Measuring the Intrinsic Value of Cryptocurrency

[eXSn]

Over the weekend, I finished writing a paper on a proposed measure for finding the intrinsic value of cryptocurrency. I'd love to know what you all think about it:

https://www.dropbox.com/s/9l63jc4yldnaeu7/Measuring%20the%20Intrinsic%20Value%20of%20Cryptocurrency.pdf

[1714151808]

1714151808

[1714151808]

1714151808

[1714151808]

1714151808

[Peter R]

Thank you for sharing your work, Kirill.  I think it was a good attempt to outline the bitcoin valuation problem and then summarize current thinking on this topic. 

I liked how you used the Quantity Theory of Money, but I noticed that your tables only consider velocities down to 5.  If bitcoin continues to act more as a store of wealth than as a medium of exchange, is it not possible to see velocity fall below unity?

I'd like to see a comparison to empirical data for the "velocity" of gold, especially over history.  I expect gold's velocity has remained below unity since the advent of fiat, but I think it's possible that it has always moved slowly. 

Here is my best attempt at calculating bitcoin velocity, BTW:




Another valuation theory you may find useful is the Metcalfe Value model discussed here:  https://bitcointalk.org/index.php?topic=572106.0

[Peter R]

I also think this chart is misleading.  Take your comparison to off-shore tax haven funds.  I think what you mean is "what would be the value of 1 BTC if the bitcoin market cap was equal to the value of funds store in off-shore tax havens."  But what seems to be implied from the chart is the valuation that would result if all that money flowed into bitcoin (the word "replaces" implies this).    

If $20 trillion flowed into bitcoin, its market cap would be a lot greater than $20 trillion!

[eXSn]

The velocity number in the formula is constrained to the BTC used within transactions and not the BTC used as store of value, which would heavily decrease the number. I'd guess it would be closer to 10-25 range. Additionally, any coins lost would permanently skew velocity down. Parsing the blockchain also presents a lot of problems because not all transactions, especially large ones that skew network statistics, have any value. Bitstamp might modify their wallet management systems and redistribute 500,000 BTC 100 times. I avoided bitcoin days destroyed for this reason.

I'll definitely check out Metcalfe Value. Thanks for the feedback!

[eXSn]

I also think this chart is misleading.  Take your comparison to off-shore tax haven funds.  I think what you mean is "what would be the value of 1 BTC if the bitcoin market cap was equal to the value of funds store in off-shore tax havens."  But what seems to be implied from the chart is the valuation that would result if all that money flowed into bitcoin (the word "replaces" implies this).    

If $20 trillion flowed into bitcoin, its market cap would be a lot greater than $20 trillion!

The chart is misleading, I included it as an example of improper valuation used in media

[dogechode]

based on that chart - what reserve currency are you referring to?

[Peter R]

The chart is misleading, I included it as an example of improper valuation used in media

Sure, but you didn't really explain the issues here.  It is valid to make valuation estimates by comparing the bitcoin market cap to the gold market cap (or to tax haven funds).  These comparisons are useful.  That's not what is wrong with the chart, however.

[Peter R]

The velocity number in the formula is constrained to the BTC used within transactions and not the BTC used as store of value, which would heavily decrease the number. I'd guess it would be closer to 10-25 range. Additionally, any coins lost would permanently skew velocity down. Parsing the blockchain also presents a lot of problems because not all transactions, especially large ones that skew network statistics, have any value. Bitstamp might modify their wallet management systems and redistribute 500,000 BTC 100 times. I avoided bitcoin days destroyed for this reason.

I'll definitely check out Metcalfe Value. Thanks for the feedback!

Fair response, as your method attempts to separate "active" from "inactive" bitcoins.  I think you should make your tables clear, however, and call it "Velocity of Active Bitcoins" as opposed to just "Velocity."

I'd still like to see historical data on gold velocity.  I expect the same phenomenon happened in pre-fiat times: the rich dukes had vaults of "inactive gold" while middle-class merchants traded "active" gold at a much higher velocity. It would be very interesting to know the ratio of inactive/active gold over history and the corresponding velocity.  


EDIT: I guess there is also a straightforward mapping between "velocity" and "velocity of active bitcoins," that just depends on velocity and the percentage of bitcoins that remain inactive, correct? 

[eXSn]

The chart is misleading, I included it as an example of improper valuation used in media

Sure, but you didn't really explain the issues here.  It is valid to make valuation estimates by comparing the bitcoin market cap to the gold market cap (or to tax haven funds).  These comparisons are useful.  That's not what is wrong with the chart, however.

Gold doesn't have value as a payments network. I discuss in the paper why it's not an appropriate comparable. You can, however, factor it as a % of BTC outstanding to remove from Active Coins.

The velocity number in the formula is constrained to the BTC used within transactions and not the BTC used as store of value, which would heavily decrease the number. I'd guess it would be closer to 10-25 range. Additionally, any coins lost would permanently skew velocity down. Parsing the blockchain also presents a lot of problems because not all transactions, especially large ones that skew network statistics, have any value. Bitstamp might modify their wallet management systems and redistribute 500,000 BTC 100 times. I avoided bitcoin days destroyed for this reason.

I'll definitely check out Metcalfe Value. Thanks for the feedback!

Fair response, as your method attempts to separate "active" from "inactive" bitcoins.

I'd still like to see historical data on gold velocity.  I expect the same phenomenon happened in pre-fiat times: the rich dukes had vaults of "inactive gold" while middle-class merchants traded gold at a much higher velocity. It would be very interesting to know the ratio of inactive/active gold over history and the corresponding velocity.   

I'll check it out but I'm not sure the concept of velocity existed that far back lol
Maybe if they recorded GDP and tracked the monetary base it could work.

[Peter R]

I'll check it out but I'm not sure the concept of velocity existed that far back lol
Maybe if they recorded GDP and tracked the monetary base it could work.

I looked into it a month ago and found this:

http://www.complementarycurrency.org/ccLibrary/Mayhew_1995_Population%20money%20supply%20and%20velocity.PDF

It claims that velocity of money in ancient times was hovering between 3 and 10 between 1300 and 1700 in England.  I wasn't convinced however that they had a good way to estimate the "inactive gold" and thought maybe some powerful families had a lot more than the authors assumed.  

Fascinating stuff.

[Peter R]

The chart is misleading, I included it as an example of improper valuation used in media

Sure, but you didn't really explain the issues here.  It is valid to make valuation estimates by comparing the bitcoin market cap to the gold market cap (or to tax haven funds).  These comparisons are useful.  That's not what is wrong with the chart, however.

Gold doesn't have value as a payments network. I discuss in the paper why it's not an appropriate comparable. You can, however, factor it as a % of BTC outstanding to remove from Active Coins.

Historically it did have a sort of "payment network."

Comparing the total value of all gold reserves (either now or at some point in history) to the potential value of all bitcoins is a useful comparison.  How could this not be useful?

I'm not saying that such a comparison will necessary be an accurate predicator or the best predicator for bitcoin, but to say that it is not an appropriate comparison does not make sense.  

[eXSn]

Its definitely something good to look at but the way analysts and media are translating it to potential bitcoin price as of now makes no sense.

[eXSn]

Anyone else have feedback?