2010-06-03 Techcrunch Calculating The Long-Term Value Of A Bitcoin

[bitbitcoins]

http://techcrunch.com/2013/06/02/calculating-the-long-term-value-of-a-bitcoin/

[cypherdoc]

it's an actual useful "calculator".

you should try it. 

[TraderTimm]

Chance Bitcoin Succeeds 2%
Assuming Bitcoin succeeds, what market share does it capture?

Store of Value       2%
Black Market       0%
Global Currency       0%
Each Bitcoin is Worth    $180

Not bad for low-balling the numbers. I personally think the chance of success is higher, as well as the other categories.

[xcsler]

I don't understand how "chance of success" factors in.
Isn't it either 0% or 100%? If it's 0% then obviously the value of bitcoins is 0. If it's 100% then the value is determined by the other variables.
What is 25% success. Isn't this what the other variables are for.
The whole exercise seems a bit sketchy albeit admittedly fun.

[DeathAndTaxes]

I don't understand how "chance of success" factors in.
Isn't it either 0% or 100%? If it's 0% then obviously the value of bitcoins is 0. If it's 100% then the value is determined by the other variables.
What is 25% success. Isn't this what the other variables are for.
The whole exercise seems a bit sketchy albeit admittedly fun.

Well you won't know if it is successful on a long term scale until after the fact.  25% says over the next decade (or two) there is a 25% chance that Bitcoin reaches the marketshare predictions (the next three values) and a 75% chance the network fails and value goes to zero or some very small niche low usage, low valuation scenario.

Then IF the 25% occurs the next three values are your prediction on the marketshare Bitcoin will command.


So hypothetically if you put in
25%
2%
5%
1%

you are saying "I think Bitcoin has a 25% chance of success and am willing to write up the other 75% as a complete loss.  I define success as 2% of store of value, 5% of illicit trade, and 1% of global commerce.  The calculator estimates that gives Bitcoin a fair valuation of $1,267.  If Bitcoin IS successful the value won't be $1,267 because it would be more like $5,000 the $1,267 is the risk adjusted (i.e. 1 in 4 chance of success) valuation.

An analogy might help.  Lets say I tell you that you can roll a dice and if it comes up six I will give you $120 how much would you value the opportunity at.  Obviously not $0 or $120 although those are the only possible end states.  Since you have a 1 in 6 chance of getting $120 the opportunity is worth $20.  This means the fair valuation is $20.  In the long run if you cam across an infinite number of scenarios and paid the fair valuation you would neither be ahead nor behind.  On the other hand if I tried to get you to pay $30 for a roll of the dice it would be a "bad deal" but if I offered you a chance to roll the dice for $1 it is a no brainer to take it right?  Granted you could still pay $1 and not roll a six.  That doesn't mean that at the time of making the choice it was a bad choice.

[symaxian]

Sure seems to throw out some encouraging numbers. What exactly is "Store of Value", the idea that it 5% of the population use it then that 5% store that much of their wealth in BTC?

[xcsler]

I don't understand how "chance of success" factors in.
Isn't it either 0% or 100%? If it's 0% then obviously the value of bitcoins is 0. If it's 100% then the value is determined by the other variables.
What is 25% success. Isn't this what the other variables are for.
The whole exercise seems a bit sketchy albeit admittedly fun.

Well you won't know if it is successful on a long term scale until after the fact.  25% says over the next decade (or two) there is a 25% chance that Bitcoin reaches the marketshare predictions (the next three values) and a 75% chance the network fails and value goes to zero or some very small niche low usage, low valuation scenario.

Then IF the 25% occurs the next three values are your prediction on the marketshare Bitcoin will command.


So hypothetically if you put in
25%
2%
5%
1%

you are saying "I think Bitcoin has a 25% chance of success and am willing to write up the other 75% as a complete loss.  I define success as 2% of store of value, 5% of illicit trade, and 1% of global commerce.  The calculator estimates that gives Bitcoin a fair valuation of $1,267.  If Bitcoin IS successful the value won't be $1,267 because it would be more like $5,000 the $1,267 is the risk adjusted (i.e. 1 in 4 chance of success) valuation.

An analogy might help.  Lets say I tell you that you can roll a dice and if it comes up six I will give you $120 how much would you value the opportunity at.  Obviously not $0 or $120 although those are the only possible end states.  Since you have a 1 in 6 chance of getting $120 the opportunity is worth $20.  This means the fair valuation is $20.  In the long run if you cam across an infinite number of scenarios and paid the fair valuation you would neither be ahead nor behind.  On the other hand if I tried to get you to pay $30 for a roll of the dice it would be a "bad deal" but if I offered you a chance to roll the dice for $1 it is a no brainer to take it right?  Granted you could still pay $1 and not roll a six.  That doesn't mean that at the time of making the choice it was a bad choice.

That's a very helpful explanation and analogy.
Nontheless, I think most people are using the calculator to figure the actual future value of BTC as opposed to its current fair value.
The author even opens the article with the statement: "A big question that’s debated in the Bitcoin community is “How much will Bitcoins be worth in the long term”." and then goes on to add "Assuming Bitcoin does succeed, what will it then be worth? Let’s look at what specific markets Bitcoin might capture."