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The way I value bitcoin is to take the fully diluted market cap (21 million * $850 ~= $18 billion) and apply a money velocity which I assumed to be similar to U
by tpeng 13y ago
The way I value bitcoin is to take the fully diluted market cap (21 million * $850 ~= $18 billion) and apply a money velocity which I assumed to be similar to US M2 velocity of 1.6 ($18 billion * 1.6 ~= $28.5 billion). Since global ecommerce transactions are about $1 trillion / yr this implies that bitcoin should penetrate 2.85% of ecommerce. Big assumption here is that bitcoin does not work for real-world transactions as the confirmation time is > 15 min. This may be oversimplified because a lot of real-world transactions don't need to be real time. I'm also excluding time value effects which you can insert back in if you like.
From the data I have seen, the bitcoin real economy could be orders of magnitude smaller than that implied by the current price, although there is no way to know precisely how large it is. This is including "illegal" transactions (I'm not sure why sam is discounting drug transactions, unless he means to imply that these will be shutdown. It does make sense to exclude gambling transactions as they are extremely high velocity).
Note that sam's point about merchants immediately converting BTC back to USD serves to increase the money velocity (perhaps by >10x). This would mean that BTC is pricing in a real economy even larger than $28.5 billion. Based on current BTC-denominated real transactions, fair value of BTC is at most only a few dollars.
- im3w1l 13y agoI think much of BTC's valuation come from expectations that money velocity and market penetration will increase. EDIT: Sorry I meant to say the velocity will decrease.
- tpeng 13y agoA higher money velocity => lower BTC/USD, but yes, the current price implies a huge future growth of the bitcoin economy. This is what sam is saying and I agree. I happen to think that we will not see that growth/adoption, but that is a different question.
- im3w1l 13y agoOops, yeah, I meant the other way around.
- tpeng 13y agoThere's no obvious reason why BTC velocity should go lower than USD velocity. If anything, its electronic nature and potential for fast settlement times should indicate a much higher velocity than USD M2.
- im3w1l 13y ago>Note that sam's point about merchants immediately converting BTC back to USD serves to increase the money velocity (perhaps by >10x). If this changed, it could at least get closer to the velocity of usd.
- foobarqux 13y agoI don't understand what you are calculating but it's circular in any case: You can't use the current price of bitcoin to derive a value.
- tpeng 13y agoPrice-implied expectations http://www.amazon.com/Expectations-Investing-Reading-Prices-Returns/dp/159139127X http://www.amazon.com/Expectations-Investing-Reading-Prices-...
- foobarqux 13y agoI understand what you are saying now but I'm not convinced by the argument: It does not seem plausible that transaction volume will be affected by value of the medium of exchange. Can you show your reasoning applies to other conventional currencies? Specifically that the transaction volume changes in direct proportion to some numeraire, say USD? (That book is about DCF and bitcoin and other currencies don't give off cash flows).
- tpeng 13y agoWe could debate what the velocity of bitcoin is/will be, but the relationship between velocity, money supply, and transaction volume is definitional. http://en.wikipedia.org/wiki/Velocity_of_money http://en.wikipedia.org/wiki/Velocity_of_money
- foobarqux 13y agoThe definition of velocity is not at issue, the relationship between "price" and transaction volume is. If tomorrow the US gov decreed that every $1 of USD will immediately be exchanged for $2 of USDX you wouldn't expect, in theory, for the USDX transaction volume, denominated in USD, to change. Put another way, I fail to see how the BTC/USD exchange rate is related to BTC transaction volume except for tangential reasons like sentiment.
- 13y ago