BREAKING NEWS

The Cash Pricing Of Vs. The Current Value Of Bitcoin

The Cash Pricing Of Vs. The Current Value Of Bitcoin
24 Jul
8:03

Researchers from ETH Zurich and the Swiss Finance Institution suggest that you can estimate the value of Bitcoin considering the size of a BTC users network. They proposed a model they called “Generalized Metcalfe’s Law”. 
I followed their instructions and roughly calculated the value of Bitcoin. I got the result of $2,855.Pixabay.com

The value of cryptocurrency, according to current pricing models

At the end of 2017, the price of Bitcoin rocketed up to nearly $20,000. In June 2018, a single unit of cryptocurrency cost “only” $5,818. Bitcoin’s price has been really shaky. And the recent, mainly negative, buzz has not done much to prevent its fluctuation.

Is the current price of Bitcoin justified? This question has been continually asked for a long time. And with a high probability that it will be asked many times again. The problem is that it’s very difficult to set a reference point for Bitcoin’s value.

The Size Of The Network Is Key

Let’s review some recent studies and facts about the value of Bitcoin. Last year, one of the publications suggested that “Metcalfe’s Law” can be applied to Bitcoin. The law originally describes the size of the network as being proportional to the square of the number of connected users of the system (n2).

However, in their paper published in mid-March 2018, researchers from ETH Zurich and the Swiss Finance Institution modified this model (“Generalized Metcalfe’s Law”) and suggested that the exponent, 1.69, should be used instead of the original value of 2. They argue that based on historical data it reflects how BTC’s value has increased compared to the number of users. They concluded that the market capitalization should be somewhere between $22 and $44 billion. Their findings quickly became news all over the globe.

How It Looks Today

Inspired by the story of Arthur Laffer and his sketching of a curve in restaurant, yesterday when visiting a coffee shop and thinking about my last text at Forbes.com on Bitcoin, I roughly followed calculations by ETH Zurich researchers.  

On the day their paper was published (March 15, 2018), the stats for Bitcoin were as follows:

March 15
The total number of Bitcoins that have already been mined;
in other words, the current supply of bitcoins on the network.*
16,921,288
The total USD value of Bitcoin supply in circulation,
as calculated by the daily average of the market price across
major exchanges*
$141,430,179,682
The sum of total number of unique addresses used on
the Bitcoin blockchain (users)**
291,435,529
Source: * blockchain.com, ** own calculation based on data from blockchain.com

Since then, the market capitalization has decreased but the number of Bitcoins mined and the unique addresses used is even higher:

July 22
The total number of Bitcoins that have already been mined;
in other words, the current supply of bitcoins on the network.*
17,162,500
The total USD value of Bitcoin supply in circulation,
as calculated by the daily average of the market price across
major exchanges*
$125,840,427,125
The sum of total number of unique addresses used on
the Bitcoin blockchain (users)**
318,676,255
Source: * blockchain.com, ** own calculation based on data from blockchain.com

The Current Value Of BTC According To The Theory

Without getting too much into financial mathematics, if you assume that the market value was about $44 billion USD in mid-March, it should now be approximately $49 billion. If you divide it by the number of Bitcoins we get the figure of $2,855.

Let’s see once again the chart of average USD market price across major Bitcoin exchanges to see the difference:

The cash pricing of bitcoinAdapted from blockchain.com

As you can notice, it’s still much above the calculated level.

Of course, it’s only a theory and it has its own limitations (read about some of them at the bottom of the article) and my calculations are far from being precise, but they can show the scale of the phenomena.

Value As A Cost Of Mining

Despite the fact that I used some analogs to technical analysis, it’s still not clear BTC is a currency, a security, or a commodity. It has some similarities of each of them but, on the other hand, there are fundamental differences, too.

That is why Joost van der Burgt, a policy advisor at the Dutch National Bank, the central bank of the Netherlands, and an advisor of the Federal Reserve Bank of San Francisco in his report tried to examine the bitcoin value from these perspectives.

He argues that cryptocurrency is not subject to monetary policy or tied to any central government. Neither is there a current native Bitcoin economy with native Bitcoin prices for goods and services. These determinants influence the fiat currency exchange rate.

In some mentions, the SEC admitted that cryptocurrencies could be treated as securities in certain circumstances. BTC do not generate interest payments, dividends, earnings, or capital gains. That is why van der Burgt applied the methods of VC’s (venture capital) used to estimate the value of startups. As a result, Bitcoin’s valuation should be around $10 trillion by the year 2030. This equals 150% of the global supply of gold and M2 United States dollar supply.

If you treat bitcoin as a commodity then it does not possess any value. The researcher says the cost of creating a single Bitcoin is about $1,800, calculated by the cost of energy when mined by professional, energy-efficient mining rigs in China. This figure should be increased due to account overhead, machine costs, and a 25% profit margin (similar to the margins of the most profitable gold mining companies). As a result, van der Burgt postulates that the value of a single BTC is on the level of approximately $2,500.

However, the report by EliteFixtures calculates the energy cost per single BTC on a completely different level. According to this report, the cost of mining in China, where the great majority of BTC originate, should be closer to $3,200.

Ancient Philosophers’ Take On Bitcoin

There is also another theory that may be used when thinking about the value of Bitcoin. It derives from a maxim attributed to Publilius Syrus: “Everything is worth what its purchaser will pay for it”. In other words: value is equal to what someone is willing to pay.

Apparently, it gains the most popularity right now.


The ETH Zurich researchers’ disclaimer about the limitation of their methods:

It is difficult to know the true number of active users, in particular because a single user can have multiple addresses that, to an outsider, cannot be distinguished from addresses belonging to multiple users. Moreover, bitcoin.org’s Developer Guide discourages key reuse, advising that each key should only be used for two transactions (to receive, then send), and that all change should be sent to a new address, generated at the time of transaction (belonging to the sender). Depending on to what extent this advice is followed, this measure is thus an unclear mix between the number of daily users and the number of daily transactions (their activity).

Source: https://www.forbes.com/sites/michalgromek/2018/07/24/the-cash-pricing-of-vs-the-current-value-of-bitcoin/

Recommended

« »