A Proposal for Bitcoin Valuation and Price Analysis

15 Aug 2017 by Brett Garman, SC Bitcoin and Blockchain

Bitcoin is the first of its kind, a new asset class. One of the reasons I think folks have a hard time understanding why Bitcoin is worth so much is because they try to compare it to something that is not entirely its equal and for that I am no different. Really now, what are we to do? In the history of man, we have never had an asset like it.
For example, evaluating a stock prospect may begin by simply looking at the company’s earnings and comparing that to its price. Of course, the stock’s P/E ratio is just an indicator and not all the info you need but it is a basic property of a stock’s value nevertheless. Then you sort of find that the actual value of the stock is near the inverse of Price/Earnings+ CapitalAssets-Debt=n.

Bitcoin does not have a P/E ratio. It does not have Overhead Costs or Debt. It is not a company nor is it owned by a company so how should it be valued? Like anything, a value is derived from demand and price is a function of Demand. The belief that it has value, (people want it) and the supply (how much is available) provides the price. Price and Value are easily distinguishable this way because a price is based on the actual value of a given thing. That means Price is mainly driven by the market of Buy/Sell orders and duration of those, not to mention the most important factor…fear. Fear is a big driver in stocks prices and likewise Bitcoin prices and as such, it should be a variable.

I may have missed something but all of the above factors are what I consider with some modification.

My 3-year estimates:

So how do I value Bitcoin right now? I think we have to start with a realistic guess. I think Bitcoin will someday (3 years) consume 5% ($350 billion) of the money currently invested in Gold ($7 trillion). I think this because the philosophical underpinnings appeal to the main customer of shiny things, namely Gold. I have also watched Bitcoin’s market cap grow to 70 billion in 2 years. If I am right about that, then I can calculate a very conservative base value that I can add other factors to0 as I find relevant.

350bil/17mil=20,588.24

That is a core valuation of $20,588.24 per Bitcoin in 3-5 years but that’s not the whole story.

The MBP (most basic price) I choose for all of my Bitcoin analytics is the 2014 Bear Whale incident upon which a $300 dollar, 6 hour, near-death experience for the king of digital assets was achieved.

Using the MBP and the last time I believe a strong consolidation occurred flushing out the speculators and revealing the HODLers ($3500) I can then derive a Psuedo-P/E Ratio (P-P/E).
3500/300MBP=P-P/E:11.67

So if I believe that 11.67 is a P-P/E for conservative estimation purposes then I can factor in my first product of 20,588.24
11.67(20,588.24)=240,264.76

That leaves me with a 3-year future Bitcoin valuation of $20,588.24 at a price of $240,264.76. The P-P/E ratio is naturally 240,264.76/20,588.24=11.67
So I think the MBP of Bitcoin in 3 years is $240,264.76

However, based on the spot price of Bitcoin as of this writing $4,200/300=14, 14(20,588.24)=288,235.36 and the given the nature of FOMO and various sociological product adoption curves I am of the opinion a P-P/E of 20 is doable. 20(20,588.24)=411,764.80

Therefore, a realistic price range for Bitcoin in 3 years is block $288,235.36-$411,764.80.

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Disclaimer: All of the above is not to be considered financial advice. It is my opinion based on my research and sentiments and used for my personal investment purposes.