Bitcoin Valuation Models Survey

An enthusiast’s attempt to fathom a top

I was fortunate enough to start buying Bitcoin in the summer of 2016. Like many, I viewed investing in bitcoin as a 100% risky endeavor. I started with a modest position, and continued to dollar cost average throughout the 2017 bull run. I was unfortunate enough to naively hold most of the position throughout the crash.

Now we’re in 2020, and we seem to be repeating the cycle. In the meantime many analysts, chartists, and amateurs have developed valuation models. In 2016 and 2017 I don’t know if we had nearly the level of perceived sophistication that we have today, but I definitely feel like I have more signal than we had in the last cycle.

Prior to writing this article, I had a sense that most of these models converge fairly well at a price target for the top of this halving cycle, but I wanted to do a survey of valuation models and try to develop a summary. This is far from a rigorous analysis, but hopefully its a useful collection of data points.

I’m referencing all of the following work:

• PlanB: S2FX
• Dave the Wave: logarithmic growth curve
• Raoul Pal: chart porn (see Twitter)
• GD: market cap:money supply
• Michael Saylor: monopolistic network valuations (see numerous podcasts)
• GD: flow based model

PlanB’s stock to flow cross asset model projects a price of $288,000 during this halving cycle.

Dave the Wave’s logarithmic growth curve projects a price range of ~$20,000 to ~$120,000 during this halving cycle.

Raoul Pal’s charting projects the following:

• previous halving period overlay: ~$200,000
• regression on the log chart: ~$250,000

My own market cap:money supply model projects a price of ~$250,000 if Bitcoin’s market cap reaches half of the average gold:money supply ratio (derived with data from 1971 to 2020). The price target would be $525,000 if Bitcoin’s market cap:money supply ratio hits the historical average of gold (.51).

Michael Saylor has made some interesting analogies of Bitcoin to other networks, thinking in terms of network effects and dominance. His argument is that once a given network reaches a dominant state, it only grows in value and dominance. Saylor has said that Bitcoin is the network of money, such as Facebook is the social network, Google is the search network, Apple maintains a mobile application network (not exclusively, but does have significant network dominance), and Amazon has a dominant online retail network, and Amazon and Microsoft have dominant cloud computing networks.

Here are some valuations of these networks, naively using the market capitalization of the companies:

• Google: $1.2 trillion
• Apple: $1.9 trillion
• Amazon: $1.6 trillion
• Microsoft: $1.6 trillion

Let’s take a conservative estimate and say that the network of money (or the network of hard reserve assets) will be worth $1 trillion. That would project a price of 1 bitcoin to be ~$54,000. If you fully buy in to Saylor’s thesis that digitized versions of existing networks are orders of magnitude more valuable than their predecessors, then the digitized network of money may be orders of magnitude more valuable than the previous version, gold (current market cap ~$10 trillion). Just add however many zeros you want to $54,000 depending on how many orders of magnitude more valuable you think a digital network of money is relative to a physical network of money. If you say Bitcoin will be as valuable as the gold network, one bitcoin will be valued around $500,000. If you say Bitcoin is one order of magnitude more valuable than gold, you get a price projection of >$5 million per bitcoin.

The flow based projection I’ve done is inspired by the meme of “smart money is moving into bitcoin”. You hear rock star hedge fund managers say they are moving into bitcoin, and you see people discussing on Twitter how corporate treasuries, high net worth individuals, and others are moving into the space. I wanted to attempt to quantify how this could impact the price of bitcoin. Willy Woo also has a metric for how much the market cap gains for each $ invested. Using estimates of how much capital different investor segments manage, and making some educated guesses about how much of that capital would move into bitcoin, and then using the market cap gained for each $ invested metric, one can get a reasonable low and high range estimate for how the price of bitcoin will be influenced. My projections include the following investor segments:

• Corporate treasuries (S&P 500 companies with no net debt only)
• Hedge funds
• US pension funds
• Sovereign Wealth Funds
• non US pension funds
• US Fed reserve
• federal reserve banks

Notable omissions include non US corporate treasuries, non US central bank reserves, and non US commercial banks.

A very conservative projection suggests a price of $50,000 per bitcoin, a more aggressive projection suggests a price of over $5 million per bitcoin.

In conclusion, if Bitcoin turns out to be what many hope and think it will be, which is to say, the dominant digitized network of money, $100,000 seems like a conservative price target for the next 1–3 years, and $5 million per bitcoin is not a completely ludicrous price target over the long term adoption life cycle.