[2018-05-05] How to Value Bitcoin and Invest in the Crypto Economy

[Karartma1]

Unlike companies in the stock market, Bitcoin and other cryptocurrencies don’t have cash flow, profits, or other conventional metrics analysts use to evaluate whether something is a good investment. But there are some traditional economic principles that can help determine whether it’s a good time to buy Bitcoin and its fellow digital assets.
Chris Burniske, the co-author of the book Cryptoassets, shares insights on applying such a valuation methodology on this week’s episode of “Balancing the Ledger.”

Read more http://fortune.com/2018/05/04/ledger-burniske/

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[sandor111]

I find this formula MV=PQ very interesting. If I understand it correctly, the important thing is Price to Volume ratio. Higher ratio means that Bitcoin is overpriced, lower ratio means that it is underpriced so it will likely go up again. According to Burniske, Bitcoin is currently at its norm, which means norm P/V ratio is about

Code:

ratio(norm) = P/V = 9/8 = 1.13*

Where  P is Bitcoin price in thousands USD and V is trade volume in last 24 hours in billions USD.

On December 17, 2017 (ATH) P/V ratio was 20/15=1.33 which is considerable higher than the norm 1.13 so Bitcoin was about to crash.
On February 6, 2018 (bottom price near 6k) P/V ratio was 6.3/9=0.70 which is lower than the norm 1.13 so Bitcoin started to go up.

*After looking the chart for some time and calculating P/V ratios at different points where Bitcoin started to go up or down, I think the norm ratio should be closer to 1.0.

This method is definitely not good for day trading, because 24h trade volume depends on many factors so one day the volume could go up but this doesn't necessarily mean that price of Bitcoin will go up as well. But I see the potential for mid to long-term trades.

[aso118]

MV/PQ is a valid equation when it involves money, but the problem is that not all investors treat it as money. Some of them treat it as a commodity or as a safe haven like gold. That equation is not suitable for all applications.
Moreover, even if the equation is valid, it is not of much use if you do not have precise estimates for the other variables.

[richardsNY]

It all depends on the purpose of why you invest and/or use Bitcoin. The thing is that we shouldn't really keep focusing on how to value Bitcoin, but more what we are willing to pay for it in order to achieve our goal. In some cases Bitcoins are being sold below market value, and in some cases above, which is pretty normal. If I take myself as an example, back in the days my goal was to reach a certain amount of coins as long term investment. I set myself the target to keep buying Bitcoin with a fixed amount of fiat per 2 weeks or month, till the price reached $500 which it did. It fell down again but since I completed my goal already, there was no incentive to buy anymore. In other words, your market price might not be my market price, and vice versa. It's all personal. Bitcoin is literally worth what you want to pay for it since the utility has never really represented the actual market value.

[d5000]

Interesting, I'll follow his analysis. (I saw however that the Medium article is already half a year old ...).

There was a (slightly) earlier attempt by Bitcointalk/Steemit user @pablomp (see this thread) to do a very similar kind of valuation based on the Quantity Theory of Money, but basing the analysis only on the amount of on-blockchain transactions, while Bersiske's model is based also in estimations about future adoption and off-chain usage.

The author, pablomp, also came to the conclusion that in 2017 the Bitcoin price was overheating, but his outlook was a bit more pessimistic, so he failed to predict the last bullish leg in late 2017. Unfortunately, his original BTC/USD charts aren't preserved anymore (only the LTC/BTC and Dash/BTC prices that can be seen in his Steemit article).

[Alex077]

MV/PQ is a valid equation when it involves money, but the problem is that not all investors treat it as money. Some of them treat it as a commodity or as a safe haven like gold. That equation is not suitable for all applications.
Moreover, even if the equation is valid, it is not of much use if you do not have precise estimates for the other variables.

I entirely agree with you,  but things aren't so clear, and not everybody considers bitcoin as money. It's stocks and digital gold, in general, I think that it's a huge mistake to try to describe everything with mathematical formulas, this is just one of the components and it's not the most important one.

[d5000]

I think that it's a huge mistake to try to describe everything with mathematical formulas, this is just one of the components and it's not the most important one.

The problem is that price is a number. Thus, if you want to get to a theory about how the price or value mechanism works, a mathematical formula has to be employed.

I consider MV/PQ to be an approach that's worth a try. However, a "Grand Theory of Cryptocurrency Value", as you wrote, should include more elements. In my opinion, above all, the size of the ecosystem of groups and organizations/businesses related to the particular cryptocurrency should be estimated to get an impression if the user base is growing or not, and at what (approximate) speed - transaction data alone is not enough.

Another interesting approach would be to study the "hodl/transaction" ratio in relation to price movements. For example, in bull markets, "hodlers" numbers - as far as I know - tend to increase, while in bear markets and phases where the price stagnates, the usage as a transactional currency grows. That, however, has to be studied thoroughly. If someone knows empirical research of that kind, feel free to post it here.