Bitcoin’s value ranges between $25,000 and $38,000
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The valuation of a crypto-token is really a difficult exercise, because there is no referential, no benchmark. What is the right model to apply?
Let’s start first with the basic. Blockchain is a messaging protocol managing the settlement of any digital asset transfer. The embedded token is a commodity to use the network and be part of the protocol, as well as an incentive to play an active part of the community. The clearing can be done in the community, on the blockchain, in that case the token is a crypto-currency, or out of the blockchain, in that case the token is only a crypto-commodity.
2 illustrations:
With Bitcoin, clearing and settlement are done on the network, Bitcoin is a crypto-currency
With Ripple, only clearing is done on the network (for now at least, Ripple’s strategy is first to build a community using Ripple as a messaging – clearing service, before moving to settlement using XRP), Ripple is a crypto-commodity – same thing with Ethereum
Therefore, there are 2 ways to value a crypto-token: as a crypto-currency and as a crypto-commodity. This is depending on how we consider a crypto-token, in term of use cases that will classify the token into one the 2 categories.
Valuation As a crypto-currency – settlement function
The most common tentative to value a crypto-currency is to compare the use case with the equivalent market value. If Bitcoin is to be used for remittance transfer, which accounts for $500bn per year, then the max value of a Bitcoin should be : $500bn / 21m = $23,809. If it is supposed to replace gold (market cap = $8,000bn), then the max value of a Bitcoin should be $381,000. The value can be added, depending on which use cases Bitcoin finally takes. These values are max, because it would assume that Bitcoin takes 100% of the market. So if Bitcoin takes only 10% of the gold market, then the value is $38,000.
This approach is a first very basic one, because If Bitcoin is a currency (or close to in the case of gold), it should include the velocity.
As a currency / money, the formula should include the velocity of circulation (MV = PQ). Looking forward, if the use case extends to peer-to-peer money transfer, we can assume that the more users there are, the highest the Velocity is (1 bitcoin will circulate more frequently between users). As the bitcoin supply is capped, the velocity for 1 bitcoin has to increase when there are more an more users. Currently, Bitcoin’s velocity, for the ones used as a payment or transfer (as opposed to investment) is close to 5, so Bitcoin’s value only related to the remittance use case should be closer to $5,000 (USD velocity is about 13, so if Bitcoin were to replace the USD, then its value should be closer to $2,000).
Also, this approach focuses only on the settlement part related to money and does not count the clearing part, which is necessary to get the full value of a Bitcoin.
Valuation as a crypto-commodity – clearing function
If Bitcoin is a crypto-commodity, its valuation is derived from the underlying protocol managing the settlement. It is difficult to value a protocol, but with bitcoin being used like Western Union, another way to value 1 Bitcoin would be to compare the fees of both kind of transactions. For a bitcoin transaction, there is on average 0.0001 bitcoin fees, corresponding to the clearing part, which counts for 25% of the total cost of clearing & settlement. 1 remittance transaction generates about $20 fees, assuming it counds $5 for the clearing part. So 1 bitcoin should be $5 / 0.0001 = $50,000, but to convert the market, there has to be an incentive on cost, let’s assume that using Bitcoin should be 50% cheaper than using WU, so the price should be closer to $25,000.
Interestingly, with this model, the number of bitcoins does not have a direct impact (may have nevertheless because at some point we might run out of Bitcoin). In that particular case, the notion of market cap does not seem really relevant (for oil, the most relevant information is the price of the baril, not the value of the petrol’s reserve on earth).
Whatever the token is, there are also a couple of drivers to take into account
Bitcoin is actually creating a new market and might not be replacing an existing one. Comparing Bitcoin to gold assumes that Bitcoin is going to replace gold, but the reality is that it opens a totally new market, providing access to an asset class some people could not have access to. It is about financial inclusion, and it is about enabling anyone on earth to have access to safe haven investment. So there is no point in comparing both, and even less to derive a value from the gold market.
As a protocol and a commodity, Bitcoin does not benefit anyone except the miners. But it is organizing and incentivizing human activity, through a “token economy”, an economy based on a token which is natively embedded in the protocol and the network to create additional services. So the value of the token as a community is derived from the number of use cases built for the community.
When it comes to valuation, it should include a combination of different use cases with a probability of occurrence
For Bitcoin, if there are 3 main use cases, the value should be somewhere between $25,000 and $38,000:
International remittance – bitcoin as a crypto-currency (Clearing & Settlement) – 1 bitcoin = $5,000 + $25,000 = $30,000International remittance – bitcoin as a crypto-commodity (Clearing part only) – 1 bitcoin = $25,000Replacing gold – 1 bitcoin = $38,000
With the same kind of analysis, Ripple / XRP is valued at $1,250 (XRP as a crypto-commodity, clearing compared to SWIFT transactions fees) – quite a huge potential for this crypto-currency.
Of course, at the end of the day, Bitcoin has a price buyers are ready to buy, and sellers are ready to sell. It is an Investment, following the typical supply-demand law. As Bitcoin and the other currencies are not correlated to any other assets, no doubt that it will play an important role in the hedging strategy of investors.