A Primer on Valuing Bitcoin. How much is Bitcoin worth?

[traderyin]

Hello there Internet!

Introduction (You can skip this if you like):
Usually I do not post reviews on websites. But lately my personal philosophy has changed. Understanding everyone contribution is what make internet an awesome place for sources of information. I feel obligated to contribute something of value. So I have been writing a few reviews here and there for place like tripadvisors/yelp - my frequently used websites. Now I've been hearing about Bitcoin and actually invested in one, I would like to share my view on the potential value of Bitcoin.

About Me:
I am a full time accounting/finance professional working in one of the big financial institution. I research investing idea as a hobby on my off time. What I present here has nothing to do with the company I work for nor my profession.

Part I: Valuing Bitcoin as an asset or storage of value

Bitcoin is alot like the physical gold. In places where the infrastructure or a place of exchange is set up, you can exchange gold for fiat currency and vice versa. Bitcoin is currently functioning the same way. You can exchange and trade them for fiat currency with relative ease. So let assume Bitcoin can take market share from physical gold as a storage of value.

Estimated Total numbers of gold mined: 171,300 tonnes
http://www.bbc.co.uk/news/magazine-21969100

USD$ per ounce of gold as of today: $1232

Take 171,300 x 32573.6 = 6 billions ounces of gold x 1232 per ounce =
$7.4 Trillions USD

Divide that by 21 millions Bitcoin

Which will value each bitcoin at $354,486

Realistically, we don't think bitcoin can replace gold completely. So take a scenario where bitcoin replaces 10% of gold value and you would get $35,449 per BTC.

Optimistic like the Winklevoss. I know.

We also know that gold isn't easily transferable. And that's why I am going to value bitcoin like a money transfer business in the 2nd part of the post.

Part II: Valuing Bitcoin as a money transfer business

Because Bitcoin lives in the cyber space with zero needs for physical storage (aside from servers and hardware where the miners/ online wallets operate). That's what make it difficult to value because it can function just as well as any money transfer business.

So we can are going to look at the most comparable business: Western Union.

Western Union: Market Cap. of $9 Billions with 15% market share (Transaction volume of $79 billion)

Western Union Market Value if it own 100% Market Share: $60 billions. (Transaction volume of $527 billion)

Bitcoin value if able to capture 15%-100% of money transfer business:
$9 billions - $60 billions
Divided by 21 millions coins = $428 (@15%) to $2857 (@100%)

Bitcoin as a money transfer business operate on a much more efficient scale due to the fact that physical locations and employees are replaced by miners and hardware. So there is economic value created there by cutting cost per transaction relative to Western Union. So $428 per coin might be on the low end but it's somewhat realistic.

Part III: Valuing Bitcoin as a currency


To be updated.



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[homestereo]

What about the bitcoin that have been lost forever? Do you think that number will ever be significant enough to properly value bitcoin in this fashion?

[traderyin]

What about the bitcoin that have been lost forever? Do you think that number will ever be significant enough to properly value bitcoin in this fashion?

That's the inherit design problem with Bitcoin. There's only a limited amount at the moment and rather Satoshi change his mind and up the limit in order to replace these lost coins is too much of an unknown to account for.

Again, this is why Bitcoin is alot like gold. Because there is gold out there that is "lost" forever when people stashed them in unknown location or bury them with dead bodies. We can are only making educated assumptions based on some what realistic estimate. That's the problem with putting a hard value on any assets or companies - some of the assumptions you make can change rather quickly due to the operating and business environment.

But by doing this exercise give me a good idea what Bitcoin can potentially worth one day given the world isn't trying to shut it down like they are trying in China. It's better than randomly say "hey bitcoin is worth $400 billions and 40,000 per coin!"

I assume the Winklevoss hire an analyst or two to do the dirty work and hopefully they won't steal their work this time around.

[traderyin]

Updated with Part II.

[Denmor]

Bitcoin have nothing to do with gold. It has absolutely zero value in the real world and it's price is just a bubble created by investors. Not that it's bad or anything, you can make lots of money with it, but seriously comparing virtual numbers to gold that can be used in lots of industries even if all currency in the world dies, well that's delusional. It's more like a gamble than a real currency, even the best analyst in the world can't predict the real price of bitcoin because it doesn't exist. For as long as people are ready to invest their money in it, it works.

[traderyin]

Gold is the same. It's a piece of metal. There is industrial usage for gold but it's minimal compare to the number of gold being stored underground in central banks for storage of currency value. Most gold is used for storage of value or jewelry.

If you want to argue bitcoin doesn't worth anything. What makes diamond worth anything or any fiat currency?

Bitcoin has value as long as it able to provide a service (money transfer) to a community. And as long as the community of people willing to exchange Bitcoin into physical goods and fiat currency (which is just another exchange medium - worthless if you can't buy food with it), there is value to Bitcoin.

Much like the chips you buy at the casinos, those are plastic chips with ZERO value. What makes them valuable is the community (casino in this case) willing to redeem them for fiat currency- which can further be exchange for goods and services.

Of course, one can always make the argument and say if the community abandon the idea of Bitcoin has any value then it has no value. Same can be said of gold or US Dollar. Just because gold and USD are widely accepted now doesn't mean people cannot abandon them in the future and just because Bitcoin has no industrial value doesn't mean it has no economic value if it allows for transfer of funds anonymously. As of now, the community and acceptance of Bitcoin is growing, so the value is growing. Can Bitcoin loses value to zero in the future? It can. But so can gold. It just gold has a lesser probability because of its historical usage in the world. If people stop investing in gold and stop believing gold as a storage of value - the prices of gold can easily crash just as well.