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Author Topic: A revised Revalin Equation for bitcoin Fundemental Price  (Read 4009 times)
Peter Lambert
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October 22, 2011, 03:32:31 PM
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Revalin has proposed a formula for the fundemental USD price of a bitcoin:

I've been talking fundamentals for a while, and here's my formula:

Fundamental price = A * B / (C - D)

A = USD-value of goods and services purchased per day in BTC
B = Number of days buyers and sellers hold the coins before and after a transaction
C = Number of coins in circulation
D = Number of coins hoarded by (speculators/early adopters/whatever)


While this equation makes sense, the variable D is unsatisfying to me. Therefore I would like to propose a slightly modified equation:

P(USD/BTC) = V * T / (A - S + I - L)

Where P(USD/BTC) = Price of a bitcoin in USD/BTC
V = Value of goods and services purchased for BTC, in USD
T = Time buyers and sellers hold bitcoin, in days
A = Total bitcoins
S = average bitcoin savings of each person
I = bitcoin investments
L = lost bitcoins

I would like this discussion to address the validity of the equation, and how it can be estimated.

If I understand correctly, any bitcoin investment will have a corresponding bitcoin savings. For example, if Ben gives Joe one bitcoin, then Joe holds one bitcoin of I and Ben holds one bitcoin of S. So investing with bitcoins does not affect the money supply, since an increase in S and I cancel each other.

So to increase the value of P (the USD price of bitcoins), we should focus on increasing V, the value of goods and services traded in bitcoins.

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Revalin
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October 22, 2011, 09:57:16 PM
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I agree with your conclusion: the only way to grow Pf is to grow the economy.  I'm personally not interested in growing Pf, but I do want to see the economy grow.  I would rather this happen with inflation: grow the market cap / total value store with an increasing number of coins and keep the Pf stable, but that's really a topic for altcoins.

Yes, the B and D terms in my original formula are a little fuzzy, since they incorporate several different elements in a nontransparent way.  It makes it easier to initially understand at the expense of being messy when you want to apply it in detail.  I think breaking them out is worthwhile.

Where does S belong, in D or A*B?  Which way is right?  Well, what are savings?  An attempt to store value?  A casual investment in the future?  Avoidance of friction?  I don't have a simple answer to that.

In the current market I don't think anyone has savings that last more than a week.  I think people who hold their coins longer than that pretty universally consider them an investment. Thus, I rolled S into A*B - the coins are still in circulation and intended to be spent on goods even if those goods are not yet selected.  At present, that's just taking a slightly broader picture of required value store.  In the future, I think you're right to roll it into D.  In practical terms, it works either way: in A*B it slightly stabilizes Pf; in D it tracks the market quicker.

I'm not sure why you put a + between the S and I.  Here are the two ways I'd write it:

Pf = V * T / (A - S - I - L)
Pf = V * T / (A - (S + I + L) )

A bit more background for those who didn't read the original thread:
Much more detail on how this model works: https://bitcointalk.org/index.php?topic=42514.msg579137#msg579137
Explanations for my guesses for the variables: https://bitcointalk.org/index.php?topic=42514.msg579196#msg579196

      War is God's way of teaching Americans geography.  --Ambrose Bierce
Bitcoin is the Devil's way of teaching geeks economics.  --Revalin 165YUuQUWhBz3d27iXKxRiazQnjEtJNG9g
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