Thoughts on How We Might Approach Finding a Fair Price of a Bitcoin
Some people think Bitcoin is worth $20; others think it is worth over $200k. Can we come up with a fair price that isn’t based on sentiment or logarithmic charts? I think we can.
I mean, if Satoshi could build a blockchain, I think at least one person on the planet can come up with a reasonable formula for calculating the fair price of a blockchain based asset (just a theory of course).
Although I’m no expert, if I had to come up with a formula for valuing Bitcoin, I would consider the following factors:
- The average cost of mining a Bitcoin with quality fairly priced equipment and reasonable energy costs (and related trends; Will costs and competition go up or down? What has been the trend so far?)
- Transaction data trends (volume, costs, time, fees).
- Trends related to the Satoshi value and dollar value of goods and services purchased with Bitcoin.
- Total unique Bitcoin users and user growth projections.
- Total fixed supply and circulating supply vs. demand in the markets and supply/demand trends.
- Trends pertaining to the average price in dollars people are paying in markets.
- The potential market cap of similar assets vs. the total supply of cryptos compared to BTC market dominance (and trends related to this).
- The utility of the underlying technology and how the token is or isn’t a necessary part of that system.
- And I’d attempt to filter out anomalies like pumps and dumps (times when Bitcoin quick shot up or down but didn’t spend much time at that price point).
In other words, I’d factor in some fundamentals related to transaction data and actual usage for goods and services, I’d strongly consider the cost of mining, and then look at growth trends related to all of this. Then, I’d move onto look at what people were paying, what a potential market cap could be over time, and lastly at price action is manifesting on the exchanges.
No one factor really tells us a fair price, but things like the cost of mining hint at it well (despite the fact that mining difficulty and costs change over time, the cost of mining works as an indicator at a point in time in my opinion).
Of course, that said, if you are mining Gold, there is no promise that your profits from selling Gold will cover your mining costs. Likewise, the velocity of the dollar doesn’t explicitly tell us the value of the dollar in a Forex market. And very certainly the price people are willing to pay for something on an exchange can have very little to do with its fundamental value at times (see “speculative bubbles”).
The exact formula I’d use isn’t something I’m sure of. However, I am sure that it is a worthwhile venture to at least try to come up with a fair price for every crypto, especially the cornerstone of the market Bitcoin.
So let’s keep it simple and give an example using very lose numbers and reasoning:
Cost of mining $8.5k x .05 (which represents growing demand and usage and every other complex factor I’ve noted) = $425. $8.5k +$425 = $8.925k
Oh look, we got a value that is close to the average price over the past 6 months and a price close to what people are paying for it now.
Sure, that formula was basic and only represented a proper, usable formula. My point is that someone better qualified than I could go ahead and come up with a formula that didn’t output either $20 or $200k based on drawing lines on a log chart while intoxicated. Instead, they could crunch some real numbers that relate to the current hundreds of billions of dollar market cap we see. They could inject this important foundation into crypto trading and then traders could speculate on that foundation, as in other markets.
If a fair price is $9k, then $6k is a great deal if nothing has fundamentally changed, but $12k starts feeling a bit more risky unless we see the increase in adoption and usage to back that up.
This is at its core more respectable than everyone just flinging money around going “maybe Ether is worth $400, maybe it’s worth $1,4000.”
It is hard to understand how the developers are genius enough to develop cryptos, the traders nimble enough to profit, yet no one is smart enough (or perhaps cares enough) to come up with a formula for accurately pricing cryptos.
Pricing cryptos based purely on speculation is in my opinion sort of nonsense that isn’t going to end well or spur on mass adoption. How the entire crypto community that spans nations can remain bewildered by this eludes me?!
Not to be mean, but I mean, someone who is smarter then I needs to be working on a formula that outputs something fair. Saying a Bitcoin is worth $20 or should be $200k is dangerous, especially considering it costs roughly $8.5k to mine a coin.
Instead, I would assume a fair value was in a range of about $5k – $12k, as that would be the sort of value needed to maintain the current system. Consider, how could a value that failed to maintain a system be considered “fair?” Miners could drop out to account for this since fewer miners mean less difficultly and costs. Mining competition could increase and account for some price changes; higher prices lead to more competition and higher mining costs. However, at a point, miners will be needed to maintain the system, and thus a fair price has to support them.