Embed Size (px)
Citation preview
Fundamental Analysis and Valuation for
Bitcoin
Kirill Gourov
Agenda
Why is Analysis Important?
How can you Analyze Price?
Comparable Analysis
Quantity Theory of Money
Bitcoin’s Price Today
Why is Analysis Important?
“The price of Bitcoin itself shouldn’t matter in the long term, because it’s not supposed to be a speculative currency.” 1
All currencies are speculative
Daily FX transactions calculated at $5.3 trillion per day
1 USD is worth more today than 6 months ago
1 Why Bitcoin’s Price is Irrelevant to Its Success.
Why is Analysis Important?
As long as the value of Bitcoins does not go to zero, it will have the same utility as if the value were very ‘high’. 1
Small market capitalization limits remittance sizes
Multiple negative effects to stakeholders
The price is irrelevant because by the time Bitcoins are seen as incredibly valuable we will no longer be looking at the price to sell. 2
Investors should seek to diversify their portfolio across many asset within multiple asset classes, including currencies
Comparing Bitcoin value to the dollar’s is like comparing a written letter to an email… oil to steam before the oil age, etc. 3
Just as easily comparing Betamax to VHS
Good luck telling a VC that you have no competitors
1 Why the Quoted Price of Bitcoin Doesn’t Matter2 The Price of Bitcoin Doesn’t Matter3 Why Bitcoin Value vs. The Dollar Doesn’t Matter (and Never Will)
Why is Analysis Important?
Stakeholder Considerations
Consumers
Merchants
Miners
Bitcoin Businesses
Investors
Developers
Regulators/Law Enforcement
How can you Analyze Price?
Comparable Analysis
Uses a statistic to relate the values of similar assets
“If it captures X% of Y”
Quantity Theory of Money
Equilibrium price changes based on expected changes in supply and demand
Comparable Analysis
𝐵𝑖𝑡𝑐𝑜𝑖𝑛 𝑃𝑟𝑖𝑐𝑒 =𝑆𝑖𝑧𝑒 𝑜𝑓 𝑋
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐵𝑖𝑡𝑐𝑜𝑖𝑛𝑠
Make sure you compare Apples to Apples
Where is the value of comparison derived?
Comparison Examples:
Images from Heavy.com
Comparable Analysis
Currency Replacement
M1 vs M2 Money Supplies
Low Inflation vs High Inflation
Market Penetration Rates
Regulatory Risks
Sources: St. Louis Fed, European Central Bank, Bank of Japan, SolidX Partners
Comparable Analysis
Currency Replacement
Quantity Theory of Money
𝑀𝑉 = 𝑃𝑄
M = Money Supply
In terms of Bitcoins, total Bitcoins Mined
In terms of fiat, Market Capitalization
V = Velocity
How many times is each bitcoin spent?
P = Average Price Level
Q = Quantity of Goods
P * Q = Total Transaction Volumes (T)
Quantity Theory of Money
𝑀𝑉 = 𝑇
Money Supply
Sources: blockchain.info
Quantity Theory of Money
𝑀𝑉 = 𝑇
Money Supply
Sources: blockchain.info
Quantity Theory of Money
𝑀𝑉 = 𝑇
Money Supply
Given a certain level of T transactions and V velocity, there has to be market capitalization M
Both sides of the formula will balance
This is where the price of bitcoin exists
Quantity Theory of Money
𝑀𝑉 = 𝑇
Velocity
How many times has each bitcoin been spent?
USD Velocity = ~1.53
As velocity increases, each bitcoin is used more often to process transactions
Increased Velocity = Lower bitcoin price
Quantity Theory of Money
𝑀𝑉 = 𝑇
Transaction Volume
Total value of remittance
Sending money for goods and services
Main metric for gauging adoption
Does not include speculative trading
Quantity Theory of Money
𝑀𝑉 = 𝑇
Transaction Volume
Payment Processor Volumes
Sources: Coinometrics
Quantity Theory of Money
𝑀𝑉 = 𝑇
Transaction Volume
Global GDP as a proxy for addressable transactions
Sources: United Nations 2012
Quantity Theory of Money
𝑀𝑉 = 𝑇
Transaction Volume
Quantity Theory of Money
𝑀𝑉 = 𝑇
Additional Considerations
This does not reflect the market price
Bitcoins have been lost and others held long-term
𝑀𝑉 = 𝑇
Additional Considerations
Quantity Theory of Money
Sources: Federal Reserve 2014
𝑀𝑉 = 𝑇
Bitcoin Utilization
Quantity Theory of Money
Putting the Formula Together
𝑀𝑉 = 𝑇
Bitcoin’s Price Today
How much is being Transacted?
Bitpay announces an average of $1 million processed daily.
– May 2014
Under the assumption that they’ve grown 2x since and control 20% of payment activity, you reach $10 million in daily transactions.
Bitcoin’s Price Today
Bitcoin’s Price Today
What does this mean?
Bitcoin Price: ~$265
Intrinsic Value: $27 - $182
Summary
Analysis is more an art than science
The better your assumptions, the better your analysis
Bitcoin’s current price is significantly based on speculation
If transaction use does not increase, price will continue to go down
