World Bitcoin Network has just released a new Bitcoin Value Model. Let me begin by stating that this is a model, and no model can accurately state how much any currency is going to be worth at a point in the future. What the model can do, however, is show us how price is determined and the factors that determine it and the model can also allow us to factor in variables and view their effect. In February of this year, the Financial Times received an eMail predicting a $50,000 Bitcoin value. Their response was to remind people that Wall Street traders use models:
“While the eMail pointing to a $50,000 bitcoin is imprecise to say the least, It’s a starting point. A more rigorous mathematical model integrating demand projections with probabilities of certain make-or-break contingencies isn’t just possible – it already exists, in various versions, across various investors’ hard drives.”
Bitcoin has, seen as an asset, outperformed almost every other asset on Earth over the past five years. However, we cannot predict with certainty the Bitcoin value going forward simply because almost everything in the World can affect price and it is impossible to factor, anything other than a very small few of, these factors in. One of the most important factors must be Transaction Volume (The volume of bitcoins exchanged over any given period.) and today (29 June) that stands at 50,577 transactions. We must remember that someone sending themselves bitcoins, one wallet to another, will show. We must use the Transaction Volume figure cautiously. Another factor that will affect Bitcoin value is the level of positivity of the market. If people looking at bitcoins see good news they tend to buy in, if they see bad news they tend to sell. When China dictated that the PBOC should be anti-cryptocurrency the market negativity forced the price of a bitcoin down; when Tiger.com came on board the value of a single bitcoin rose. The changes in positivity levels lead to people choosing to sell short and others to buy when they see the price as deflated and this leads to the important issue of volatility. Volatility is caused by people choosing to buy and sell bitcoins. Volatility is a significant factor in predicting Bitcoin Value going forward. Remember any currency must function as a means of exchange and also as a store of value. A volatile currency is a poor store of value, and this has led to traders accepting bitcoins to factor in a price margin to allow for volatility. This is the amount, over the dollar price, that traders charge for people choosing to pay with bitcoins.
Another important factor in predicting future Bitcoin value is the velocity, or the number of times that a unit of currency is used within a fixed period of time. Now, the lower the velocity, the higher the value. Remember, if velocity is high then that means there will have to be a higher number of transactions to achieve the total transaction volume, as measured in fiat. The $US has a transaction volume of 7, it is difficult to estimate the velocity of a bitcoin but it is in the 50-1oo. The next factor we must be aware of is Supply. Now, there are just under 13 Million bitcoins in circulation, but many of these may well be lost, others are held and therefore are not used for transactions. We talk about Liquidity, the ease with which an asset can be bought or sold without affecting the asset’s value. Liquidity is characterized by high levels of transaction volume. Now, if we accept that there are 13 Million bitcoins and if we assume that at least 1 Million are lost we must then look at the remaining 12 Million bitcoins and assume that a large proportion of these are hoarded by speculators, these coins are illiquid, the coins we spend and accept as payment are, on the other hand, liquid.
Remember, Gold is a great store of value, how much of that store can Bitcoin assume? More is better!
How much eCommerce can Bitcoin take up? More is better!
How much of the Global money supply can Bitcoin take up? More is better!
Black market as well as remittances, the more, the better!
Number of bitcoins mined, the more mined, the lower the value of a single bitcoin.
Have a look and see what you think will affect the future value of Bitcoin. Will it hit $50,000 or $1 Million? You decide!
The model in use by Worldbitcoinnetwork can be found here.
Last modified: July 6, 2014 11:41 UTC