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BoA Merrill Lynch publishes target price for Bitcoin: $1300

43 points by jackgavigan 13y ago

crntaylor 13y ago
Don't get too excited. The actual quotation is "Assuming Bitcoin becomes a major player in both e-commerce and money transfer *and* a significant store of value with a reputation close to silver, our fair value analysis implies a *maximum market capitalization* of Botcoin of $15bn (1 BTC = 1300 USD). This suggests that the 100 fold increase in Bitcoin prices this year is at risk of running ahead of its fundamentals." So if two questionably likely events both occur, BAML think that Bitcoin might have a maximum value of 1300 USD.
- scotty79 13y ago
  The assumptions they made are quite insane. To calculate how much value in bitcoins is required to facilitate online trades they fixated on proportion of total US households cash and deposits to their total expenditures. They assumed they will have amount of wealth in bitcoins that's in same proportion to 10% of their online expenditures. Then they extrapolated it to whole world. Do Americans actually have cash and deposits at all? I was under the impression that most of their household expenditures are either directly coming from their paycheck or are credit based. Not to mention that they "calculated" (how? they say that they divide 11trn by 0.7trn to get that) proportion to be 0.07 then they sliced it down to 0.04 because Americans have recently started saving money which is unusual. They also assumed that shops will convert bitcoins back to dollars immediately. When assessing bitcoins as a store of value they state bizarre things: "Furthermore, the reputation of gold as a unique and safe store of value has been growing for the past ten thousand years. It will take some time for Bitcoins to acquire that reputation. We don’t know how to quantify the value of gold’s reputation, but this reputation is probably the main reason that its value is 60 times that of silver." Personally I though that the reason gold is many times more expensive than silver is the fact that silver is vastly more abundant. So for me it sounds more like: "If two questionably likely events both occur, BAML think that Bitcoin might have a maximum value of 1300 USD. Unless of course it turns out that pigs actually can't fly, then it could go higher."
  - sanxiyn 13y ago
    Historically gold to silver ratio was around 15 -- Coinage Act of 1792 defines ratio to be exactly 15, for example. I don't think abundance of gold and silver changed much since then. So change from 15 to 60 indeed is based on the reputation of gold.
    - scotty79 13y ago
      Roughly there's 10 times as much silver mined as gold. So you are right that 60 times is a bit high. 17.5 times is estimated proportion of those metals in earths crust (not sure if it takes into account gold and silver dissolved in oceanic waters. Whether the difference between the actual price of gold and the price that can be derived from fundamentals is a value of trust in gold or, as BAML puts it in case of bitcoin, speculation, is up to debate. Pointless I think because speculation is enabled by trust.
salient 13y ago
They will look like complete fools when Bitcoin goes way beyond their "maximum" value $1,300. This seems like a very shallow analysis, done by someone who's new to Bitcoin, and within a single day.
exo762 13y ago
BoA Merill Lynch current price is 231% of it's target price. Best regards, Bitcoin.
- Kequc 13y ago
  So if you buy in now then Bitcoin becomes a major player in both e-commerce and money transfer. Then becomes a significant store of value with the reputation of silver. And for some reason this estimate is off by a factor of two then you could theoretically double your money by whatever time that all this happens. All you need to do is risk it all.
  - exo762 13y ago
    Unless you've bought in year ago. Also, you don't have to treat Bitcoin as a mean of storing value. You can use it as a way to transfer money over great distances.
zmitri 13y ago
In case HN wasn't completely aware, most bank "research papers" are content marketing designed to try and get you to buy products from their desk. They are often very biased and should be analyzed with caution. I don't know much about bitcoin, but I've seen enough "research" from desks to know the analysis is very slanted - hence the page of disclaimers at the end.
- Tenoke 13y ago
  I can believe that, having seen this report.
- fnordfnordfnord 13y ago
  Exactly this. Be wary. Given the liquidity of the BTC/USD, the amount of capital needed to substantially move prices is trivially small for an investment bank, or even for many individuals.
- justincormack 13y ago
  The disclaimers are because they used to be overt fraud. Now they are mostly paid for by "soft commission" and are supposed to be "independent research" for people who will not pay for research with their own money but will spend customers money on it.
Tenoke 13y ago
Why the double submission pdf - the report has already been submitted and has been in the top for a while - https://news.ycombinator.com/item?id=6859832 https://news.ycombinator.com/item?id=6859832 Yeah, this is direct link to the pdf but does this really justify a second submission (and upvoting to top)?
Aqueous 13y ago
They are way understating the growth potential of a currency that has unlimited growth potential because it knows no borders, and serves as a new technological platform.
tpeng 13y ago
My thoughts on the BAML report: The calculation of BTC's value as a currency uses the correct methodology, which I had previously outlined in this post: https://news.ycombinator.com/item?id=6829518 https://news.ycombinator.com/item?id=6829518 BAML uses M1 (cash + checking accounts) instead of M2 (M1 + savings accounts + time deposits). Using M2 is a lot more aggressive but it also captures the "store of value" value. M2 is really a best case scenario for BTC owners, as it assumes that users will hold their savings in BTC. BAML is fine to be conservative with this. BAML's inclusion of Bitcoin's value as a money transmission business is absurd. While transfer fees accrue to the shareholders of Western Union, the transfer fees of BTC transfers do not accrue to BTC owners. In fact, the transfer fees are quite small to zero and they accrue to the miners. So if BTC does take share from WU, etc., it only shrinks the pie. Some posters on HN and elsewhere are saying that BAML is "too conservative", but they have not posted their own numbers and assumptions. The reality is that BTC's current real economy is nowhere near the size needed to justify the current BTC price, and enormous growth of this economy is already baked into the price. While it's not impossible that this growth can occur, there are real reasons to believe that it won't.
wellboy 13y ago
Lol, right now almost no one is using Bitcoin for actual purchases, because it's not a viable currency yet. Right now it's just an investment opportunity until Bitcoin has found its price. Then not an investment opportunity anymore and becomes a viable currency. That point is reached when 1 Bitcoin is worth between $100,000-$500,000, because then it has replaced all banks, all currencies and taken up around 10% of the world gross product. I give it 3 years.
- JoeAltmaier 13y ago
  "Value" of an investment during a bubble is not a useful number. We can write all the imaginary numbers on the wall we like; only backed currencies reflect real wealth. Because in the end our standard of living doesn't change by fiddling with the numbers; only investing in real infrastructure, energy mining and manufacturing, makes any difference in the real world. Fiddling with numbers just bids up the price of those things, a zero-sum game.
tim333 13y ago
Stockbrokers always give a target price about 20-100% more than the current price for any asset. It's a marketing thing. They make commision or get investment fees whether the estimates are wrong or right.
- UnFleshedOne 13y ago
  Not quite correct. They downgrade below current levels occasionally too.
deleted 13y ago
[deleted]
Havoc 13y ago
I've always found the notion of a "target price" somewhat entertaining. Its market forces at work - baring Goldman schenanigens - nobody is targeting anything.
drakaal 13y ago
Author apparently didn't read the article from Merril Lynch https://www.documentcloud.org/documents/885843-banks-research-report-on-bitcoin.html https://www.documentcloud.org/documents/885843-banks-researc... What it actually says is that if BitCoin is to be viable it has to be used as Currency exchanged against the price of the local currency at the time of transaction. This makes sense. You wouldn't want to buy gas based on the high or the low of the day. So you can't say that Gas costs 1/300th of a Coin, and leave that as the price all day because right now that could be Cheap at $900 a coin and Expensive at $1300 a coin. It also says that there has to be enough people using it for it to not have huge price swings based on Volatility. This also makes sense. We don't buy things with gold often because knowing the value at a given moment is hard. And since we don't trade in raw gold we trade in coins, typically those coins each have values, a Krugerand and a Panda don't have quite the same value per ounce and the difference fluctuates per day. So unless we can get to a point that BTC is only changing fractional percentages per day, people are going to always be changing coins to local currency. All of this summarized in one sentence: BoA ML thinks that BitCoin will become a Merchant Services System that works on the instantaneous exchange rate with the local currency, and based on the market share they believe it could have and the total number of coins in circulation the cap will be $1300. (yeah it is a long compound sentence)
headgasket 13y ago
These analysts are not to be trusted. The stock market is a 0 sum game, your loss is someone else's gain. Analysts and brokers are out to get you at worst, or part of the noise at best. the market is an information/disinformation battle. From a dev mindset it might be hard to grasp, in our world people don't gain anything from worsening someone else's prospect. In fact open source can be actually seen as the opposite.

43 points by jackgavigan 13y ago

Don't get too excited. The actual quotation is "Assuming Bitcoin becomes a major player in both e-commerce and money transfer *and* a significant store of value with a reputation close to silver, our fair value analysis implies a *maximum market capitalization* of Botcoin of $15bn (1 BTC = 1300 USD). This suggests that the 100 fold increase in Bitcoin prices this year is at risk of running ahead of its fundamentals." So if two questionably likely events both occur, BAML think that Bitcoin might have a maximum value of 1300 USD.

scotty79 13y ago
The assumptions they made are quite insane. To calculate how much value in bitcoins is required to facilitate online trades they fixated on proportion of total US households cash and deposits to their total expenditures. They assumed they will have amount of wealth in bitcoins that's in same proportion to 10% of their online expenditures. Then they extrapolated it to whole world. Do Americans actually have cash and deposits at all? I was under the impression that most of their household expenditures are either directly coming from their paycheck or are credit based. Not to mention that they "calculated" (how? they say that they divide 11trn by 0.7trn to get that) proportion to be 0.07 then they sliced it down to 0.04 because Americans have recently started saving money which is unusual. They also assumed that shops will convert bitcoins back to dollars immediately. When assessing bitcoins as a store of value they state bizarre things: "Furthermore, the reputation of gold as a unique and safe store of value has been growing for the past ten thousand years. It will take some time for Bitcoins to acquire that reputation. We don’t know how to quantify the value of gold’s reputation, but this reputation is probably the main reason that its value is 60 times that of silver." Personally I though that the reason gold is many times more expensive than silver is the fact that silver is vastly more abundant. So for me it sounds more like: "If two questionably likely events both occur, BAML think that Bitcoin might have a maximum value of 1300 USD. Unless of course it turns out that pigs actually can't fly, then it could go higher."
- sanxiyn 13y ago
  Historically gold to silver ratio was around 15 -- Coinage Act of 1792 defines ratio to be exactly 15, for example. I don't think abundance of gold and silver changed much since then. So change from 15 to 60 indeed is based on the reputation of gold.
  - scotty79 13y ago
    Roughly there's 10 times as much silver mined as gold. So you are right that 60 times is a bit high. 17.5 times is estimated proportion of those metals in earths crust (not sure if it takes into account gold and silver dissolved in oceanic waters. Whether the difference between the actual price of gold and the price that can be derived from fundamentals is a value of trust in gold or, as BAML puts it in case of bitcoin, speculation, is up to debate. Pointless I think because speculation is enabled by trust.

salient 13y ago

They will look like complete fools when Bitcoin goes way beyond their "maximum" value $1,300. This seems like a very shallow analysis, done by someone who's new to Bitcoin, and within a single day.

exo762 13y ago

BoA Merill Lynch current price is 231% of it's target price. Best regards, Bitcoin.

Kequc 13y ago
So if you buy in now then Bitcoin becomes a major player in both e-commerce and money transfer. Then becomes a significant store of value with the reputation of silver. And for some reason this estimate is off by a factor of two then you could theoretically double your money by whatever time that all this happens. All you need to do is risk it all.
- exo762 13y ago
  Unless you've bought in year ago. Also, you don't have to treat Bitcoin as a mean of storing value. You can use it as a way to transfer money over great distances.

zmitri 13y ago

In case HN wasn't completely aware, most bank "research papers" are content marketing designed to try and get you to buy products from their desk. They are often very biased and should be analyzed with caution. I don't know much about bitcoin, but I've seen enough "research" from desks to know the analysis is very slanted - hence the page of disclaimers at the end.

Tenoke 13y ago
I can believe that, having seen this report.
fnordfnordfnord 13y ago
Exactly this. Be wary. Given the liquidity of the BTC/USD, the amount of capital needed to substantially move prices is trivially small for an investment bank, or even for many individuals.
justincormack 13y ago
The disclaimers are because they used to be overt fraud. Now they are mostly paid for by "soft commission" and are supposed to be "independent research" for people who will not pay for research with their own money but will spend customers money on it.

Tenoke 13y ago

Why the double submission pdf - the report has already been submitted and has been in the top for a while - https://news.ycombinator.com/item?id=6859832 https://news.ycombinator.com/item?id=6859832 Yeah, this is direct link to the pdf but does this really justify a second submission (and upvoting to top)?

Aqueous 13y ago

They are way understating the growth potential of a currency that has unlimited growth potential because it knows no borders, and serves as a new technological platform.

tpeng 13y ago

My thoughts on the BAML report: The calculation of BTC's value as a currency uses the correct methodology, which I had previously outlined in this post: https://news.ycombinator.com/item?id=6829518 https://news.ycombinator.com/item?id=6829518 BAML uses M1 (cash + checking accounts) instead of M2 (M1 + savings accounts + time deposits). Using M2 is a lot more aggressive but it also captures the "store of value" value. M2 is really a best case scenario for BTC owners, as it assumes that users will hold their savings in BTC. BAML is fine to be conservative with this. BAML's inclusion of Bitcoin's value as a money transmission business is absurd. While transfer fees accrue to the shareholders of Western Union, the transfer fees of BTC transfers do not accrue to BTC owners. In fact, the transfer fees are quite small to zero and they accrue to the miners. So if BTC does take share from WU, etc., it only shrinks the pie. Some posters on HN and elsewhere are saying that BAML is "too conservative", but they have not posted their own numbers and assumptions. The reality is that BTC's current real economy is nowhere near the size needed to justify the current BTC price, and enormous growth of this economy is already baked into the price. While it's not impossible that this growth can occur, there are real reasons to believe that it won't.

wellboy 13y ago

Lol, right now almost no one is using Bitcoin for actual purchases, because it's not a viable currency yet. Right now it's just an investment opportunity until Bitcoin has found its price. Then not an investment opportunity anymore and becomes a viable currency. That point is reached when 1 Bitcoin is worth between $100,000-$500,000, because then it has replaced all banks, all currencies and taken up around 10% of the world gross product. I give it 3 years.

JoeAltmaier 13y ago
"Value" of an investment during a bubble is not a useful number. We can write all the imaginary numbers on the wall we like; only backed currencies reflect real wealth. Because in the end our standard of living doesn't change by fiddling with the numbers; only investing in real infrastructure, energy mining and manufacturing, makes any difference in the real world. Fiddling with numbers just bids up the price of those things, a zero-sum game.

tim333 13y ago

Stockbrokers always give a target price about 20-100% more than the current price for any asset. It's a marketing thing. They make commision or get investment fees whether the estimates are wrong or right.

UnFleshedOne 13y ago
Not quite correct. They downgrade below current levels occasionally too.

deleted 13y ago

[deleted]

Havoc 13y ago

I've always found the notion of a "target price" somewhat entertaining. Its market forces at work - baring Goldman schenanigens - nobody is targeting anything.

drakaal 13y ago

Author apparently didn't read the article from Merril Lynch https://www.documentcloud.org/documents/885843-banks-research-report-on-bitcoin.html https://www.documentcloud.org/documents/885843-banks-researc... What it actually says is that if BitCoin is to be viable it has to be used as Currency exchanged against the price of the local currency at the time of transaction. This makes sense. You wouldn't want to buy gas based on the high or the low of the day. So you can't say that Gas costs 1/300th of a Coin, and leave that as the price all day because right now that could be Cheap at $900 a coin and Expensive at $1300 a coin. It also says that there has to be enough people using it for it to not have huge price swings based on Volatility. This also makes sense. We don't buy things with gold often because knowing the value at a given moment is hard. And since we don't trade in raw gold we trade in coins, typically those coins each have values, a Krugerand and a Panda don't have quite the same value per ounce and the difference fluctuates per day. So unless we can get to a point that BTC is only changing fractional percentages per day, people are going to always be changing coins to local currency. All of this summarized in one sentence: BoA ML thinks that BitCoin will become a Merchant Services System that works on the instantaneous exchange rate with the local currency, and based on the market share they believe it could have and the total number of coins in circulation the cap will be $1300. (yeah it is a long compound sentence)

headgasket 13y ago

These analysts are not to be trusted. The stock market is a 0 sum game, your loss is someone else's gain. Analysts and brokers are out to get you at worst, or part of the noise at best. the market is an information/disinformation battle. From a dev mindset it might be hard to grasp, in our world people don't gain anything from worsening someone else's prospect. In fact open source can be actually seen as the opposite.