Cast your mind back to mid-October. The price of Bitcoin was $27K, bulls were waiting for confirmation of a spot ETF, and bears were waiting for one last capitulation. Since then the price has increased +55% to $42K at the time of writing; the price briefly hit $44k in early December. The price rally was driven by rumours that the SEC will confirm the spot ETF - they actually delayed the decision to Q1 24 - and speculation that the FED will reduce interest rates. Regardless of whether you are a bull or a bear, everyone trading or investing in Bitcoin wants to know: what is Bitcoin really worth?
One way to estimate the true value of Bitcoin is to benchmark it against something else. Bitcoin is commonly compared to Gold. This post will estimate the true value of Bitcoin by using Gold as a benchmark. Fidelity Digital Assets, a subsidiary of Fidelity Investments, has completed the first step of benchmarking Bitcoin vs Gold by comparing the fundamentals. See
this link and comparison chart below. The conclusion is that as a store of value, Bitcoin is better or equal to gold in six out of seven characteristics. Gold beats bitcoin for a longer track record. Overall I agree with their assessment.
https://i.imgur.com/WN1aASj.pngTo estimate the true value of Bitcoin, we need to build upon Fidelity’s work. One weakness of this comparison chart is that some categories are more important than others. I have assigned an importance to each category below. This is subjective. Someone could make it more objective, but it would make the analysis more painstaking to complete and I don’t think my importance ratings will be majorly controversial anyway.
https://i.imgur.com/n2M1WZV.pngThe largest consequence of my importance ratings is that Gold is going to get a favourable comparison vs Bitcoin for winning the ‘track record’ category which has 65% importance. I think that is cautiously fair. The largest advantage of Gold is that it has been used as a store of value for over 2,500 years and I think track record is an important characteristic for most investors. Crypto investors evidently don’t care about track record, but outside of crypto a lot of investors do care. I have avoided making any dubious assumptions that benefit Bitcoin in this benchmarking analysis. I would prefer to make a confident estimate that ‘Bitcoin is worth at least X’ instead of a dubious claim that ‘Maybe Bitcoin could be worth up to X’. For example, I think I have been harsh on Bitcoin to say that ‘verifiable’ only has a 14% importance. This is an important characteristic and Bitcoin is much more verifiable than Gold. So my end calculation will under-value Bitcoin if you agree verifiable is actually more important than 14%.
Next I want to quantify the exact difference between Bitcoin and Gold given Fidelity’s ratings and my importance ratings. The first step is to assign arbitrary points for each category. The winner of a category gets 100 points, the loser gets zero points, and for a draw both Bitcoin and gold get 50 points each. Here is how the results look:
https://i.imgur.com/UOa7Vu0.pngBitcoin investors might be shouting ‘Stop the count!’ at this point because Bitcoin looks like a better store of value than Gold. But we have not considered the importance of each category just yet. Gold is going to perform much better once we factor in the importance of ‘track record’. To consider category importance, I calculated a weighted score by multiplying the points by importance. The results are shown below.
https://i.imgur.com/vcZrqfA.pngBitcoin scores 26 vs gold 74 after we consider the importance of each category. This result is more meaningful if you put it into a percentage: Bitcoin is 35% as good as Gold as a store of value (26/74 = 35%). This 35% is a key figure that will be used to value Bitcoin in the remainder of this post. If you disagree with 35% that’s fine, you can replicate the steps below with a different figure. For example, if you think Bitcoin is half as good as Gold, you can use 50%. To estimate the value of one bitcoin we need to gather the remaining inputs for our calculation: (Market cap of Gold * % used for investing * 35%) / supply of bitcoin.
According to
Infinite Market Cap, the market cap of Gold is $13.7 trillion. The small print mentions that the market cap is the total value mined. What we are interested in is the market cap of Gold used for investing because that is the market Bitcoin is trying to capture. Bitcoin can’t be used for jewellery. According to
wikipedia: “The world's consumption of new gold produced is about 50% in jewellery, 40% in investments, and 10% in industry”. The exact percentages are debated because Gold reserves are not regularly audited (if at all). A few
other sources tend to gravitate around a 40% figure. So we will stick with 40%. Lastly there is a maximum of 21 million bitcoin that will ever exist. Not all Bitcoin has been mined yet, and some has been lost. But I will use 21 million to err on the side of a pessimistic estimate.
Put this all together and you can estimate the value of one bitcoin as ($13.7 trillion * 0.40 * 0.35) / 21 million = $91,833.
I like this analysis for three reasons. (1) It is based on the value of Gold which is a moving target and Bitcoin has a real opportunity to capture some of this market. (2) The assumptions are pretty ‘safe’. I think the biggest underlying assumption is the belief that if Bitcoin is 35% as good as Gold it should also be worth 35% of the addressable market. (3) It passes the ‘eyeball test’. The logic makes sense and the end result is a believable number.
If someone wanted to, they could also repeat this process for other markets that Bitcoin could capture. For example Bitcoin might partly capture market share of the reserve currency market cap or the real estate investment market cap. Then you could add the Gold benchmark + reserve currency benchmark + real estate market benchmark to have a final number.
For now, I am content believing that one bitcoin is worth $92K which could deliver a 119% ROI for anyone buying at the current market price.
Btw, if anyone wants a minimalist website to track the price of bitcoin over the next bull market cycle, I made
DefiDive.comTLDR:
Valuation calculation vs gold = (market cap of gold * percentage used for investing * percentage of market bitcoin should capture) / supply of bitcoin
= ($13.7 trillion * 0.40 * 0.35) / 21 million = $91,833.
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