Are you willing to hold Bitcoin for 4 years to $500,000? Over the past 10 years, it has already risen 90 times. Where will it go in the next 10 years, or even 20 years?
The Bitcoin price has recently stood at $69,000 again. With the continuous release of crypto-friendly news from 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 stronger and stronger.
Source: https://coinmarketcap.com/currencies/bitcoin/
In a recent interview, MicroStrategy CEO Michael Saylor said 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 am more curious about the valuation models of Bitcoin? What will the long-term trend 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 One: Gold Substitute
- Valuation Model Two: Global Asset Substitute
- Valuation Model Three: Stock to Flow Model
- Valuation Model Four: Long Term Power Law Forecasting
- Valuation Model Five: Celebrity Shilling
- Valuation Model Six: US Dollar Inflation Model
- Valuation Model Seven: Based on Production Cost
Valuation Model One: 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 "store of value" 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.
Source: https://companiesmarketcap.com/assets-by-market-cap/
The current (2024.10.18) market capitalization of gold is $18.3 trillion, with the price of Bitcoin at $67,819 and a market capitalization of $1.34 trillion (the current mined supply is 19.76 million, very close to the total supply of 21 million), ranking it the 10th largest asset globally, accounting for 7.3% of gold. I have listed the corresponding Bitcoin prices as this ratio increases:
- 10%: $92,523
- 15%: $138,784
- 33%: $305,325
- 100%: $925,226 (fully 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 increases further, it can reach 15%, which means that 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 may reach around $300,000.
If one day Bitcoin reaches the same market value as gold, the price per coin will reach close to $1 million.
Source: The Golden Age of Bitcoin
Valuation Model Two: Global Asset Substitutes
Is $1 million the endpoint for Bitcoin?
The answer is of course negative.
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 time point is 2018, can be downloaded here):
- The total market value 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, time and demand deposits, client margin at securities firms, etc. Except for cash (8% share) used for circulation, the rest are used for value storage.
- The main purpose of real estate should still be 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 have put most of my funds into buying a house. 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 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 the total Bitcoin supply is only 21 million, with about 3 million permanently lost. Considering the absolute advantage 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 a rate of 6% per year, and in 10 years the total will be 1.8 times the current amount, and in 20 years it will be 3.2 times the current amount. Therefore, assuming that in 20 years (2038) the value storage function of Bitcoin is widely recognized, its price should be $24 million, RMB 160 million.
Of course, this is the case where Bitcoin occupies 100% of the global total value storage market. If it reaches a 10% market share, the price of Bitcoin in 2038 will reach $2.4 million, RMB 16 million.
For the most aggressive [RMB 160 million] version, Nine Gods also did linear and exponential price models:
- "Linear growth" (mathematically not really linear): 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 the price of Bitcoin did reach $64,863 at the end of 2021, about RMB 450,000, which is quite close to Nine Gods' forecast. Will this cycle reach the 3.4 million RMB / $500,000 in the table?
In addition, Nine Gods' another major contribution is the invention of the famous Nine Gods Hoarding Index, which guides dollar-cost averaging and bottom fishing (I use this indicator myself):
ahr 999 = (Bitcoin price / 200-day dollar-cost average cost) * (Bitcoin price / growth model valuation)
- Growth model valuation = 10 ^[5.84 * log (coin age) - 17.01]
- Coin age = the number of days from the Bitcoin Genesis Block (January 3, 2009) to the current date
According to the indicator backtest:
- When the ahr 999 indicator data is below 0.45, it may be suitable for bottom fishing
- In the range of 0.45 and 1.2, it may be suitable for dollar-cost averaging BTC
- Above this range, it may not be a good time for dollar-cost averaging
Valuation Model Three: Stock to Flow Model
In 2019, Twitter user PlanB, based on the "gold substitute", added consideration of "scarcity" and proposed the Stock to Flow Model.
We will explain this model in 3 parts:
- Commodities with scarcity can better serve as a store of value and play a monetary role
- Scarcity can be quantified through the Stock-to-Flow Ratio
- Final modeling
Commodities with scarcity can better serve as a store of value and play a monetary role
This point should not require much explanation, directly quoting the words of the cypherpunk pioneer Nick Szabo:
Here is the English translation:"What do antiques, time, and gold have in common? They are all expensive, either because of their original cost or because their history is unpredictable, making them difficult to counterfeit. Precious metals and collectibles have an uncounterfeit scarcity due to their expensive manufacturing costs.
This once provided value for currency, with its value largely independent of any trusted third party. Therefore, if there were a way to establish online an uncounterfeit expensive bit, with minimal reliance on a trusted third party, and with similar minimal trust security storage, transfer, and verification, that would be very good. 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.
Scarcity can be quantified through 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 plummet, harming holders. For gold, a price spike causing annual production to double is negligible, only increasing reserves by 3%. It is 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 least supply elastic commodity. In 2017, the existing Bitcoin reserve was about 25 times the amount of new Bitcoin produced that year. This is still less than half the gold ratio, but by around 2022, Bitcoin's Stock-to-Flow ratio will exceed gold's."
Stock-to-Flow Ratio (SF) = stock /flow
- Stock is the total current quantity of the commodity
- Flow is the annual production of the commodity
The author provides 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 above 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 Bitcoin stock is 17.5 million, with an annual supply of 700,000 = SF 25. This makes Bitcoin, like silver and gold, a monetary commodity. Bitcoin's market value at the current price ($4,000) is $70 billion.
The table also shows that SF is proportional to the value of these commodities, and the Bitcoin halving will continuously increase Bitcoin's SF, thereby increasing its value.
Indeed, according to Biteye's statistics,
"Bitcoin'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 Bitcoin has increased by more than 3 times, and is currently about 2 times that of gold! That is, Bitcoin's scarcity is about twice that of gold, how will this be reflected in Bitcoin's value forecasts?
Final Modeling
PlanB's model assumes that the 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)
https://charts.bitbo.io/stock-to-flow/
As can be seen, this Stock-to-Flow model was quite accurate in predicting until May 2021, and then the predicted price became far higher than the actual price.
"According to this model, the current predicted price is $250,000."
However, the author did correctly predict that in the one to two years after the May 2020 halving, the price would reach $55,000 and the Bitcoin market cap would exceed $1 trillion (3/9/2021), which made Plan B very famous on Twitter.
And he also predicted where all the funds needed for a $1 trillion Bitcoin market cap would come from:
"My answer: silver, gold, negative interest rate countries (Europe, Japan, US soon), predatory governments (Venezuela, China, Iran, Turkey), billionaires and millionaires hedging quantitative easing (QE), and institutional investors discovering the best performing asset of the past 10 years."
Plan B himself still insists on his prediction:
"After the 2024 halving, by 2028 Bitcoin will reach $500,000, 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 Bitcoin prices over time, including Harold Christopher Burger. He has a PhD from the Max Planck Institute and is now an AI expert.
On 9/3/2019, he published an article titled "Bitcoin's natural long-term power-law corridor of growth", making long-term forecasts of Bitcoin's market tops and bottoms:
- Bitcoin price will reach $100,000 per Bitcoin between 2021 and 2028, and will never be below $100,000 after 2028
- Bitcoin price will reach $1 million per Bitcoin between 2028 and 2037, and will never be below $1 million after 2037
This model is very easy to understand:
- The distribution of for Bitcoin, when the logarithms of both the y-axis (price) and the x-axis (time) are taken, can actually be fitted by linear regression
- By slightly moving the above fitting line downward (without changing the slope), we will obtain the support line of the Bitcoin price
- By performing linear regression only on the three highest points obtained in 2011, 2013, and 2017, we then obtain a power law line defining the market top
- The Bitcoin price fluctuates between the two power law lines: the lower support line and the upper line defined by the three market highs
Source: https://hcburger.com/blog/powerlaw/
The strength of this model lies in the fact that the data for the 5 years after its proposal (2019.9-2024.9) are still within its prediction range, suggesting that the $100,000 mark may not be far away.
Valuation Model Five: Celebrity Predictions
I must admit that this part is more entertaining, and is more of a record of the times. Here are 3 relatively representative ones:
ARK Invest CEO Cathie Wood predicted in January 2024 that Bitcoin 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 said 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.
However, although it is entertainment, the crypto market still has strong reflexivity, and celebrity predictions can indeed affect regional prices at certain special times.
Valuation Model Six: US Dollar Inflation Model
Source: https://www.tastycrypto.com/blog/bitcoin-price-predictions/
If we are to make price predictions in 10-year units, we must consider the impact of US dollar inflation, which has led to a significant rise 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 money by lowering interest rates to stimulate economic growth, especially in difficult times like the pandemic. This is why we are seeing soaring inflation, reaching an annual rate of around 8%, the highest in about 40 years."
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 worth over $300 today.
Considering this factor alone, the current Bitcoin price of $69,400 (2024.4) could reach around $200,000 by 2050, without considering other fundamental factors.
(I believe that many celebrities' predictions also take into account 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, this could lead to hyperinflation (although the probability is extremely low), which could price Bitcoin into astronomical figures.
Valuation Model Seven: Based on Production Cost
This is also very easy to understand. For miners, Bitcoin is a business that generates cash flow and profits, and the shutdown price of mining machines often marks a period of bottom price, which can be used to guide buying the dips (but it is difficult to use it to guide the upward movement of prices).
Well, these are the 7 valuation models for Bitcoin. 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 Bitcoin.
