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Author Topic: Expected Value for Bitcoin in the Long Term  (Read 8244 times)
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March 22, 2013, 01:43:17 PM
 #21


Hess, as a matter of fact it has been done quite a few times. Just looking at market cap and the size of online business, $10,000-$100,000 is not that unrealistic. But that requires quite some work on Bitcoin software to iron out the flaws.

blog: how much is a bitcoin worth?
http://gruvr.com/blog/how-much-is-a-bitcoin-worth/

Okay, well I went ahead and wrote up a draft blog post, explaining my way of thinking about the innate value of bitcoins (they do exist physically, are 'backed' by prime numbers, governed by laws of nature like precious metal, have a face value similar to a discount coupon...)

If you could point me to the best of these similar industry-based analysis I'd appreciate it, and would love
to get constructive comments on this draft post so I can evolve it, thanks!

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March 22, 2013, 01:51:42 PM
 #22

there are so many unknowns and so many factors that you did not contemplate that I wouldn't even know where to start ripping it apart...
this posting should be sent to the recycle bin not to be recycled ever.

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March 22, 2013, 02:11:02 PM
 #23

thanks deathcode!  Grin

one need not account for unknowns in conjecturing about markets or reasoning towards order-of-magnitude estimates, extrapolating from known bits of data is pretty common in these sorts of valuations... still, I'm looking for the big confounding factors so feel free to mention some...

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March 22, 2013, 03:00:02 PM
 #24

thanks deathcode!  Grin

one need not account for unknowns in conjecturing about markets or reasoning towards order-of-magnitude estimates, extrapolating from known bits of data is pretty common in these sorts of valuations... still, I'm looking for the big confounding factors so feel free to mention some...


Sure, here I go:

Directly related to bitcoin:
* Bitcoin difficulty growth
* Adoption rate (by users and merchants/by country)
* Offer/Demand
* Currency reward halving
* Legality of the currency worldwide
* Security of the protocol
* People's sentiment (hoarding/spending - speculative/circulative)
* Network power
* Evolving of other e-currencies (LTC, Amazon, Ripple, FacebooKoins, deathcoINS, etc)


Not directly related to bitcoin:

* Moore's Law fulfillment expectation (related to hashing power)
* Natural Disasters around the world (will affect technology production)
* Economic Disasters around the world (Will affect fiat currencies, people's mood)
* Energy production (electricity costs/fossil fuels cost)


That's just off the top of my head... I'm sure with more time I can think of many others...


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March 22, 2013, 05:56:58 PM
 #25


Okay, the things you've mentioned will mostly effect the rate of coin production, but from what I can see, not by an order of magnitude.  They would all impact these 'what if' scenarios; but I have some comments on specific items for discussion.

Directly related to bitcoin:

* Adoption rate (by users and merchants/by country)

The adoption rate is specifically what I'm speculating about, given existing adoption rates by market, then asking what might happen if we see similar adoption (to 1%) in other global industries. 

* Offer/Demand

Demand is driven by adoption rate, which we can put numbers on in these what-if cases.
Supply will grow in a gradual way from its current 10M to at most 21M (minus saved coins) over the coming years.

The considerations below will all affect how much Supply is available to circulate. In the worst case (for price) nobody would save and all 21M would get mined much sooner than planned.  This would double the amount in circulation at most - but that's not an order-of-magnitude difference.  If hoarding increases or mining slows, it would  reduces the supply which is good for price, ceterus paribus.   So, none of these factors would be likely to impact my guesses by more than say 50%.


* People's sentiment (hoarding/spending - speculative/circulative)
* Network power
* Bitcoin difficulty growth
* Currency reward halving
* Moore's Law fulfillment expectation (related to hashing power)
* Natural Disasters around the world (will affect technology production)
* Economic Disasters around the world (Will affect fiat currencies, people's mood)
* Energy production (electricity costs/fossil fuels cost)

As for the next 3, my operating assumptions for this what-if are:

a) that security flaws and hacks will continue to happen as the technology matures.  Personally, I think the bigger risk is architecture scalability - replication of the block chain can only go so far - and time to confirm transfers lagging as the network grows.    However, these kinds of issues are resolved by fixing and improving.   

b) If a competing/superior v-coin arises, there would be an exchange where you could buy the new coin for bitcoin -- it would be the fastest way to fund/sell the new coins.

c) as to legality, nobody has come up with a convincing case yet for how every nation on earth could make all virtual currencies illegal - and enforce it.  In fact the latest FinCen statements say that exchanges will be regulated, which means the most powerful legislative force is acting to legitimize virtual currencies.

* Security of the protocol
* Evolving of other e-currencies (LTC, Amazon, Ripple, FacebooKoins, deathcoINS, etc)
* Legality of the currency worldwide

Maybe I'm missing something  - for example I did not account for coin recirculation in calculating BTC price, I merely divided market demand by supply of 10M.   I know some modeler will have issues with that, and I'd love to see a better function for mapping likely price given demand....



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March 22, 2013, 06:43:17 PM
 #26


Okay, the things you've mentioned will mostly effect the rate of coin production, but from what I can see, not by an order of magnitude.  They would all impact these 'what if' scenarios; but I have some comments on specific items for discussion.

Directly related to bitcoin:

* Adoption rate (by users and merchants/by country)

The adoption rate is specifically what I'm speculating about, given existing adoption rates by market, then asking what might happen if we see similar adoption (to 1%) in other global industries. 

* Offer/Demand

Demand is driven by adoption rate, which we can put numbers on in these what-if cases.
Supply will grow in a gradual way from its current 10M to at most 21M (minus saved coins) over the coming years.

The considerations below will all affect how much Supply is available to circulate. In the worst case (for price) nobody would save and all 21M would get mined much sooner than planned.  This would double the amount in circulation at most - but that's not an order-of-magnitude difference.  If hoarding increases or mining slows, it would  reduces the supply which is good for price, ceterus paribus.   So, none of these factors would be likely to impact my guesses by more than say 50%.


* People's sentiment (hoarding/spending - speculative/circulative)
* Network power
* Bitcoin difficulty growth
* Currency reward halving
* Moore's Law fulfillment expectation (related to hashing power)
* Natural Disasters around the world (will affect technology production)
* Economic Disasters around the world (Will affect fiat currencies, people's mood)
* Energy production (electricity costs/fossil fuels cost)

As for the next 3, my operating assumptions for this what-if are:

a) that security flaws and hacks will continue to happen as the technology matures.  Personally, I think the bigger risk is architecture scalability - replication of the block chain can only go so far - and time to confirm transfers lagging as the network grows.    However, these kinds of issues are resolved by fixing and improving.   

b) If a competing/superior v-coin arises, there would be an exchange where you could buy the new coin for bitcoin -- it would be the fastest way to fund/sell the new coins.

c) as to legality, nobody has come up with a convincing case yet for how every nation on earth could make all virtual currencies illegal - and enforce it.  In fact the latest FinCen statements say that exchanges will be regulated, which means the most powerful legislative force is acting to legitimize virtual currencies.

* Security of the protocol
* Evolving of other e-currencies (LTC, Amazon, Ripple, FacebooKoins, deathcoINS, etc)
* Legality of the currency worldwide

Maybe I'm missing something  - for example I did not account for coin recirculation in calculating BTC price, I merely divided market demand by supply of 10M.   I know some modeler will have issues with that, and I'd love to see a better function for mapping likely price given demand....

Thank you for your explanation, but I still you're far from being able to quantify the variables in question. I agree on your offer and demand relationship, but there are still many many variables involved i.e.:

* Network power
* Bitcoin difficulty growth
* Currency reward halving
* Moore's Law fulfillment expectation (related to hashing power)
* Natural Disasters around the world (will affect technology production)
* Economic Disasters around the world (Will affect fiat currencies, people's mood)
* Energy production (electricity costs/fossil fuels cost)

That you will never be able to account for and I am sure I'm forgetting a bunch of other variables that if I think about it more I can come up with that will be even harder to account for.
What is the goal of your formula? to calculate the value of bitcoin long term correct?
Let's consider the value of the stock market long term, since it's a more mature environment. You'd think wall street analyst, or any other analyst around the world probably already tried to determine or they are trying to determine the value of the stock market not in a year or two, but tomorrow! yet, there are so many variables that it's impossible to do so (proof is a lot of people lost a shit load of money in 2008). Now consider that fact and compare it to a new currency that has completely different rules than anything we have seen in the past:

There are two certainties about bitcoin:

* It's deflationary (unless the core developers decide that 21million is not a number set in stone, but highly unlikely)
* More adoption = higher value

(*) More adoption means = higher hashing power due to moore's law and also more massive use from users and merchants

Based on those two criteria you can determine determine a laboratory price of bitcoin in a controlled environment... but then again, we live outside that controlled environment.

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March 22, 2013, 08:31:14 PM
 #27

Not sure how exact something like this would need to be. You could get lost trying to account for factors that may not really have a significant impact.

I'm of the belief that some rough measure of value expectation could be hashed out akin to Black-Scholes in the option space. It doesn't account for every market factor but provides a "good-enough" approximation of value at a point in time. Keeping in mind that there are more complex models that build on BS in order to account for different factors.

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March 22, 2013, 09:51:15 PM
 #28

deathcode

Ah, I see more of what you're saying now... you're not as concerned about ability of miners to create coins as you are about the scalability of the architecture, fault resiliency, etc... ?? 

I have some of those reservations too, in particular as a VLDB type guy I suspect that replicating the block chain will slow transaction confirmations a lot at some point.   As for fault tolerance, bitcoin is really much like the internet itself and can continue to process transactions over network partitions etc.   

Here's more of where I'm coming from:  I've seen plenty of posts arguing about reasonable potential value for bitcoin, so I'm trying to make an informed conjecture by using the kind of reasoning equity analysts use to value a company (not the entire market) and make bets on its growth.  Some of the approaches are extremely mathematical (e.g. the start of this post) but devoid of market-oriented input.  Others (e.g. Max Kaiser, Rick Falkvinge ) are taking extremely broad-brush and talking about bitcoins being with $100K to $1M - after they replace trillions of dollars of GDP for multiple countries 20 years from now!

I'm trying to hit a middle ground and reason about bitcoin's possible prices by examining narrower industry segments where one might expect adoption, and only talking about orders-of-magnitude estimating: what if bitcoin reached 1% adoption in several specific industries, and scaled well enough to service that demand?  Are we talking about prices in tens, hundreds, or thousands per BTC?   I haven't seen many cogent attempts to assess this. 

The other thing doing is suggesting that there is indeed inherent value to cryptocurrency, based on the value of prime numbers.  It serves similar functions as gold but weighs nothing, is indestructible, etc.  I haven't seen a clear argument on that front either...


As for segfault -- Black-Sholes is an interesting idea, but that's for valuing time-limited derivatives based on some notion of expected rise or loss, right?  So you'd still need some input data on that... plus bitcoin is not derivative and does not expire..  but I bet people are already selling puts n calls on bitcoin..


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March 22, 2013, 10:16:15 PM
 #29

deathcode

Ah, I see more of what you're saying now... you're not as concerned about ability of miners to create coins as you are about the scalability of the architecture, fault resiliency, etc... ?? 

I have some of those reservations too, in particular as a VLDB type guy I suspect that replicating the block chain will slow transaction confirmations a lot at some point.   As for fault tolerance, bitcoin is really much like the internet itself and can continue to process transactions over network partitions etc.   

Here's more of where I'm coming from:  I've seen plenty of posts arguing about reasonable potential value for bitcoin, so I'm trying to make an informed conjecture by using the kind of reasoning equity analysts use to value a company (not the entire market) and make bets on its growth.  Some of the approaches are extremely mathematical (e.g. the start of this post) but devoid of market-oriented input.  Others (e.g. Max Kaiser, Rick Falkvinge ) are taking extremely broad-brush and talking about bitcoins being with $100K to $1M - after they replace trillions of dollars of GDP for multiple countries 20 years from now!

I'm trying to hit a middle ground and reason about bitcoin's possible prices by examining narrower industry segments where one might expect adoption, and only talking about orders-of-magnitude estimating: what if bitcoin reached 1% adoption in several specific industries, and scaled well enough to service that demand?  Are we talking about prices in tens, hundreds, or thousands per BTC?   I haven't seen many cogent attempts to assess this. 

The other thing doing is suggesting that there is indeed inherent value to cryptocurrency, based on the value of prime numbers.  It serves similar functions as gold but weighs nothing, is indestructible, etc.  I haven't seen a clear argument on that front either...


As for segfault -- Black-Sholes is an interesting idea, but that's for valuing time-limited derivatives based on some notion of expected rise or loss, right?  So you'd still need some input data on that... plus bitcoin is not derivative and does not expire..  but I bet people are already selling puts n calls on bitcoin..



I'll read your full reply later, but quickly I'd say that you should know that no matter how much power there is on the network the network self regulates the difficulty to be able to release a fixed amount of coins 1 block every 10 minutes, so, the ability of miners to mine coins does not depend on the miners, that's why that's not a concern.

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March 26, 2013, 04:05:58 AM
 #30

I don't think it is going to be that nice of a bell curve given the unpredictability of price change. Nice thought though!!

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March 26, 2013, 04:11:00 AM
 #31

Someone needs to put up a chart with the market cap and the volumes traded of the various currencies in the world (if that data is even possible).

That would give a pretty good clue as to what the market cap of Bitcoin should be based on the trade volumes.
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March 26, 2013, 04:26:19 AM
 #32

Looking at the chart this way makes more sense to me.

Any significantly advanced cryptocurrency is indistinguishable from Ponzi Tulips.
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March 26, 2013, 12:05:20 PM
 #33


Has anyone tried to put together long-term targets using that kind of reasoning?  If not, I'll put up a blog post doing just that, of course for constructive  critique..

Hess, as a matter of fact it has been done quite a few times. Just looking at market cap and the size of online business, $10,000-$100,000 is not that unrealistic. But that requires quite some work on Bitcoin software to iron out the flaws.

I think those estimates make a lot of sense. We've barely scratched the surface of the potential for regular online and brick&mortar businesses to start accepting it.

The biggest problem for a lot of businesses will be that they'll be limited by the need to pay their taxes in their national currency. So if profit margins are 20% and they take 10% of their business in bitcoin, thats almost half of their profit that they'll have to find a way to spend in bitcoin.

Would be curious to hear if anyone has run into this problem much yet?
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