Everything has a value. That’s true even for bitcoin, the cryptocurrency made from math. Its value is, of course, whatever someone will pay for it, but we can model what someone should pay for it because whenever there is value, there are fundamentals. This is true for stocks, bonds and even bitcoin.
First, we need to assume that bitcoin will be around for the long term. That’s an open question, but fundamentals require faith in the future. Valuing Tesla — or IBM — involves the same requirement of faith in the long term.
With that assumption, we can value bitcoin as a store of wealth, the same method used to estimate the fundamental value of gold or the dollar.
The simplest approach is to assume investors treat bitcoin like gold — making it a hedge against inflation.
Credit Suisse estimated that in mid-2019, the most recent data available, there was about $350 trillion of wealth in the world.
To develop a value for bitcoin, we need to estimate a portfolio allocation for crypto assets.
One model suggests 0.25% is a reasonable estimate. That implies an $875 billion valuation of the crypto markets. That’s probably low since wealth most likely increased this year. Rounding to an even $1 trillion, the market could be considered fairly valued with a current market cap of $950 billion.
Bitcoin makes up about 70% of the market and right now is valued at about $37,900, a little higher than the recent price.
In this model, we required several assumptions to reach a value. This is similar to the process analysts use to value stocks, basically developing assumptions that lead to a final value.
However, the distribution of wealth in the world argues for a higher valuation. The chart below shows that most wealth is outside of North America. Investors in these regions have been more receptive to bitcoin.
This chart demonstrates that bitcoin could go higher. However, long-term investors should buy the dips rather than chasing bitcoin higher.
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Michael Carr is a Chartered Market Technician for Banyan Hill Publishing and the Editor of One Trade, Peak Velocity Trader and Precision Profits. He teaches technical analysis and quantitative technical analysis at the New York Institute of Finance. Mr. Carr is also the former editor of the CMT Association newsletter, Technically Speaking.
Follow him on Twitter @MichaelCarrGuru.