Is It Possible to Value an Asset That Has No Revenue and Zero Cash Flow?

Since the spawn of bitcoin ten years ago, speculators have been trying to figure out a way to accurately value bitcoin.

It is unlike any asset the world has ever seen. It has no earnings, it doesn’t pay you a dividend, it isn’t used in jewelry or electronics hardware. So, what are its value propositions?

The leading factor driving the current market is the safe haven/digital gold narrative - when there is tension between the US and China, both countries are forced to stimulate their respective economy via softening monetary policy hence devaluing their currency.

Another macro factor steering adoption is the ability to get rid of 3rd party intermediaries while still being able to send value across the internet. This is exactly what the blockchain was designed for, it solved the double-spend problem – a roadblock to digitally native assets before.

A third ruling proposition to buyers is the idea of digital scarcity. There is a hard cap on supply; there will only be 21,000,000 bitcoin in existence, not a single coin more. Not to mention permanently lost bitcoin, which some estimate to be in the millions. As of today, 85% of all bitcoin have been mined.

So, we know what gives bitcoin value, but how do we find its real value at the current time?

Piggybacking on the digital scarcity argument, we propose a stock-to-flow model. The stock-to-flow ratio (SF) is the amount of a commodity held in stockpiles or reserves divided by the amount produced annually. Gold has the highest SF ratio of all commodities with a value of 62 – it will take 62 years for the annual gold production to match current supply. This model hypothesizes that scarcity, as measured by SF, directly drives price.

Bitcoin currently has a stock of 17.9MM coins and a flow of ~0.7MM per year, which gives it an SF of 26. Bitcoin are created through a process called proof-of-work. In layman’s terms, a miner is a computer that trades electricity through computing power for bitcoin while also securing the network. New bitcoin are created in blocks which are formed every 10 minutes. When a miner creates a valid block, they are rewarded 12.5 bitcoin. To address inflationary issues as market value grows, Satoshi Nakamoto introduced a concept called “halving.” A halving event in bitcoin is when the amount of bitcoin that are generated by miners every ten minutes is cut in half. This occurs every 210,000 blocks. The next scheduled halving takes place in May 2020. After May 2020, the miner reward goes from 12.5 bitcoin to 6.25 bitcoin, cutting flow in half as a result.

Following the halving, the SF of bitcoin goes from 26 to 52 instantly after block #630,000 is mined. Since the halving causes a direct impact on bitcoin monetary policy, it is an undeviating driver of price. The below figure shows a logarithmic view of price on the y-axis, incorporating block height and months until halving on the x-axis.

There are countless ways to attempt to value bitcoin. Whether it be stock-to-flow, Metcalfe’s Law, or Network Value to Transactions (NVT). There is not a single model that is a clear winner, but the data shows there is a significant relationship between SF and market value. Bitcoin is the first scarce digital asset the world has ever seen, but how much value is derived from scarcity itself? The likelihood that the relationship between stock-to-flow and market value is caused by coincidence is close to zero. Using gold’s stock-to-flow ratio as a benchmark, we find that the bitcoin SF lines up almost perfectly. Based on this model alone, the market cap of bitcoin after next halving would be US $1 trillion or ~$50,000/bitcoin.

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