈ 120.1 (August 2024)
The Stock-to-Flow Ratio of gold is: 209,000 / 3,500 ≈ 59.7 (2023)”
The Stock-to-Flow Ratio of gold has not changed much from 2019, but Bitcoin has increased by more than three times and is currently double that of gold. In other words, Bitcoin’s scarcity is approximately twice that of gold, which will 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 this Stock-to-Flow model has been accurate in its predictions from March 23, 2019, up until May 2021. However, there have been instances where 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 accurately predict that within one to two years after the halving in May 2020, the price would reach $55,000, and Bitcoin’s market value would exceed $1 trillion (March 9, 2021), which brought Plan B significant recognition.
He also predicted where all the funds necessary for Bitcoin to reach a market value of $1 trillion would come from:
“My answer: silver, gold, negative interest rate countries (Europe, Japan, upcoming US), 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.”
Plan B himself still maintains his prediction:
“After the halving in 2024, Bitcoin will reach $500,000 by 2028, and its market value will exceed $10 trillion.”
Will this happen? Let’s wait and see.
After Plan B proposed the Stock-to-Flow model in 2019, many people also noticed the time power-law distribution of Bitcoin’s price, including Harold Christopher Burger. He earned his Ph.D. at the Max Planck Institute and is currently an artificial intelligence expert.
He published an article titled “Bitcoin’s natural long-term power-law corridor of growth” on September 3, 2019, predicting the long-term market tops and bottoms of Bitcoin’s price:
Bitcoin’s price will reach $100,000 per Bitcoin between 2021 and 2028. After 2028, the price will never fall below $100,000.
Bitcoin’s price will reach $1 million per Bitcoin between 2028 and 2037. After 2037, the price will never fall below $1 million.
This model is straightforward to understand:
By plotting the price-time distribution of Bitcoin, taking the logarithm of both the y-axis (price) and x-axis (time), it can be fitted with linear regression.
Shifting the fitted line slightly downwards (without changing the slope), we get the support line for Bitcoin’s price.
By performing linear regression only on the three highest points obtained in 2011, 2013, and 2017, we obtained a power-law line for market tops.
Bitcoin’s price fluctuates between these two power-law lines: the lower support line and the upper line defined by the three market tops.
If we consider the prediction 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’s inflation target at 2%. However, we are not robots, and fully controlling the economy is challenging. Central banks often print more currency by lowering interest rates to stimulate economic growth, especially during difficult times like a pandemic. This is why we see a surge in inflation, with the annual inflation rate reaching as high as 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 worth over $300 today.
Considering only this factor, Bitcoin’s current price of $69,400 (April 2024) could reach approximately $200,000 by 2050, without considering other fundamental factors. (I believe many celebrity predictions also take into account inflationary factors)
In fact, if the US dollar loses its status as the world reserve currency, which could be due to current structural geopolitical changes, it could lead to hyperinflation (although the likelihood is extremely low), and Bitcoin could be priced astronomically.
This is also easy to understand. For miners, Bitcoin is a business that generates cash flow and profits. The shutdown of mining machines often marks a bottom price for a period of time and can be used as a guide for buying at a low price (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 further exploration. If there are any other important valuation methods that I have missed, please feel free to comment.
I hope these valuation models can help you better understand, invest in, and hold Bitcoin.