At the time of writing Bitcoin (BTC) is at $8662 per coin with nearly 12% gains in 7 days. A lot has been said and written about the extreme growth in value of this asset but beyond the technical noise from the mining geeks, good fundamentals about its pending application across Asia and the constant coverage, opinion and discussion from mainstream media, there has emerged a very simple way of measuring, valuing and predicating Bitcoins price. Which, by the end of the year, could soon become bigger financially than Apple (the world’s biggest tech firm and most valuable company in the world as we speak) may turn out to be literally, priceless.
There are several ways of measuring a “normal” company or asset. Value can be considered “in the future” such as a new startup based on the predicted market cap, adoption and future application. It can be as simple as 3/5/10 times earnings or sales amassed at a fixed point in time. Or, as the old saying goes “something is only worth what people will pay for it.” Bitcoin is kind of a cocktail. It has “future” adoption potential (which is a whole new article), it has so many beneficial and anti-establishment applications and seemingly is worth what millions around the world are willing to take a punt on. Except there is a ruthlessly basic way of creating your own “Bitcoin Crystal ball.”
Analysts at FundStat Global Advisors have built a short-term valuation model to become bullish on Bitcoin in the short to mid-term future based on Metcalfe’s Law. Metcalfe’s law put simply states that a value of a network, in this case, Bitcoin, is directly proportional to the square number of users in that network. To use an analogy, a phone is pointless if just you have a phone. However, if everyone in your group of friends or around the world has a phone, suddenly the asset of “a phone” is significantly more valuable. Or to put it in the millennial form: Facebook. Not a great ball of laughs browsing your own updates but a never-ending sense of satisfaction stalking old school friends.
If you double your users, then by definition you are doubling your value. Before writing this, these smug, city slickers had Bitcoin price predictions of around $6,000. Now before we laugh at them for their inaccuracy with it now surging to nearly $9,000 they probably have invested in it and made more money than God. They were wrong, its surpassed that. They revealed that 94% of Bitcoin’s movement in price since 2013 can be explained by the square number of users X the average transaction value. They also used this linear factor to confidently explain price variation by 83%. To put in context, this is near impossible to do in a company stock.
Like any model, estimates and educated guesses were made and a financial model is only as accurate as the figures you enter in to it. In the short-term the beast can keep rising and depending which strategist you choose to believe, anywhere from $25,000 to $100,000. Yet, after this upside, the bubble could burst and a small correction like any asset class is set to loom.
How would someone credibly think $100,000 I hear you cry? This would-be Moore’s Law. Devised by an Intel cofounder back in 1965 relevant to technology it claims, “any technology (or now cryptocurrency) that is growing exponentially, has a doubling time.” Since Bitcoin’s creation its doubled every 8 months and based on this theory this doubling trend could make Bitcoin worth $100,000 by February 2021.
So I leave you with a quote. Despite all the fundamental talk, technical analysis and integral tech speak, based on the above and the laws mentioned; “Simplicity is the ultimate sophistication.”