Bitcoin has recently fallen to around US$56,000. In July, the US asset management company VanEck predicted that the price of Bitcoin will reach US$2.9 million in 2050. This is indeed an astonishing figure in comparison.
So what should be the reasonable price of Bitcoin? $0, $50,000, or $1 million? Or even higher? In this article, Biteye will discuss 4 Bitcoin valuation methods to help everyone understand the value of Bitcoin more comprehensively.
Source: Biteye
Bitcoin Valuation Method
A variety of mature and effective valuation methods have been established for traditional assets such as stocks and bonds. However, assessing the value of Bitcoin faces additional challenges, and there is currently no single valuation method that is clearly superior to other methods. The following are 4 more common Bitcoin valuation methods: production cost model, inventory flow model, Metcalfe's law, and AHR999 currency hoarding indicator.
Production cost model: Mining not only consumes a lot of electricity, but also requires other resources, so the mining cost can be regarded as the basic value of Bitcoin.
Stock-to-flow model: A higher stock-to-flow ratio usually means a higher degree of scarcity for Bitcoin, which could drive its price higher.
Metcalfe's Law: This theory emphasizes that an increase in the number of Internet users has an exponential impact on value growth.
AHR999 coin hoarding indicator: Created by Weibo user ahr999, it assists Bitcoin fixed investment users to make investment decisions based on timing strategies.
1. Production cost model
Unlike fiat currencies such as euros or dollars, which are generated at almost no cost, Bitcoin is generated through a complex mining process. Therefore, the production cost of Bitcoin mainly refers to the mining cost.
Over the long term, the cost of mining one Bitcoin is usually similar to the market price of Bitcoin. Mining costs can be viewed as a floor for Bitcoin prices because historically Bitcoin prices have rarely been below mining costs for long periods of time. This phenomenon is due in part to the correlation between the price of Bitcoin and the total computing power used for mining (i.e. hash rate), as well as the competitive environment of mining, where less efficient miners are often forced to cease operations. The figure below shows the average mining cost of Bitcoin:
圖源：MacroMicrohttps://en.macromicro.me/charts/29435/bitcoin-production-total-cost
According to the MacroMicro website, the average cost to mine one Bitcoin is approximately $74,000 as of September 2, 2024, which is the current valuation of Bitcoin based on a production cost model.
Since the price of Bitcoin is now below this mining cost (the valuation calculated by the production cost model), this means that one of two things may happen in the near future: one is that the number of miners decreases, and two is that Bitcoin The price has risen to a level that exceeds the cost of mining.
2. Inventory flow model
The stock-to-flow model, also known as S2F (Stock-to-Flow), is a method commonly used to evaluate the value of commodities. Specifically, "inventory" refers to the current total supply of an asset, while "flow" refers to the new supply every year.
The higher the stock/flow ratio, the greater the scarcity, as it takes longer to reach current stock levels. For example, if the stock of a good is 100 times the flow, it would take 100 years to replenish the current stock. By contrast, if the stock of a good is only 10 times the flow, it is less scarce because it will only take 10 years to replenish the current stock. Therefore, the inventory flow model provides us with a simple and effective way to evaluate the scarcity of goods. This scarcity is an important factor affecting price.
Bitcoin stock-to-flow ratio
As of August 2024, the current number of Bitcoins in circulation is approximately 19,750,000 (inventory). According to the current reward for each block that miners receive is 3.125 Bitcoins, and a block is mined every ten minutes, there are approximately 164,359 per year. The output of Bitcoins. Therefore, Bitcoin’s stock-to-flow ratio is:
19,750,000 / 164,359≈ 120.1
This ratio indicates that at the current rate of growth (flow), it would take approximately 120 years to reach current levels of circulation (inventory).
Next, let’s look at the world’s most important reserve asset—gold. According to 2023 data from the World Gold Council, gold’s stock-to-flow ratio is:
209,000 / 3,500≈ 59.7
As mentioned above, a higher inventory-to-flow ratio means a higher scarcity of assets. Then according to the stock-to-flow model, Bitcoin’s scarcity is approximately twice that of gold!
However, in August 2024, gold’s total market capitalization was approximately $16.8 trillion, while Bitcoin’s total market capitalization was approximately $1.1 trillion, with the latter only one-sixteenth of the former.
圖源：Companiesmarketcaphttps://companiesmarketcap.com/assets-by-market-cap/
Therefore, calculated through the stock-flow model, Bitcoin’s scarcity is twice that of gold. If we simply and roughly calculate the market value of Bitcoin as twice that of gold, the result will be $33.6 trillion. As a result, Bitcoin’s valuation will reach a staggering $1.708 million, 30.5 times its current value.
Of course, this calculation lacks a certain basis. After all, scarcity cannot be quantified. Therefore, we can also refer to the "Bitcoin Stock-to-Flow Ratio Real-time Chart", which provides a more detailed calculation of Bitcoin valuation. In the image below, the yellow line represents the price of Bitcoin calculated by the model, while the colored line represents the actual price of Bitcoin in the market. It should be noted that this indicator began to deviate from 2022, and the model predicted price continued to be higher than the actual price of Bitcoin, for reference only.
According to the "Bitcoin Stock-to-Flow Ratio Real-Time Chart", Bitcoin's current valuation should be $210,000.
圖源：bitbohttps://charts.bitbo.io/stock-to-flow/
3. Metcalfe’s Law
Metcalfe's Law is primarily used to assess the value of communication networks, but it also applies to blockchain technologies such as Bitcoin.
According to this theory, the more users a network or technology has, the greater its appeal and value will be, and the value of a network is proportional to the square of the number of users. For example, if a network has 10 users, then the value of the network is proportional to the square of the number of users, that is, 10 * 10 = 100. If the number of users increases to 20, the value of the network will increase to 20 * 20 = 400. This shows that the value of the network grows exponentially with each new user, rather than linearly.
As of September 4, 2024, the number of Bitcoin addresses has doubled from approximately 26 million to 54 million in the past 5 years, which is approximately 2.076 times. According to Metcalfe's law, the square of the growth of Bitcoin holders is proportional to the change in market value. Then the market value of Bitcoin should be 4.3 times what it was five years ago. One Bitcoin is now valued at approximately US$41,000.
4. AHR999 coin hoarding indicator
This indicator implies the return rate of short-term fixed investment in Bitcoin and the deviation of Bitcoin price from expected valuation.
When ahr999 index < 0.45, you can buy the bottom;
When ahr999 is between 0.45-1.2, it is suitable for fixed investment;
When ahr999 >1.2, the currency price is already relatively high and is not suitable for operation.
In the long term, the price of Bitcoin shows a certain positive correlation with the block height. At the same time, with the advantages of fixed investment, users can control the cost of short-term fixed investment so that it is mostly below the price of Bitcoin.
Source: ahr999
ahr999 indicator = (Bitcoin price / 200-day fixed investment cost) * (Bitcoin price / index growth valuation)
Calculated based on the Bitcoin price of $57,481.9 on September 4:
0.6=(57,481.9/63,570.07)*(57,481.9/index growth valuation)
As a result, the Bitcoin index growth valuation is $86,628
Although this index growth estimate changes every day, the current Bitcoin value is almost over 80,000.
5. Summary
Each of these valuation methods has its own characteristics and helps us understand the value of Bitcoin more comprehensively. However, the final price changes of Bitcoin will take time to observe and verify, so be cautious as to use this as an investment basis.
[Disclaimer] There are risks in the market, so investment needs to be cautious. This article does not constitute investment advice, and users should consider whether any opinions, views or conclusions contained in this article are appropriate for their particular circumstances. Invest accordingly and do so at your own risk.
This article is reproduced with permission from: "Deep Wave TechFlow"
Original author: Viee, Biteye core contributor
