Bitcoin Valuation Based on Principles of Store of Value

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By comparing bitcoin, gold and legal currency, we find that bitcoin has great potential as good value reserve, and further analyze the value range of bitcoin by means of the valuation approach based on the Store of Value.

 

Abstract

According to the definition of Store of Value, the main features of ideal Store of Value should include universal acceptance, durability, stability (scarcity) and liquidity.

Gold: excellent means of value store. Different value stores have different advantages and disadvantages. Gold is regarded as the relatively ideal value store, and it plays an important role in both international and private reserve assets.

Bitcoin has the potential to be developed into a good value store. Based on the main features of value store, we have made a comparison among bitcoin, gold and legal currency. In general, the bitcoin has significant advantages in terms of scarcity, portability, severability, verifiability, etc., as well as good durability. Although bitcoin is relatively inferior in general acceptance and stability now, the public acceptance keeps growing rapidly with the gradual maturity of the bitcoin market and its price volatility is also gradually decreasing.

Approach of bitcoin Store of Value: As the changes of bitcoin price, the share of bitcoin market value in value reserve gold or offshore assets is also changing accordingly. Therefore, by means of the expectation on bitcoin to obtain the market share of value reserve gold or offshore assets, we can make the prediction on the fluctuation range of bitcoin price.

An optimistic investor may think that the market value of bitcoin can account for 50% of the sum of the estimated reserve gold market value/offshore asset value/value reserve gold and offshore asset value by the year 2029 and before. So according to him, the price ceiling of bitcoin should be about US$100,000 / US$260,000 / US$360,000 in the year 2029 and before.

 

Contents

  1. What is the Store of Value?
  2. Can bitcoin be used as the Store of Value?
  3. Bitcoin Value Interval Calculation Based on Store of Value
  4. Conclusion

 

What is the Store of Value?

The Store of Value is one of the main functions of currency. According to the definition at Wikipedia, it refers to the function that assets can be saved and used for future exchanges. Anything which can maintain purchasing power in the future can become the Store of Value and the most common ones include currency, precious metals, etc.

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According to its definition, the ideal Store of Value should have following features such as universal acceptance, durability, stability (scarcity) and liquidity:

  • Universal acceptance: Being universally recognized and accepted, the assets can be exchanged with other items in the future.
  • Durability: Assets can be stored forever.
  • Stability (scarcity): The purchasing power of assets can remain relatively stable, and scarcity is the value source of assets as the Store of Value.

Portability (easy to transport and storage), severability (easy to segment) and verifiability (easy to quickly identify and verify authenticity) are not required for an asset to be a value reserve. But it determines the ease with which assets are exchanged.

 

Can Bitcoin be used as the Store of Value?

Gold: excellent means of value store.

Different value stores have their own advantages and disadvantages. Gold is recognized as a relatively ideal value store, which plays an important role in both international and private reserve assets.

According to the data from the World Gold Council, the global central banks hold nearly 34,000 tons of gold. The five countries with top gold reserves include the United States, Germany, Italy, France and Russia. In US foreign exchange reserves, the gold accounts for as high as 73.8%.

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Image credit: merchantcards.co.uk

In 2018, the gold demand increased by 4% worldwide, which was mainly driven by central bank purchase. In 2018, the total net gold purchase by central banks reached 651.5 tons, a year-on-year increase of 74%, which hit record high since the dollar exchange of gold was stopped in 1971.

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Bitcoin and gold share many similarities, such as limited total amount and long-term preservation. The “mining” mechanism makes it easier for people to associate bitcoin with gold. Therefore, some people also refer to bitcoin as “digital gold”. Gold is a recognized perfect value store, so can bitcoin be used as Store of Value?

Based on the main features of the value store, we have compared bitcoin, gold and legal currency.

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Note: According to the feature performance of bitcoin, gold and legal currency, they are divided into A, B and C grades from high to low.

In general, bitcoin has significant advantages in terms of scarcity, portability, severability, verifiability, etc., as well as good durability. Although bitcoin is relatively inferior in general acceptance and stability now, the public acceptance keeps growing rapidly with the gradual maturity of the bitcoin market and its price volatility is also gradually decreasing. Bitcoin has the potential to be developed into a good value store.

Ⅰ. Universal Acceptance

Bitcoin is inferior to gold and legal currency.

With a long history of development, gold has been used as a deep-rooted symbol of wealth in public minds. In contrast, the history of legal currency is much shorter, but its purchase power is guaranteed by the national law and it’s forced to be used, so it’s a generally accepted means of payment and reserve to make the exchanges with other items more convenient unless severe inflation appears. In certain periods, the legal currency of some countries can be universally accepted worldwide. In contrast, bitcoin has the shortest history and the development of blockchain is still in its early stages. Under the current legal currency system, bitcoin has not yet established extensive contacts with the real world.

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Gold coin of Eucratides I (171–145 BC),. Image credit: wikipedia.org

Bitcoin is more and more recognized by the public since trust and consensus are built up gradually.

According to the Lindy effect, the vitality of something valuable will become stronger and stronger. The longer the bitcoin exists, the more confidence people will have for it.

The Lindy effect is a theory that the future life expectancy of some non-perishable things like a technology or an idea is proportional to their current age, so that every additional period of survival implies a longer remaining life expectancy.

It’s also the case. After ten years of development, more and more countries have started to recognize and accept bitcoin. More and more people have started to know about bitcoin. More and more merchants have started to accept bitcoin payments.

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Source: coin.dance

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Source: coin.dance

According to the coinmap data, on March 5, 2014, there were only three merchants accepting bitcoin payments all over the world. On March 5, 2019, the number had increased to as many as14,420. The CAGR (Composite Annual Growth Rate) within five years had reached 310 %.

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Source: coinmap.org

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Ⅱ. Durability

Bitcoin is the most durable in theory which requires time to be tested.

The most mined gold still exists today and will continue to exist in the future.

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The funerary golden mask of Tutankhamun. Image credit: wikipedia.org

The durability of legal currency does not depend on the durability of the legal currency itself, but on whether the issuing government can maintain its purchasing power for a long time.

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Bitcoin does not have any issuers or physical entities. Therefore, so long as the system supporting bitcoin has always existed, bitcoin will be the most durable. However, in comparison, the gold has been tested by long period of time while the history of bitcoin is relatively short, so its “durability” needs to be further tested.

Ⅲ. Stability

The bitcoin stability is gradually increasing.

With the trend increase of the bitcoin market value scale, the bitcoin market has become more and more mature with higher public acceptance and more participating professional organizations. The compliance operation has become the mainstream and the bitcoin is gradually becoming more stable.

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Comparing with the volatility of gold and bitcoin, we can find that the price volatility of gold is also very severe although the dollar was decoupled from it in the early days. As the market gets more mature, the price volatility of gold will gradually decrease.

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Ⅳ. Scarcity

In terms of scarcity, bitcoin is the most advantageous. The total amount of bitcoin is constantly at 21 million just like the limited total amount of gold on the earth. The recoverable amount is even lower. However, the amount of gold stock on the earth now is still growing every year and the gold supply is still possibly increasing due to seabed or asteroid mining. As for the legal currency, there is almost nothing about its scarcity.

Ⅴ. Portability

Bitcoin owns the best portability which is incomparable to the legal currency and gold since it’s extremely convenient for storage and transportation. The legal currency exists in different forms and the storage and transportation cost of cash is relatively high. The digital legal currency is also very portable, but it’s difficult to achieve large-scale value transfer due to government regulation and other reasons. Compared with gold and bitcoin, gold is even far from being portable because of its physical form and weight.

Ⅵ. Severability

It’s the easiest to realize severability of bitcoin. The smallest unit of bitcoin is satoshi (sat) representing 0.00000001 bitcoins, which provides the possibility of small payments. The legal currency can usually be split into small changes with very low purchasing power. The split degree of gold is the most limited among the three.

Ⅶ. Verifiability

Bitcoin verification is very convenient and reliable. There are various means of counterfeiting legal currency and gold cannot become an exception, such as gold-plated tungsten. In contrast, the decentralized, tamper-resistance and transparency of the blockchain make bitcoin verification more convenient and reliable.

 

Bitcoin Value Interval Calculation Based on Store of Value

Based on the historical growth in the value of gold and offshore assets, current gold price, we can estimate the value of gold and offshore assets 10 years (i.e. 2029) later.

As the price of bitcoin changes, the market share of bitcoin value in value reserve gold or offshore assets will also change correspondingly. Therefore, by expectation on bitcoin to obtain the market share of value reserve gold or offshore assets, we can expect the bitcoin price fluctuation range.

According to the World Gold Council, the global gold over ground at the end of 2017 was approximately 190,040 tons, of which 90,718 tons were jewelry, accounting for 47.7%, private investment was 40,035 tons, accounting for 21.1%, the government investment was 32,575 tons, accounting for 17.1%, and others were 26,711 tons, accounting for 14.1%.

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In 2018, the newly produced gold worldwide was 3,347 tons. By the end of 2018, the global gold over ground was about 193,387 tons.

Judging from the new annual production, the newly produced gold has reached 2,400 tons to 3,300 tons per year since 2002 and it has kept increasing in recent years.

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Based on the annual production of 2,800 tons, the global gold over ground in 2029 will be about 221,387 tons. The current gold price is US$1,296.75 per ounce, so the value will be about 10.13 trillion US dollars. The gold invested by private and official departments will be about 3.87 trillion US dollars.

Based on the aforesaid assumptions, by separate estimations on the ratio of different bitcoin market values to the value reserve gold market value, we can estimate the corresponding bitcoin prices. Under the most conservative assumptions (bitcoin market value accounts for 1% of the gold market value), the bitcoin value is estimated to be about $1,900. Under the optimistic assumption (bitcoin market value accounts for 50% of the gold market value), the bitcoin value is estimated to be as high as US$95,000.

Simply speaking, an optimistic investor may believe the bitcoin market value can account for 50% of the estimated gold market value by 2029 and before, so he thinks the bitcoin price will reach its upper limit of about US$100,00 by 2029 and before.

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At the beginning of May, 2019, the bitcoin price was around US$6,000 and its corresponding market value was about US$106 billion. The market value of gold reserve was US$3.38 trillion. The bitcoin market value accounts for about 3.13% of the market value of gold reserve.

The aforesaid is only based on the gold invested by the private and official departments, which does not include the gold jewelry, the highest proportion of gold over ground. If this part has been taken into consideration, the bitcoin value is estimated at about US$210,000 when the market value ratio is 50%.

Another important driving factor of bitcoin value is the role of offshore asset. Due to the security and privacy, offshore bank accounts are often used as wealth storage. But, it’s not completely safe and private. The good anti-censorship of bitcoin makes it a safer and more secret mean of wealth storage. On the other hand, buying bitcoin is easier and more convenient than opening an offshore bank account.

According to the Global Wealth Report released by BCG in 2018, the global offshore assets in 2017 were approximately US$8.2 trillion, an increase of 6% compared to that in 2016. The CAGR from 2012 to 2017 was approximately 5%. If the offshore assets CAGR is calculated at 2.5% from 2018 to 2029, the global offshore assets will reach US$10.8 trillion in 2029.

Based on the aforesaid assumptions, we can estimate corresponding bitcoin price if we calculate the ratio of different bitcoin market values to the market value of offshore assets separately. Under the most conservative assumptions (the ratio of bitcoin market value accounts for 1% of offshore asset market value), the bitcoin value is estimated at approximately US$5,300. Under optimistic assumptions (the ratio of bitcoin market value accounts for 50% of offshore asset market value), the bitcoin value is estimated at as many as US$260,000.

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Simply speaking, an optimistic investor may think the bitcoin market value can reach 50% of the market value of offshore assets by 2029 and before; so he thinks the bitcoin price will reach its upper limit of about US$260,00 by 2029 and before.

At the beginning of May, 2019, the bitcoin price was around US$6,000 and its corresponding market value was about US$106 billion. The market value of offshore assets was US$8.4 trillion. The bitcoin market value accounts for about 1.3% of the market value of offshore assets.

Furthermore, if we take the value reserve gold and offshore assets into consideration, the bitcoin market value accounts for 50% of the total market value of value reserve gold and offshore assets. The bitcoin value is estimated at about US$360,000 (if gold jewelry is also taken into consideration, the bitcoin value is estimated at about US$480,000).

Simply speaking, an optimistic investor may believe the bitcoin market value can account for 50% of the estimated gold market value and offshore assets by 2029 and before, so he thinks the bitcoin price will reach its upper limit of about US$360,00 by 2029 and before.

At the beginning of May, 2019, the bitcoin price was around US$6,000 and its corresponding market value was about US$106 billion. The market value of gold reserve and offshore assets was US$11.8 trillion. The bitcoin market value accounts for about 0.9% of the market value of gold reserve and offshore assets.

 

Conclusion

The bitcoin has great potential as a store of value. By comparing bitcoin with gold and legal currency, we can find that bitcoin has shown its potential to become a good store of value apart from its young age and less stability than that of gold and legal currency.

Assuming bitcoin has acquired different golds as store of value and market share of offshore assets, then we may make relative expectation for the corresponding bitcoin prices.

 

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