The purpose of valuation is to find the intrinsic value of the investment target. Investments with stable cash flows, such as companies and bonds, can be valued using the discounted cash flow method. By predicting the cash flow generated by the company in the future, and then converting the cash into the current present value according to the time value, it is used to estimate the value of the company. Discounted cash flow valuation is widely used in stock investing because it is consistent with the core principle of business value: the value of a business should reflect the value of the cash flows it can earn in the future.

However, when an investment has no cash flow, how to value it becomes tricky. For consumable commodities, such as crude oil, copper, and iron ore, the main valuation methods are the cost method and the relationship between supply and demand. The value of commodities is determined based on their production costs, processing costs, transportation costs, etc., plus appropriate profit margins. While considering costs, it is also necessary to analyze supply and demand relationships, market expectations, global policies, and the geopolitical environment.

For value storage and currency substitute investment: gold, valuation becomes more subtle. Gold is not a consumable, and there is no rigid demand for gold in production and life. Mining costs, supply and demand, global geopolitical landscape, inflation rate, risk aversion, there are countless factors that affect gold prices. In the final analysis, gold itself has no value. Its value is a consensus that humans have used it as a store of value for thousands of years.

The value proposition of Bitcoin is digital gold, a store of value, and a substitute for legal currency. It is among the most difficult investments to estimate its intrinsic value. There is no method or formula that can accurately estimate the intrinsic value of Bitcoin, but some thinking models can make a rough judgment on the value potential of Bitcoin.

Method 1: Pure value store: digital gold

Except for short-term speculative price fluctuations, the best way to invest in gold is to hold it permanently. Although the price of gold may fluctuate in the short term, the price of gold in the long term will always rise relative to fiat currencies. It’s not that gold is becoming more valuable, it’s that inflation is making fiat currencies less valuable. The same physical asset that 1 ounce of gold could buy 100 years ago can buy the same physical asset today, and the currency has lost over 99% of its value.

Bitcoin has the strongest consensus, the most decentralized network, scarcity and immutable characteristics, creating the value proposition of digital gold. (In the ever-changing web3, many people feel that Bitcoin is developing slowly, but only by being stable, secure, and pursuing the ultimate pursuit of decentralization can it become digital gold.)

Assume that the value of Bitcoin digital gold is widely recognized , comparing its popularity with gold is a simple valuation method.

According to Credit Suisse’s 2022 estimates, the world’s total wealth is worth approximately US$463 trillion, including stocks, bonds, real estate, cash, etc. The total value of gold in the world is $12 trillion. Gold then represents 2-3% of global wealth. One way gold analysts estimate the price of gold is to assume that due to high inflation or geopolitical tensions, the risk of war increases, and people tend to hold a larger proportion of gold in their personal assets. Then assume that the proportion of gold in global wealth increases from 2-3% to 4-6%; since the total amount of gold changes very little every year, with the total amount fixed, the asset allocation proportion doubles, resulting in an ounce of gold Double the price.

If Bitcoin only reached 10% of gold’s total value ($1.2 trillion), the Bitcoin price would be $57,142.

If Bitcoin reached 50% of gold’s total value ($6 trillion), the price of Bitcoin would be $285,714.

In mainstream asset allocation recommendations, the recommended allocation proportion of gold in the investment portfolio is 5-10%. This allocation ratio is the advice provided by investment advisors from large asset management companies, such as BlackRock, when helping clients with asset allocation. The reasons why asset management companies recommend allocating gold are, firstly, because gold plays a role in hedging and diversifying risks in investment portfolios; secondly, large asset management companies have their own gold ETF products, such as BlackRock’s iShares Gold ETF , it is recommended that customers allocate gold while also selling their own products.

Recently, BlackRock and other large asset management companies have applied for Bitcoin spot ETF products. If successful, it will bring about a huge improvement in Bitcoin's status in asset allocation. Tens of thousands of investment advisers will be required to sell Bitcoin spot ETF products, promoting Bitcoin as a necessary part of investment portfolios.

Method 2: Stock to Flow (Stock to Flow Model) S2F

S2F – The stock to flow model is a common method for commodity valuation. Stock refers to the total existing inventory of a commodity, and flow refers to the annual new production of a commodity.

The ratio of stocks to production of agricultural products and various industrial metals is usually less than 1, which means that the total storage of these commodities is usually less than the annual new production. Agricultural products cannot be stored for long periods of time, and industrial metals are expensive to store and can rust, so producers often only produce quantities based on forecasts of demand for the next six months or a year. On the other hand, bulk commodities are consumable commodities, and the inventory is used all the time.

Storage-of-value commodities, such as gold, are very different. There are approximately 187,000 tons of gold in the world, which is the total amount of gold mined over the past several thousand years. As long as gold is mined, it cannot be destroyed and will exist forever.

This is the production of gold with 3,000 tons of new gold mined each year.

So the Stock to Flow of gold is: 187000 / 3000 = 62.3.

This ratio means that there are 62 years of gold production stored in vaults or in the hands of individuals around the world. When you invert this ratio, 3000 / 187000 = 1.6%, which means gold has an annual inflation rate of 1.6%.

A distinctive feature of Bitcoin is that the new supply entering circulation every year is certain. This means that both the stock and flow of Bitcoin can be accurately calculated, whereas other commodities rely on less precise estimates of mining volumes.

The total supply of Bitcoin is 21 million, of which 19.41 million have been mined. New Bitcoins are mined as miners validate transactions on the blockchain, exactly according to a predetermined schedule. The last Bitcoin is expected to be put into circulation around 2140.

Miners are currently rewarded 6.25 Bitcoins per block, with one block mined every ten minutes. This means that 328,500 BTC are mined every year. Bitcoin’s current stock to flow is roughly: 59 (19.41 million / 328500). This is very close to the previously calculated gold stock-to-flow ratio of 62. Since Bitcoin production is halved every four years, the next halving is expected to occur in May 2024, and the post-halving reward per block will be 3.125 BTC. This means that the flow of Bitcoin will be halved, and the stock/flow ratio will double.

The stock/flow ratio increased due to the Bitcoin halving, and the newly produced Bitcoins decreased significantly. If the investment demand for Bitcoin remains unchanged, the supply decreases, the demand remains unchanged, and scarcity increases. Push up the price of Bitcoin.

PlanB’s Bitcoin stock to flow model relates the price of Bitcoin to the stock/flow ratio due to the halving. The yellow line in the figure below is the Bitcoin price calculated by the model, while the colored line is the actual price of Bitcoin. PlanB’s S2F model shows that Bitcoin’s price and stock/flow ratio are indeed closely related over long periods of time. This model was fairly accurate until the high point of the last bull market, when Bitcoin price was $69,000 in November 2021. Then since a series of vicious events in the crypto market in 2022, the market entered a long bear market, and the price of Bitcoin continued to be lower than the price predicted by the model. According to the model, the price of Bitcoin should be $100,000 right now.

Method 3: Bitcoin price and global money supply

Bitcoin price is closely related to global liquidity conditions Related. Data from the past ten years shows that periods of rising global money supply correspond to periods of rising Bitcoin prices; while periods of declining growth in global money supply also correspond to falling Bitcoin prices.

The monetary policies of major countries around the world are still in a tightening cycle. US dollar interest rates are close to 5%, and sterling and euro interest rates are both over 4%. With such a high risk-free interest rate, investors' willingness to invest in Bitcoin, an investment product with violent price fluctuations, will inevitably decrease, which will continue to have a negative impact on the price of Bitcoin.

Written at the end

There is no method that can accurately predict the price of Bitcoin. The methods listed in this article are just many Bitcoin valuation methods. representative examples. Each method has certain rationality and limitations.

For example, will Bitcoin definitely fall amid a global liquidity crunch? If the proportion of Bitcoin as an asset allocation increases, from the current allocation by almost no traditional investors and institutional investors to a small number of investors starting to allocate, then even if the macro environment is bad, Bitcoin can still benefit from the popularity rate. rise by improving. Similarly, the increase in the stock/flow ratio caused by the Bitcoin halving will significantly reduce the number of newly produced Bitcoins. If the investment demand for Bitcoin remains unchanged, the supply will decrease and the demand will remain unchanged, it can also push up the price of Bitcoin. .

Finally, readers may feel that after talking so much, will it rise or fall? So my personal opinion is: interest rates in major countries around the world are close to highs, and the tightening cycle may continue for some time. However, if interest rates continue to be raised significantly, the possibility of further tightening on a large scale is extremely small. The recognition of Bitcoin as an investment has been slow in the past. If the Bitcoin spot ETF of major asset management companies can be adopted, it will have a significant positive impact on the popularity. The next Bitcoin halving is less than a year away, and the current price is still far lower than the price calculated based on the S2F model after the last halving cycle.