Author: starzq (X: @starzqeth)
Would you be willing to hold Bitcoin for 4 years until it reaches $500,000? It has already increased 90-fold in the past 10 years. Where will it go in the next 10 or even 20 years?
The Bitcoin price has recently risen above $69,000 again. With the continuous release of crypto-friendly policies in the US election and the US economy's quantitative easing, the consensus that Bitcoin will break through the $100,000 mark next year is becoming increasingly common.
https://coinmarketcap.com/currencies/bitcoin/
MicroStrategy CEO Michael Saylor stated in a recent interview that Bitcoin will reach $13 million by 2045, which means an average annual growth rate of 29% over the next 21 years.
As a long-term investor/Hodler, I'm more curious about the valuation models for Bitcoin. What will the long-term trend of its value be? So I have collected and organized 7 common valuation models, which also provide theoretical support for the 'HODL' behavior.
If you are also interested in Bitcoin's 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 Forecast
Valuation Model 5: Celebrity Shilling
Valuation Model 6: US Dollar Inflation Model
Valuation Model 7: Based on Production Cost
Valuation Model 1: Gold Substitute
This is also the most common Bitcoin valuation method. Bitcoin has a fixed supply and is resistant to inflation, becoming a new medium for 'value storage', with gold being the corresponding physical asset 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 some consensus in the asset systems of many young people, new money, and the wealthy (the approval of the BTC ETF this year has further strengthened this consensus), replacing some of the 'value storage' function previously undertaken by gold.
https://companiesmarketcap.com/assets-by-market-cap/
Currently (2024.10.18), the market cap of gold is $18.3 trillion, and the Bitcoin price is $67,819, with a market cap of $1.34 trillion (the current amount mined is 197.6 million, very close to the total of 210 million), ranking 10th among global assets, accounting for 7.3% of gold. I have listed the corresponding Bitcoin prices as this ratio rises:
10%: $92,523
15%: $138,784
33%: $305,325
100%: $925,226 (fully reaching the same market cap as gold)
10% is the historical high point of the [Bitcoin/Gold] market cap ratio, and if the penetration rate increases further, it can reach 15%, which means the peak of this cycle may be around $140,000.
The reason for putting out the 33% ratio is that the value of gold is not entirely for 'value storage', in fact, more than half is for decorative purposes, 10% is for industrial use, and only 1/3 is for investment + reserves. Since Bitcoin has no decorative and industrial uses, if there are no other variables, 33% may be the maximum ratio, and at this ratio, Bitcoin will reach around $300,000.
If one day Bitcoin reaches the same market cap as gold, the price will reach close to $1 million.
Source: The Golden Age of Bitcoin
Valuation Model 2: Global Asset Substitute
Is $1 million the endpoint for Bitcoin?
The answer is of course No.
In addition to gold, the forms we use to store value include currency and real estate. The following estimates are from the famous Nine Gods' "Hoarding Bitcoin" (estimated in 2018, can be downloaded here):
The total market cap of global gold is $7.7 trillion, the total broad money supply is $90.4 trillion, and real estate is $217 trillion.
Broad money includes cash, term and demand deposits, client margins at securities firms, etc. Except for cash (8% share) used for circulation, the rest is for value storage.
Real estate is mainly for residence and use, but there must also be a considerable proportion used for value storage. If it weren't for Bitcoin, I should also put most of my funds into buying houses. Since there is no proportion available, 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 global total value storage market? $7.7 + $90.4 × 92% + $217 × 20% = $134 trillion.
Total global gold, currency and real estate (modified from http://money.visualcapitalist.com/)
And there are only 21 million Bitcoins, with about 3 million permanently lost. Considering the absolute advantages of Bitcoin's value storage over gold, currency and real estate, each Bitcoin will rise to $7.5 million.
$134 trillion / 18 million = $7.5 million
Is that it? Of course not.
The total global wealth is growing at 6% per year, 1.8 times the current amount in 10 years, and 3.2 times in 20 years. Therefore, assuming that in 20 years (2038) Bitcoin's value storage function is widely recognized, its price should be $24 million, 16 million RMB.
Of course, this is the case where Bitcoin occupies 100% of the global value storage market. If it reaches a 10% market share, the Bitcoin price in 2038 will reach $2.4 million, 16 million RMB.
For the most aggressive [16 million RMB] version, Nine Gods also did linear and exponential price models:
"Linear growth" (actually not linear mathematically): the growth multiple is the same in each cycle;
"Exponential decay": the growth multiple is high at first and low later.
Bitcoin price forecasts under two growth models, unit: RMB
The above forecast was made in 2018, and by the end of 2021, Bitcoin's price did reach $64,863, about 450,000 RMB, quite close to Nine Gods' prediction. Will this cycle reach the 3.4 million RMB / $500,000 in the table?
Btw, Nine Gods' another major contribution is the invention of the famous Nine Gods Hoarding Index, which guides dollar cost averaging and buying the dips (I use this indicator myself):
ahr 999 = (Bitcoin price/200-day DCA cost) * (Bitcoin price/Growth Valuation)
• Growth Valuation = 10^[ 5.84 * log(Coin Age) - 17.01 ]
• Coin Age = Days since the Bitcoin Genesis Block (January 3, 2009)
According to the backtesting of the indicator:
When the ahr 999 indicator data is below 0.45, it may be suitable to buy the dips;
In the 0.45 to 1.2 range, it may be suitable to dollar cost average BTC.
Prices above this range indicate that this may not be a good time for systematic investment.
Valuation Model Three: Stock to Flow Model
In 2019, Twitter user PlanB based on the "gold alternative", added consideration of "scarcity" and proposed the Stock to Flow Model.
We will explain this model in 3 parts:
Scarce commodities can better serve as a store of value and play the role of money;
Scarcity can be quantified by the Stock-to-Flow Ratio;
Final modeling
1. Scarce commodities can better serve as a store of value and play the role of money
This point does not need much explanation, directly quoting the words of the crypto pioneer Nick Szabo:
What do antiques, time, and gold have in common? They are all very expensive, either because of their original cost or because of their unpredictable history, and are difficult to counterfeit. Precious metals and collectibles have an uncounterfeit scarcity due to their expensive manufacturing costs.
This once provided value for money, its value being largely independent of any trusted third party. So if there were a protocol whereby scarce, expensive bits could be created online with minimal third-party trust, and then securely stored, transferred, and verified in a similar minimally-trusting way, that would be very nice. Bit gold.
btw, Nick Szabo is suspected to be Satoshi Nakamoto due to his professional background and writing style, but he has denied it multiple times.
2. Scarcity can be quantified by the Stock-to-Flow Ratio
Bitcoin scholar Saifedean Ammous further introduced the concept of the Stock-to-Flow Ratio to quantify scarcity
For any consumable, doubling production will make the existing stock pale in comparison, causing prices to crash and harming holders.
For gold, a price spike causing annual production to double is negligible, only increasing reserves by 3%.
It is precisely gold's persistently low supply rate that has maintained its monetary role throughout human history.
Gold's high【Stock-to-Flow Ratio】makes it the commodity with the lowest supply elasticity.
In 2017, the existing stock of Bit was about 25 times the new Bit produced that year. This is still less than half the gold ratio, but by around 2022, Bit's【Stock-to-Flow Ratio】will exceed gold.
Stock-to-Flow Ratio (SF) = stock / flow
Stock is the total current quantity of the commodity
Flow is the annual supply of the commodity
The author gives the Stock-to-Flow Ratios of various commodities at the time (2019.3.23):
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 an SF of almost all greater than 1. The existing stock is usually equal to or less than the annual production, making production a very important factor.
Commodities can hardly achieve a higher SF, because as soon as someone hoards them, the price goes up, production also goes up, and the price goes down again. It's hard to escape this trap.
The current stock of Bit is 17.5 million, with an annual supply of 700,000 = SF 25. This makes Bit a monetary commodity like silver and gold. Bit has a market value of $700 billion at the current price ($4,000).
The table above also shows that SF is proportional to the value of these commodities, and the Bit halving will continuously increase Bit's SF, thereby increasing its value.
Indeed, according to Biteye's statistics,
Bit's Stock-to-Flow Ratio is: 19750000 / 164359 ≈ 120.1 (August 2024)
Gold's Stock-to-Flow Ratio is: 209000 / 3500 ≈ 59.7 (2023)
The gold Stock-to-Flow Ratio has not changed much from 2019, but Bit has increased by more than 3 times, and is currently about 2 times that of gold! That is, Bit's scarcity is about twice that of gold, how will this be reflected in Bit's value forecast?
3. Final modeling
PlanB's model assumes that the scarcity represented by SF directly drives the value of Bit.
Skipping the intermediate 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 this Stock-to-Flow model was quite accurate in predicting from 2019.3.23 to 2021.5, and then the predicted price was far higher than the actual price.
According to this model, the current predicted price is $250,000 😂
However, the author did predict that in 1-2 years after the 2020 May halving, the price would reach $55,000, with a Bit market cap exceeding $1 trillion (2021.3.9), which also made Plan B famous on Twitter.
And he also predicted where all the funds needed for a $1 trillion Bit market cap would come from:
My answer: silver, gold, negative interest rate countries (Europe, Japan, the US soon), predatory governments (Venezuela, China, Iran, Turkey, etc.), billionaires and millionaires discovering the best performing asset of the past 10 years, and institutional investors.
Plan B himself still stands by his forecast
After the 2024 halving, Bit will reach $500,000 by 2028, with a market cap of over $10 trillion.
Will it happen? Let's wait and see.
Valuation Model Four: Long Term Power Law Forecast
After PlanB proposed the Stock-to-Flow model in 2019, many people also noticed the power law distribution of Bit prices over time, including Harold Christopher Burger. He has a PhD from the Max Planck Institute and is now an AI expert.
On 2019.9.3, he published an article titled Bitcoin's natural long-term power-law corridor of growth, making long-term forecasts of Bit price market tops and bottoms:
Bit price will reach $100,000 per Bit between 2021 and 2028, and after 2028 the price will never be below $100,000.
Bit price will reach $1 million per Bit between 2028 and 2037, and after 2037 the price will never be below $1 million.
This model is very easy to understand:
For the【price-time】distribution of Bit, when the logarithm of the y-axis (price) and the x-axis (time) are taken, it can actually be fitted by linear regression;
Moving the above fitting line slightly downward (but without changing the slope), we will get the support line of Bit price;
Performing linear regression only on the three highest points reached in 2011, 2013 and 2017, we then obtain a power law line defining the market top;
Bit prices fluctuate between the two power law lines: the lower support line and the upper line defined by the three market highs.
- The power of this model lies in the fact that the data for the next 5 years (September 2019 - September 2024) still falls within its prediction range, so it seems that the $100,000 mark is not too far away.
Valuation Model Five: Celebrity Shilling
I must admit that this part is more entertaining, and is more of a record of the times. Here are 3 relatively representative examples:
ARK Invest CEO Cathie Wood predicted in January 2024 that BTC will grow to $1.5 million by 2030.
Former Twitter CEO Jack Dorsey predicted in May 2024 that it will break the $1 million mark by the end of 2030.
MicroStrategy's Michael Saylor stated in a recent interview that BTC will reach $13 million by 2045, which means an average annual growth rate of 29% over the next 21 years.
However, although this is entertainment, the crypto market still has strong reflexivity, and celebrity shilling can indeed affect local prices at certain special times.
Valuation Model Six: US Dollar Inflation Model
source:https://www.tastycrypto.com/blog/bitcoin-price-predictions/
If we make price predictions in 10-year increments, we must consider the impact of US dollar inflation, which has led to a significant rise in asset prices.
Unlike BTC, 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 money by lowering interest rates to stimulate economic growth, especially during difficult times like the pandemic. This is why we are seeing surging inflation, reaching an annual rate of 8%, the highest in about 40 years.
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 worth over $300 today.
Considering this factor alone, the current BTC price of $69,400 (April 2024) could reach around $200,000 by 2050, without considering other fundamental factors.
(I believe that many celebrities' predictions also take inflation into account.)
In fact, if the US dollar loses its status as the world's reserve currency, this may be due to structural geopolitical changes, which could lead to hyperinflation (although the probability is extremely low), which would price BTC at astronomical figures.
Valuation Model Seven: Based on Production Cost
This is also easy to understand. For miners, BTC is a business that generates cash flow and profits, and the miner shutdown price often marks a bottom for a period, which can be used to guide buy the dips (but it is difficult to use to guide price increases).
Okay, these are the 7 BTC valuation models. For those interested in the details, I have included links in each section for you to dive deeper. If you know of other important valuation methods that I have missed, please feel free to leave a comment to supplement them.
I hope these valuation models can help you better understand, invest in, and hold BTC.
