Bitcoin Valuation

How do we know when Bitcoin is undervalued?

One way to look at it is what we will call the “book value” or how much it cost to mine a bitcoin. Let’s take the average cost of the largest mining countries.

China: 3172
US: 4758
Sweden: 4748
Georgia: 3316
Source: Elite Fixtures

Average: 3998.5

I know China is a much larger percentage of the total so it should have a larger weighting. But the data from elite fixtures probably doesn’t take into account cooling cost or any other kind of overhead cost. So in my opinion this is a very conservative book value and would be undervalued if prices hit this level.

The book value model would be more applicable if this was a mature market or maybe if we were in a recession. But we are seeing user growth rates of almost 100% per year so any attempt to hit the above number should not last long.

The other way to look at this is to discount the expected network value at a desired hurdle rate. You do this by finding the past transaction growth rate on the network and extrapolating that forward.

Looks like the transactions are about 4x greater since 2013.

Next is coming up with a discount rate needed to hold bitcoin. That is subjective and each investor needs to come up with their own number based on opportunity cost and risk tolerance.

Here are the results from plugging the above data into moneychimps present value calculator:

Don’t get confused by the $ sign. Bitcoin price and transaction volume are correlated so if transactions go up the price will eventually follow. So either variable will work.

As you can see, assuming the same growth rate going forward in transaction volume an investor with a 30% hurdle rate will consider this slightly undervalued.

The other way to value this is also subjective and prob the most familiar. It’s the comparative analysis. It’s kind of like valuing a house. You see a similar house in the same neighborhood just sold and you say my house is way better and should be worth at least as much as what it sold for.

So everyone has heard this I am sure but here we go:

Gold = $8 Trillion dollar market
Currency = $80 Trillion
BTC = $112 Billion dollar market

So BTC is obviously undervalued since it’s such a small percentage of a similar use case. If the growth rate continues then yes. There are definitely risk to this analysis but it’s beyond the scope of this post.

So maybe next time we can get into that.

Wishing everyone peace, joy and contentment.

“Today I will be the master of my emotions” OG Mandino