Valuing Bitcoin – Part II

In my previous post on valuing Bitcoin I settled on supply/demand balance as the “least-bad” valuation model. I have been thinking more on how one might actual implement this in practice. The supply side is fairly straightforward. There are lots of free calculators that allow you to play with cost assumptions for Bitcoin miners. Now, there are probably going to be places in the world where an astute Bitcoin miner can arbitrage differences in electricity costs. But for now that’s splitting hairs.

The far trickier part is the demand side.

The reason is that while there are lots of use cases for Bitcoin, far and away the most prevalent is speculative trading. Therefore, if you take network activity at face value you are probably missing the fact that there is some reflexivity in those statistics. It’s basically a circular error problem. Speculative trading activity drives up network activity which drives up miner’s costs which causes the equilibrium price to rise. BUT, if speculative trading activity slackens (e.g. Bitcoin is in an asset bubble that deflates in the future) then the reverse will occur on the way down.

So in my view what you need to do is account for potential increases or decreases in speculative trading activity (and other kinds of activity) in your model. To do this you would need data that segments different transaction types.

The trick is finding that data.

As always this is not an investment recommendation. It is written for entertainment purposes only. As my thorough disclosure states very clearly, you should never make any investment decision based on something some random dude writes on the internet. Everything I am saying here could be wrong. In fact it is likely wrong. If you are looking for a recommendation on whether to own Bitcoin or any other cryptocurrency you should consult with a trusted financial advisor.

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