Bitcoin Valuation
What is the real value of Bitcoin? What is the potential for cryptocurrencies?
In the era of abundance, scarcity has its value.
In a world flooded with financial liquidity and misinformation, fixed and clear rules and the transparency of Bitcoin has its value.
Trust is the base for cooperation between people. With collaboration, a community can flourish. In the physical or digital world.
Bitcoin is the base of trust in the world of cryptocurrencies. It is the most secure and the hardest to be attacked.
Today, Bitcoin is compared with digital gold. Makes sense. Gold was a symbol of trust. There was a time when central banks depended on the gold they had to execute monetary policies.
The digital gold has its advantages in relation to physical gold. Less cost to be transferred to any part of the world.
The digital gold is more accessible to people. With only 50 dollars you can already invest. Whereas the physical gold is not accessible to the mainstream. Surveys point that more than half of crypto investors do not invest in traditional investments. Also, the World Bank says that 1,7 billion adults remain unbanked.
Bitcoin is more than digital gold. Today, it is the base for financial innovation. Bitcoin has come to broaden access to the financial system. An ecosystem of financial services is being built around it. And this is just the first area to be impacted by this global digital notary office.
As big companies, institutional investors and family offices entered this space and the Bitcoin increased its value, cryptocurrencies reached US$ 1 trillion market cap. This mountain of money asks for a number of financial services, from custody to payment and credit.
It starts to emerge ways to lend and invest BTC and other cryptocurrencies. Exchanges like Coinbase and Binance are creating user friendly platforms to do that. In crypto, the exchanges are not only brokers, but banks and providers of liquidity for investors, working as a huge global stock market.
Traditional players will play an important role in the increasing adoption of Bitcoin. In the area of payment and transfers, Paypal will bring access to cryptocurrencies for 300 million users. Also, exchanges launched partnerships with Visa to create a credit card that uses crypto.
Traditional banks that do not adapt and innovate will lose space. The crypto exchanges and wallet companies (Trezor and Ledger) are increasingly offering financial services. Moreover, traditional players and fintechs, as Paypal and others are at the front of it.
Considering this context, I see good perspectives for Bitcoin in the midterm as a unit of value in this crypto universe and for Litecoin to be an alternative for payment and transfers. As if Bitcoin was the investment saved and Litecoin was the value you bring in your wallet and let in your bank account. Bitcoin has the potential to be the global digital monetary network.
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Below I provide a brief analysis of the main factors impacting the value of Bitcoin (in the next letter I will talk about Litecoin in more detail):
Bitcoin Valuation
Value Drivers
Big companies investing in Bitcoin (eg.: MicroStrategy)
Big institutional funds investing (eg.: hedge funds, Grayscale and recently Blackrock)
With the quality approval from big companies and institutional investors, many family offices investing (observe on-chain data to follow this trend)
Easier use and access to Bitcoin with Paypal app
Advances from exchanges, especially the IPO from Coinbase bringing this subject to mainstream (advisor is Goldman Sachs)
The deposit of trust from the world financial elite, the entry of traditional players and advances from global exchanges open space to more resources and users of Bitcoin, expanding its network effects.
Risks
Recession: impact all the assets and trigger a flight to safety (today is the US dollar)
Exchanges: problems with exchanges as hacker attacks and stronger and improper regulations can delay their expansion and the increase of users
Governance: in case Bitcoin community become divided in the implementation of upgrades in the network we can see part of the value being destroyed (eg.: if divisions as Bitcoin and Bitcoin Cash become more frequent)
Custody: losing of BTC because of an underestimation of these risks
Technology: some problem with network health (decrease in the hash rate, problems with miners, etc)
Competitive Advantages
The entry barriers of Bitcoin are similar to global digital platforms.
Network effect (more users, more value of the network): miners bringing more safety to the network, more liquidity provided for trading, companies in the ecosystem offering more services, more acceptance as means of payment. The network effects are associated with scale gains, which increase the substitution cost of the platform.
Habit power: Bitcoin became a strong brand globally and the habit of using it as an investment, protecting from the inflation in the long term, is an entry barrier.
Team and Community
The attention point here is the cohesion of the community of developers and miners for possible upgrade that should be made in the protocol in the following years. Depending on the level of coordination of the community, it can destroy part of the Bitcoin value.
Price
Bitcoin valuation is not a stock valuation, in which we already have many consolidated multiples as P/E, P/BV or EV/EBITDA. In the land of cryptocurrencies, we are still exploring the most appropriate multiples and metrics to have an idea of the network value. The wisdom from investing tells us that it is better to be approximately correct, than precisely wrong.
The valuation for Bitcoin is more similar to the analysis of a country 's currency. We need to analyze the flows of money entering and exiting the network. To this end, on-chain analysis is essential. We need to know who is buying, what is the profile of the buyer and the conviction level they have in the network at a certain price. In the last months, we saw an influx of long term investors, family offices and institutional investors.
On the other hand, an increase in network users followed by a big volume of Bitcoins stored in exchanges, can be a signal that people are investing in Bitcoin do not have high conviction. Thus, in the first turbulence it can trigger a selling wave and decrease the price.
It is also possible to perceive the sentiment from investors with metrics as Market Value to Realized Value (MVRV) and adjusted Spent Output Profit Ration (aSOPR). They indicate how profitable were the last transactions in the network, giving a signal for a correction or a price increase. When investors are in high profit, it is natural to have a potential selling pressure.
Another interesting analysis is to compare the network market cap with its transaction volume (similar to a GDP of a country). In that sense, one interesting metric is Network Value to Transaction (NVT).
Moreover, it is always a good idea to observe the network health in terms of hash rate and the cost per transaction.
Considering this metrics, I believe that we are still in the beginning of this Bull Market. We need to follow these metrics and indicators throughout the year, to see a possible exit point. I do not believe it is possible to have a price target for Bitcoin as it depends on this money flowing in and out.
If you have any doubt in the text, please feel free to leave your comments below. See you in the next letter!
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Two ideas: 1. Maybe its possible to analyse Bitcoin valuation as a B2C Startup valuation; 2. As the cancel culture and the deplatforming advances, bitcoin becomes an even more important way of store of value .
This article is gold!!!