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 Author Topic: The proper way to calculate the future value of a bitcoin  (Read 6918 times)
go1111111
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 November 01, 2013, 02:47:43 AM

A while back I found this site: http://www.btcglobe.com/tool/calculate-future

If you play with it, you'll see that it is using this formula:

[(World GDP in dollars)*(fraction of economic transactions using bitcoin)]/[(supply of bitcoins)*(fraction of bitcoins used in transactions)]

Shouldn't there be a (velocity of bitcoins) term in the denominator? Like this:

[(World GDP in dollars)*(fraction of economic transactions using bitcoin)]/[(supply of bitcoins)*(fraction of bitcoins used in transactions)*(bitcoin velocity)]

That seems to work for some toy examples I invented with an economy of 3 people.

This shows the velocity of the US M1 money supply: http://en.wikipedia.org/wiki/File:Velocity_of_M1_Money_Stock_in_the_US.png

It seems we should be dividing the numbers from the value calculation link by something between 5 and 10, unless we have a good reason to think bitcoin velocity will be much different than M1 velocity. Am I missing something?

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laowai80
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 November 01, 2013, 08:59:20 AM

There is no realistic way to calculate the future value of bitcoin. There is even no way to calculate the future value of real-life items, not to mention something virtual and 'on the edge' like bitcoin. But as long as we all work together to make bitcoin more popular, for sure its value is gonna rise.
go1111111
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 November 01, 2013, 10:18:18 AM

There is no realistic way to calculate the future value of bitcoin.

The calculation above puts a floor on the value of a bitcoin. It is impossible for a bitcoin to be worth less than shown in the above calculation if the assumptions used as inputs are met.

gaston909
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 November 01, 2013, 11:46:37 AM

looks nice anyway
countryfree
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 November 02, 2013, 01:07:22 AM

uncertainty is the rule. Nobody can predict the price of oil in a month, and that's the same for BTC. Actually, it's even more difficult because we can guess what will be the demand of oil in a month, but nobody knows what it'll be for BTC.

wachtwoord
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 November 02, 2013, 01:11:32 AM

\$373M a Bitcoin at 100% of economy and 1% for transactions. So \$3.73 for a Satoshi

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 November 02, 2013, 02:39:16 AM

Shouldn't there be a (velocity of bitcoins) term in the denominator? Like this:

I agree with you that velocity should be in the calculation. So the question becomes: do you think the velocity of bitcoin will be greater or less than that of the USD? (or roughly the same)

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Jabbatheslutt
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 November 02, 2013, 02:52:30 AM

You can't predict the value, only make an informed guess.
go1111111
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 November 02, 2013, 05:27:53 AM

I agree with you that velocity should be in the calculation. So the question becomes: do you think the velocity of bitcoin will be greater or less than that of the USD? (or roughly the same)

I don't know that much about money velocity, so I'd guess about the same.

On the one hand, I was thinking that the faster payments in bitcoin (an hour, vs. a few days for checks) might make bitcoins move faster than dollars, but that may also make the economy move slightly faster in general and boost GDP.
laowai80
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 November 02, 2013, 04:39:04 PM

\$373M a Bitcoin at 100% of economy and 1% for transactions. So \$3.73 for a Satoshi

Sounds pretty Weimar'ish to me
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 November 02, 2013, 09:13:10 PM

You guys forget to consider that the 21M number is just of the monetary base. Money supply can vastly exceed that due to fractional reserve banking. If Bitcoin replaced the USD, but fractional reserve banking stayed as commonplace as it is now, then BTC = 170,580 2013 USD.
EDIT: This is assuming BTC replaces just the dollar, and doesn't become some kind of super-currency.

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go1111111
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 November 02, 2013, 10:09:31 PM

You guys forget to consider that the 21M number is just of the monetary base. Money supply can vastly exceed that due to fractional reserve banking. If Bitcoin replaced the USD, but fractional reserve banking stayed as commonplace as it is now, then BTC = 170,580 2013 USD.

Doesn't my adding in the velocity of money term take this into account? Can you elaborate on what you're saying with a small example?
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 November 02, 2013, 10:43:31 PM

You guys forget to consider that the 21M number is just of the monetary base. Money supply can vastly exceed that due to fractional reserve banking. If Bitcoin replaced the USD, but fractional reserve banking stayed as commonplace as it is now, then BTC = 170,580 2013 USD.

Doesn't my adding in the velocity of money term take this into account? Can you elaborate on what you're saying with a small example?

The US Monetary base is the total amount of backing in the Federal Reserve and is calculated as the the total \$ worth of all Federal Reserve Notes issued. That's 3.6 Trillion.

The total amount of M2 is the total amount of debt currently serving as liquid, spendable money. This includes not only Federal Reserve Notes, but also Money Market Funds, Savings Deposits, Checking Accounts etc... so long as its liquid (not CDs, bonds) and its spendable (not IRAs). That's almost 11 trillion.

The total amount of M3 (not official terminology) is the total amount of debt that can be created to serve as liquid, spendable money. This includes M2, plus available credit lines on credit cards, freshly borrowed funds from the bank, portfolio margin balances, etc... so long as it can be liquid (not Cds, bonds), and can be spendable (not IRAs). I believe this must be about 36 Trillion.

M3 is what actually sets short-term prices, but can easily set up bubbles/crashes. Fluctuations in M3 make up the "business cycle." You guys are looking at M3, when you're calculating how much Bitcoin is worth. However, you're dividing by 21 Million, while those 21 Million Bitcoins are real Bitcoins, not Bitcoin-denominated spendable debt. So you're getting an inflated number.

M2 is almost real money, but its debt. So its real money that can accidentally be lost due to a big economic problem, such as that triggered by M3 fluctuations. A M2 parallel for Bitcoin would be stuff like BTC deposited into Gox/Bitstamp.

The Monetary Base is the risk-free "real money" that won't go away under any circumstances unless you spend it (although its purchasing power may be lost). THAT'S the original 21M Bitcoin.

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rudz
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 November 02, 2013, 11:01:47 PM

A while back I found this site: http://www.btcglobe.com/tool/calculate-future

If you play with it, you'll see that it is using this formula:

[(World GDP in dollars)*(fraction of economic transactions using bitcoin)]/[(supply of bitcoins)*(fraction of bitcoins used in transactions)]

Shouldn't there be a (velocity of bitcoins) term in the denominator? Like this:

[(World GDP in dollars)*(fraction of economic transactions using bitcoin)]/[(supply of bitcoins)*(fraction of bitcoins used in transactions)*(bitcoin velocity)]

That seems to work for some toy examples I invented with an economy of 3 people.

This shows the velocity of the US M1 money supply: http://en.wikipedia.org/wiki/File:Velocity_of_M1_Money_Stock_in_the_US.png

It seems we should be dividing the numbers from the value calculation link by something between 5 and 10, unless we have a good reason to think bitcoin velocity will be much different than M1 velocity. Am I missing something?

First of all there is no way to calculate or even estimate the value of BTC in a few years. The main reason for that is that its new and it has no history.

Second, the price calculator is incorrect. To make sure of that, you can take BitCoin's economy at the current time:
Y: World's GDP = 71 trillion
S: BTC supply: 12 million
B: % of world economy using BitCoin = (BTC market cap) / World's GDP = 0.0035%
T: % of BTC used in transactions. We know that the current price is \$210. So to get 210 using the formula, T should be equal to 100%, which is impossible since there are already BitCoins lost and a lot of people are saving bitcoins.

SOO this formula doesnt work. you can also look at it this way: (just plugging variables)

from the formula: P = (Y*B)/(S*T)
B = (BTC market cap) / World's GDP = (S*P)/Y     (market cap = price * quantity which is supply here)
so the formula becomes: P = (Y*S*P)/(Y*S*T)
==> P = P/T ==> T = 1 ==> impossible
BitchicksHusband
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 November 02, 2013, 11:06:05 PM

But are you considering that there will be about 10% loss by then?  Still, I'll take anything over 10,000 per BTC thank you very much.

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go1111111
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 November 03, 2013, 12:27:34 AM

First of all there is no way to calculate or even estimate the value of BTC in a few years. The main reason for that is that its new and it has no history.

I'm surprised by how many people believe this. Note that we have some idea how currencies work and where their value comes from.

Second, the price calculator is incorrect. To make sure of that, you can take BitCoin's economy at the current time:
Y: World's GDP = 71 trillion
S: BTC supply: 12 million
B: % of world economy using BitCoin = (BTC market cap) / World's GDP = 0.0035%
T: % of BTC used in transactions. We know that the current price is \$210. So to get 210 using the formula, T should be equal to 100%, which is impossible since there are already BitCoins lost and a lot of people are saving bitcoins.

SOO this formula doesnt work.

(1) The fraction of bitcoin market cap to total GDP is not equal to the % of the economy using bitcoin.
(2) You're using the current price of BTC and trying to derive the other values from that, but the current price is overwhelmingly based on people's guesses about Bitcoin's future use, not based on its current use in transactions. The formula above shows the value of BTC based only on its use for transactions. As bitcoin matures and uncertainty over its future declines, we should expect its value to get closer to what is given by this formula. Any speculation on its value would only drive the price higher. So the formula is useful for showing the minimum value that a bitcoin would have, given the assumptions.

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 November 03, 2013, 10:16:56 PM

The US Monetary base is the total amount of backing in the Federal Reserve and is calculated as the the total \$ worth of all Federal Reserve Notes issued. That's 3.6 Trillion.

Incidentally, the US Monetary Base is published by the St Louis Federal Reserve here:
http://research.stlouisfed.org/fred2/series/BASE/
Not to get off topic, but the rise in the monetary base over time is remarkable. ALMOST as fast as the rise in the price of bitcoin

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go1111111
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 November 04, 2013, 02:37:22 AM

The total amount of M3 (not official terminology) is the total amount of debt that can be created to serve as liquid, spendable money. This includes M2, plus available credit lines on credit cards, freshly borrowed funds from the bank, portfolio margin balances, etc... so long as it can be liquid (not Cds, bonds), and can be spendable (not IRAs). I believe this must be about 36 Trillion.

M3 is what actually sets short-term prices, but can easily set up bubbles/crashes. Fluctuations in M3 make up the "business cycle." You guys are looking at M3, when you're calculating how much Bitcoin is worth. However, you're dividing by 21 Million, while those 21 Million Bitcoins are real Bitcoins, not Bitcoin-denominated spendable debt. So you're getting an inflated number.

M2 is almost real money, but its debt. So its real money that can accidentally be lost due to a big economic problem, such as that triggered by M3 fluctuations. A M2 parallel for Bitcoin would be stuff like BTC deposited into Gox/Bitstamp.

The Monetary Base is the risk-free "real money" that won't go away under any circumstances unless you spend it (although its purchasing power may be lost). THAT'S the original 21M Bitcoin.

For some reason I just noticed your post now. It sounds like via various lending arrangements and contracts, M1 gets converted onto M2, and M1 and M2 get converted into M3. In the bitcoin economy I understand that if I set up a Bitcoin credit card company and you take out one of my credit cards and I give you a 20 BTC line of credit, that 20 BTC has moved into M3. Bit it's also 20 BTC that I can't spend simultaneously, so it is removed from M1, no? M3 still contains only 21 million bitcoins right?

Regardless of the above, I think my formula about is still correct for valuing bitcoins based only on their use in transactions (this it gives a correct lower bound on their real world price). It does not try to estimate the value of M3 in bitcoin. It's just saying: "if this much value is transacted using bitcoins, then each bitcoin must be worth at least X." For reference, this is the statement I'm saying must always be true:

(price of 1 BTC) >= [(World GDP in dollars)*(fraction of economic transactions using bitcoin)]/[(supply of bitcoins)*(fraction of bitcoins used in transactions)*(bitcoin velocity)]
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 November 04, 2013, 03:07:28 AM

For some reason I just noticed your post now. It sounds like via various lending arrangements and contracts, M1 gets converted onto M2, and M1 and M2 get converted into M3. In the bitcoin economy I understand that if I set up a Bitcoin credit card company and you take out one of my credit cards and I give you a 20 BTC line of credit, that 20 BTC has moved into M3. Bit it's also 20 BTC that I can't spend simultaneously, so it is removed from M1, no? M3 still contains only 21 million bitcoins right?
Exactly, that's what you'd think. The main issue with this theory though is that its wrong.

You see, say Citibank comes over to you and says "hey, here's a Bitcoin. Ok I lied, its not a dollar, but its going to be a Bitcoin tomorrow. But y'know, here's my signature and all, and I'll give you a few extra satoshis tomorrow and all... please let me buy a coffee." And then you say OK because you were probably just going to deposit your Bitcoins into Citibank anyway, to get your few free satoshis, and its not as if Citibank has ever lost any of your money before, so why not just accept his note. After all, there's this guy you know that Citibank lent money to about a week ago, and if he doesn't pay me back Citibank will get his house, and they'll just sell that to pay you back instead. So you accept Citibank's note, because he'll give you a  few extra satoshis.

Presto, now M3 contains more than 21 million bitcoins.

Well you might say that isn't really how its going to work out, and that nobody will actually accept those notes, however it already happens, its just you don't notice it as much. Like, take Mt. Gox. People are always depositing bitcoins, you're depositing your real Bitcoins and they're just upping a number in a table. Now there's two bitcoins: Gox has access to the first, and the second Bitcoin, the one you see in your Mt. Gox account, you can use to buy stuff: USD. As we all know, what happens when you use a Bitcoin to buy USD? It contributes some selling pressure to push the price down. In other words, that's inflation. Because there are now TWO bitcoins.

Secondly, it doesn't need to work exactly like the above, although from a bank's perspective, that's ideal. Traditionally (and if things were fair, the way things would work) would be that the bank gets this contract, saying that a person owes them such and such amount of money, suddenly they get a huge urge to spend some of that money they just lent away. So they go to some market somewhere and sell it, and get some money, and spend the proceeds of that sale. And each successive link in  that chain, the moment he wants to spend some money, goes back to the market, and somebody else will buy it from him, because they know, they'll get some of that money that was originally owed to Citibank, and they'll give him real Bitcoins, to spend right away, in return for that debt. The debt functions exactly like a Bitcoin in your wallet: It can be spent (although you have to go to the market to do so) and it serves as a store of value.

The only real difference is that that money actually can't move through the blockchain. But I highly doubt that theres going to be 21 Million Bitcoins waiting for confirmation at the same time, so what does it matter?

Quote
Regardless of the above, I think my formula about is still correct for valuing bitcoins based only on their use in transactions (this it gives a correct lower bound on their real world price). It does not try to estimate the value of M3 in bitcoin. It's just saying: "if this much value is transacted using bitcoins, then each bitcoin must be worth at least X." For reference, this is the statement I'm saying must always be true:

(price of 1 BTC) >= [(World GDP in dollars)*(fraction of economic transactions using bitcoin)]/[(supply of bitcoins)*(fraction of bitcoins used in transactions)*(bitcoin velocity)]
Not true. What you're saying is if Bitcoin was at its point of maximum deflation (when there is no debt), then you'd be right. Otherwise, M3 is bigger than M0 and you're quickly getting screwed.

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go1111111
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 November 04, 2013, 03:31:20 AM

You see, say Citibank comes over to you and says "hey, here's a Bitcoin. Ok I lied, its not a dollar, but its going to be a Bitcoin tomorrow. But y'know, here's my signature and all, and I'll give you a few extra satoshis tomorrow and all... please let me buy a coffee." And then you say OK because you were probably just going to deposit your Bitcoins into Citibank anyway, to get your few free satoshis, and its not as if Citibank has ever lost any of your money before, so why not just accept his note. After all, there's this guy you know that Citibank lent money to about a week ago, and if he doesn't pay me back Citibank will get his house, and they'll just sell that to pay you back instead. So you accept Citibank's note, because he'll give you a  few extra satoshis.

Presto, now M3 contains more than 21 million bitcoins.

Let me make sure I understand your example. It's a bit unclear now, because I'm not sure why Citibank would be approaching me and giving me a Bitcoin for no reason.

Step 1: I deposit 1BTC at Citibank today.
Step 2: Tomorrow I go to withdraw my 1BTC, but Citibank tells me to please not withdraw it now, but wait until the next day and they'll compensate me by giving me 1.001BTC instead of the 1BTC I deposited.
Step 3: Citibank gives me a signed note promising to give me 1.001BTC the next day.
Step 4a: I go spend the note that Citibank gave me, because it's basically a debt that Citibank owns the holder of the note and other people are willing to accept it.
Step 4b: At the same time as Step 4a, Citibank is spending the real 1BTC that I let them keep.
Step 5: The next day the person I gave the 1.001BTC promise from Citibank goes into Citibank and redeems it for real 1.001BTC from Citibank.

You're saying that during Step 4a/4b, the money supply has grown?

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