🔮 Bitcoin: How to predict future prices? (Part 2)
This is part two of my two part series on Bitcoin covering the basics on how to value this crypto asset. You can check out part one for an explanation of the key terms. But first I will provide a quick update on the macro-economic climate which caused Bitcoin to hit 5-month lows last week.
Next I will assess the current health of the asset on the basis of its own fundamentals. You can go to the “tldr” summary at the end if you want to skip straight to my conclusions on price predictions. (Disclaimer: This is not financial advice, make sure to always do your own research).
📊 Macro-Economic Environment
In a nutshell the Federal Reserve is under pressure to raise interest rates in order to curb higher than expected inflation figures coming out of the US. This has caused investors to go “risk-off” or in other words get out of riskier assets like stocks and cryptocurrencies.
Netflix has been the most high-profile name in equities to be hit by this broader market sell-off. The company also reported disappointing subscriber growth figures last Thursday which sent the stock down over 20%.
The effects of this downturn have also impacted Bitcoin and the wider crypto market. Bitcoin’s decline below the $40,000 barrier last week is also psychologically important and may cause the price to drop further.
The Bank of Russia’s proposal to ban all cryptocurrency activity also appears to have spooked the Bitcoin market and sent prices lower this weekend.
But are the fundamentals of Bitcoin sound? Let’s take a look at that in the next sections.
🥇Store of Value: Gold Comparison
As mentioned in part one, in addition to being a medium of exchange, the second major use-case for Bitcoin is as a store of value.
The current market cap of all the gold in the world is valued at $10 trillion. Gold obviously has a number of other uses such as in jewellery or certain kinds of industrial manufacturing. But if we run a thought experiment and assume that Bitcoin can get to a market cap of 50% of gold or $5 trillion, what will be the new price?
Price = Market Cap / Circulating Supply
We know that the maximum total supply of Bitcoin will eventually be 21 million units (it is currently much lower than this). But if we fast-forward to the future date when the total amount of Bitcoin has been released onto the market we can divide $5 trillion by 21 million. This results in a fairly conservative future price of $238,095.
(Note: I use the Wolfram Alpha natural language calculator to make it easy to calculate big figure in the trillions and millions without having to remember all the zeros).
With the current price of Bitcoin fluctuating around $35k this represents a price increase of 580% or in other words an almost 7x return.
But there are some analysts who don’t view Bitcoin as a replacement for gold. For example, Bitcoin strategist Greg Foss focuses on the bond market as the main target for Bitcoin to take market share.
The international bond market is worth well over 10 times that of gold - estimated to be in the region of $119 trillion. If we assume that Bitcoin can attract just 10% of this capital, we get to a figure of 11.9 trillion. If we run the calculations again and divide 11.9 trillion by 21 million we get to a price of: $566,666.
📈 Transactions, Market Cap and the NVT Ratio: Paypal Comparison
The one year chart below shows the daily amount of Bitcoin being sent on the network in US dollars. If we ignore the huge spikes in September of around $310 billion to $380 billion, we can arrive at a conservative average of around $50 billion that was sent on the network every day during 2021:
To get the annual figure I will simply multiply this 50 billion by 365 days. This equals: $18.25 trillion sent on the Bitcoin network per year.
Next we divide Bitcoin’s current market cap at almost $678 billion by $18.25 trillion to get an annual NVT ratio of 0.037 (rounded up). In other words, Bitcoin is valued at 3.7% of the money it moves on an annual basis.
- Note: prices and therefore the market cap changes all time, but these figures are correct at the time of writing on Sunday January 23rd.
Now we can compare this NVT figure to other major payment networks in the fiat currency world such as Paypal which has a current market cap of $192 billion:
In Q3 2021 Paypal processed almost $310 billion worth of payment transfers:
We can multiply that by 4 to get the rough annual amount of $1.24 trillion.
So again, $192 billion market cap divided by $1.24 trillion results in over 0.15 or trading at 15% of the dollars it moves annually.
Based on these rough calculations it looks like Bitcoin is still very under-valued or under-priced compared to Paypal.
🖥️ Hash Rate: Comparison with other Cryptocurrencies
Put simply, the hash rate determines the level of security of a crypto asset which uses proof of work to reach consensus on transactions. As you can see in the all-time chart below, Bitcoin’s hash rate dwarfs that of its main cryptocurrency competitors:
The other major assets including Ethereum, Litecoin and Bitcoin Cash in fact barely register on the chart in comparison to Bitcoin.
Hash rate is a factor which is often overlooked given that there is nothing equivalent to it in traditional financial markets. But a crypto network will not be very valuable for long if it is not secure, so hash rate is a critical metric to take into consideration.
🎁TLDR: Summary
So, what does this all mean? Based on my store of value analysis, I think it is reasonable to assume that over the long-term (multiple years) Bitcoin can reach a price target of between $240k at the low end and $570k at the higher end. At the current prices between $30-35k (and going lower), this appears to be a good entry point.
Of course you have to be willing to tolerate a lot of downside price volatility in the short to medium term, which I define as multiple weeks and months. So I don’t view Bitcoin as a short-term speculative bet. Also I would always advise to put a small percentage of your total net worth in this asset, and only what you can afford to lose. (This is a good rule of thumb for all volatile high-growth assets).
Given the value Bitcoin generates in terms of daily transactions compared to Paypal, it also looks under-valued as a payment network. This might also indicate that now is an advantageous time to enter the market for Bitcoin.
And lastly, when we look at hash rate we can see just how dominant Bitcoin is in comparison to other leading blockchains which use proof of work. This is also reflected in the recent price movements in the market. Bitcoin continues to be the most stable asset compared to its peers in crypto during market downturns. At the same it offers impressive long-term upside potential. This balance is difficult to find among many other investment types.
What did I miss? - These reports are a learning process for me and I’m very open to constructive feedback and suggestions.
What stock or crypto asset should I cover next? You can contact me by email: hellorobostox@gmail.com or feel free to leave your response in the comments below. You can also follow me on Twitter: @daneasterman.
Disclaimer: I am not a financial advisor, none of this report should be taken as financial advice. Instead this should be viewed as starting point to conduct your own research. I have been long Bitcoin since spring 2018.