Disclaimer: Opinions expressed in this article do not constitute investment advice from Bitcoin Reserve.
Defining bitcoin's worth is tricky. Unlike traditional investments, bitcoin lacks the quantitative qualities such as revenue, cash flow, or profit necessary to project value in the conventional sense. But by determining bitcoin's potential utility, we may be able to grasp an understanding of its fundamental worth.
People struggle to define bitcoin because it's undefinable. It's one of the world's most versatile assets. And for many, that renders bitcoin with indefinite upside.
Being so versatile allows bitcoin an almost unending tap of capturable markets. Be it within remittance, as a store of value, via micropayments, in trading, gaming and gambling, or as a global reserve currency, bitcoin's scope is almost limitless.
The resultant effect of bitcoin's extensive utility is innumerable price predictions. From analysts making educated guesses based on technical setups to forecasts plucked seemingly from thin air, determining bitcoin's projected value has become an industry-wide affair.
In a previous research piece, we highlighted the work of several analysts attempting to predict bitcoin's expected value via the stock-to-flow (S2F) model. The S2F hypothesizes that bitcoin's worth can be determined based on its supply and demand. By calculating bitcoin's circulating supply (stock) against annual production (flow), a ratio upon which to factor bitcoin's scarcity arises.
With this ratio, analysts believe bitcoin's value could theoretically continue perpetually alongside its ever-deflating annual production.
Today, we look at a different model: The equation of exchange.
Calculating Bitcoin's Worth
In economics, the model shows the relationship between money supply, the velocity of money, price level, and index of expenditures. Put simply, the model attempts to discover the principal value of a currency based on the relationship of these factors.
In 2016, analyst Chris Burniske adapted the equation of exchange model to fit bitcoin. Burniske's improved model dictates that the value of bitcoin is directly related to the dollar volume of the market it supports. As noted, bitcoin has a fair bit of versatility in this regard.
A recent report from Liechtenstein-based research group Crypto Research extrapolates upon Burniske's earlier work. Applying the model, researchers determine bitcoin's value based on its use in the following "addressable" markets—areas in which the asset can find the most use:
- The unbanked
- Tax evasion
- Online transactions
- Store of value
- Reserve currency
- Offshore accounts
- Medium of exchange
To factor in the expected growth of each capturable market, researchers appended each one with an assumed annual growth rate. They base this on the CAGR of the S&P 500 index from 2000 to 2018—noting that expected growth would match the long-term growth of the world economy.
Next, researchers estimate adoption rate by calculating the growth in the number of people owning crypto per year alongside the historical increase in active wallet addresses.
The result is an estimate of bitcoin's value increase over the next decade. The report suggests that bitcoin is still at the start of its adoption curve. It also submits that as of the end of 2019, the pioneer cryptocurrency has penetrated less than 0.44 % of its total addressable markets. Consequently, the researchers conclude that should bitcoin manage to penetrate even 10% of its addressable markets, its utility price should reach "nearly $400,000."
Bitcoin's Best Bet Is as a Global Reserve Currency
Reserve currency counts among bitcoin's many capturable "markets." Arguably this market is one in which bitcoin could wholly dominate—by becoming a global reserve currency. While the researcher's caveat that bitcoin has yet to penetrate this goal, some analysts propose that it's very much on its trajectory.
As touched upon in a previous research piece, the dollar's days as the world's de facto reserve currency are numbered. And with economists more or less ruling out a return to the gold standard, bitcoin could viably take the mantle.
Should reserve status be achieved, bitcoin's price estimate could be far higher than the researcher's $400,000 valuation—even without penetrating any of the other markets.
According to the IMF, present estimates value reserve currencies at around $11.7 trillion, but judging by the researchers assumed CAGR for reserve currencies of 6.4%, this market could be worth in excess of $23 trillion in 10 years. Based on the fiat amplifier—the impact of a net dollar on network value—if bitcoin were to capture the entire reserve currency market, BTC could comfortably surpass $1 million apiece. In theory, at least.