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Ultimately, the million (or rather, trillion) dollar question on Bitcoin is whether there is an existing metric by which this new asset class can be accurately valued. Current attempts at valuation fall under five major categories, as economists at DBS Bank note.

See:

  • Bitcoin: Three possible roadblocks to widespread adoption – DBS Bank

  • Three opportunities that Bitcoin brings – DBS Bank

Bitcoin’s valuation frameworks

“Disruptable markets. Analysts review the potential for disruption of various currency and commodity markets and estimate how much market share Bitcoin will take from fiat (currently c.USD100t of global money supply) or gold (currently valued as a c.USD9t market). For example, estimating that Bitcoin would eventually gain the prominence of gold with a back-of-envelope calculation would see an estimated price of (USD9t ÷ c.18m BTC in existence = USD500k per BTC).”

“Costs of production. This is a supply-side consideration applicable to traditional commodities where the equilibrium price of Bitcoin is equivalent to the cost of the last miner to join in producing (in this case, the cost of electricity consumed in mining Bitcoin).”  

“Equation of Exchange (MV = PQ). An old macroeconomic equation to value money using the supply of money (M), velocity of money in a given time period (V), the price level (P) and the transaction volume in a given time period (T). With a relatively static M for Bitcoin, estimates of V and T would lead to an approximation for its price P.”

“Metcalfe’s law. This was originally applied to telecommunications networks where valuations are proportional to the square of users in the system (n2). For Bitcoin, this implies that a liner increase in adoption would lead to an exponential increase in valuations.  

“Stock-to-flow models. The stock-to-flow ratio is used to evaluate the current stock of a commodity against the flow of new production. High ratios are indicative of store-of-value commodities, as production is stored more as a monetary hedge than consumed in industrial application.”

 

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