How to think about valuing Bitcoin

Bitcoin. Everyone’s talking about it, some people want a lot of it, but nobody really knows how to value bitcoin. As of today, Bitcoin’s market cap is about USD$189 Billion. A single Bitcoin is currently at USD$10,210, down from the last 2 week high of about $12,000. If you think this is volatile, where were you in 2018? So, is bitcoin overvalued? Is bitcoin undervalued? How do we actually go about valuing an asset that is still undergoing price discovery?

If you think and feel that it’s super expensive, you’re right. Whenever anyone sees something as costing $10,000, of course you’d think it’s expensive. Unless you’re Jeff Bezos of Warren Buffet of course. But, what’s in a Bitcoin? Did you know that a bitcoin is extremely divisible, and that you can simply own a fraction of it? This is one of the reasons why I think Bitcoin is undervalued.

Fractional Bitcoin Ownership

One bitcoin is divisible up to 100,000,000. That’s right. You can divide one bitcoin into a hundred million pieces. That smallest fraction of a bitcoin, is called a satoshi.

100,000,000 Satoshis (SAT) = 1 Bitcoin (BTC)

The metric you use to measure things is important, because it gives you context. The fact that there will only ever be 21 million BTC therefore, gives us some context of how scarce BTC is, and how to thus value it.

If you had no context of how heavy 1KG is, and I were to tell you 1KG of Gold will cost you USD$62,300, you’d be like what. the. fuck.

So, let’s get fractionality out of the way by remembering that 1BTC = 100,000,000 Satoshis. And that the end goal for BTC is to transact in satoshis.

Get on this asymmetric bet while you still can

What is an asymmetric bet? It is one where your downside is severely limited, while your upside is potentially unlimited, or several magnitude higher than your downside risk.

“But…. bitcoin is already at $10,000. How much more upside can there be?”

Yes, a single bitcoin at $10,000 seems expensive, and a market cap of $189 billion sounds impressive and probably at the ceiling of what it can be.

But remember, Bitcoin is not a company. It is meant to be a digital asset that can also act as a store of value and a currency to transact with. This means that Bitcoin is not competing with individual companies, but with Fiat currencies and other store of value such as gold.

Comparing Bitcoin with Gold and Money

Yes yes yes, you can’t get over the fact that bitcoin is worth $189 Billion. But did you also know that Apple alone is worth USD$2 Trillion?

Let’s open our minds a little and see just how little Bitcoin is compared to the market cap of some other stuff. Then, maybe we’ll be able to see just how much more room it has to grow into.

This is how bitcoin currently stacks up against Apple and Gold. Apple is currently more than 10X the market cap of Bitcoin, and Gold is about 5X of Apple. Now, let’s look at how they in turn stack up against the global stock market and M2 money supply.

The global stock market stands at $89.5Trillion, and the M2 broad money supply is at $95.7T. Looking at this chart, Bitcoin is hardly a dent. In fact, i could simply remove the words Bitcoin, and you couldn’t tell the difference. (M2 broad money supply includes all cash, checking and saving deposits, time deposits, securities and mutual funds.)

This is how early bitcoin is in claiming some ownership from the rest of these assets. If even 1% of these other assets were to shift to bitcoin, their value would skyrocket.

The Bitcoin Lindy effect

Bitcoin has come a long way from the days of using 10,000BTC to purchase 2 pizzas, and at each bump up, there’s been disbelief at how much it has risen. From $1 to $112, $112 to $1,000, and $1,000 to $10,000.

But if you look at the road ahead, and the chart above, it still has a long road ahead. Over the last decade of bitcoin’s existence, there’s also been serious accusations and hurdles thrown in Bitcoin’s path, but it has done more than survived, and has thrived in spite of the difficulties faced.

The Lindy Effect posits that the future life expectancy of a technology is proportional to their current age. Every year that bitcoin survives and thrives, is an additional year into the future that bitcoin should survive.

In fact, Bitcoin in 2020 is stronger than ever, with companies like MicroStrategy choosing to hold their treasury reserve in Bitcoin instead of USD.

This particular post is not for me to post my bitcoin value predictions, but more for you to see where bitcoin is currently in relation to other assets, and where you think bitcoin can be over the next decade.