Bitcoin Analysis and Fair Value Estimate ($1.4 million?)
By: Value Of Growth
Tags: Bitcoin, Crypto, Cryptocurrency, Analysis, Investing

Bitcoin has been on a tear as of late. But is this bull run just getting started? We’ve reached yet another all-time high ($22,735 at the time of this writing, reaching $24,000 just 2 days ago), so there’s a lot of speculation about where price could go and what bitcoin is actually worth. To find these values, I’m going to analyze similar assets and find the correlating fair value estimate of bitcoin.

You may have heard bitcoin referred to as “Digital Gold”. This isn’t without justification, as they share various similarities (A store of wealth detached from a single country’s economy, an asset with limited supply, value based heavily on supply vs demand, and the economic viability of mining) so the most obvious way is to compare bitcoin to gold, so we’ll start here.

Bitcoin vs Gold

We’ll start with the basics: Bitcoin’s market cap vs Gold’s total value

At the time of this writing, bitcoin’s marketcap is $422,863,313,618 and it’s price is at $22,874. The circulating supply is 18,577,656 and the maximum supply at 21,000,000.

The total value of gold is a bit less cut and dry. The various supplies are all estimates, and those supplies are broken into categories such as jewelry, industrial uses, private investment, and central bank holdings, so it’s important to keep that in mind. But moving past that, using data from the World Gold Council, JM Bullion, Metals Focus, SD Bullion, Thomson Reuters, and Golden Eagle, I averaged out several estimates and came to the following results.

There is an average estimate of about 194,324 tons of gold mined throughout history with an estimated 2700 tons added each year from global mining. Mining companies give their own estimates of underground reserves that are economically viable to mine, and those reserves are estimated at 56,400 tons. Of all the gold currently above ground that has been mined throughout history, about 47% is in jewelry, 21.6% is in private investment, 17.2% is held by central banks, 12% is used for industrials, and 2% is unaccounted for. Since gold can be melted and reused, we’ll pretend all of this gold is available for sale and calculate it into the total value of gold.

There are 32150.7 troy ounces in a ton of gold. So the 194,324 tons of gold is equivalent to 6,247,652,626.8 ounces. The current spot price of gold is $1899.61 per ounce. This means the current value of all mined gold is approximately $11,868,103,406,395 and some change. Compare this to the value of bitcoin’s marketcap, and you’ll see that the value of gold is 28.1x higher. At bitcoin’s current price, our first fair value estimate for bitcoin comes out to:

$642,759.4 (BTC Fair value estimate #1)

Summary: Estimated value of all gold and assumed bitcoin marketcap should be equal to that. In that case, BTC marketcap would be $11.868 trillion and the price would be $642,759

Now, we all know Bitcoin isn’t being used by everyone. At this stage, it’s investment firms, private investors, and the wealthy with some small time enthusiasts sprinkled in. This is due to a mix of the early enthusiasts becoming wealthy and hedge funds having the capital to load up when the price depreciated the last few years and caused some of the not-so-well-off to sell in fear of losing what value they had. Wallets with more than 1 BTC now totals over 800,000 and wallets with less than 1 BTC make up less than 5% of the bitcoin marketcap. To that end, you’ve probably heard the valuation argument that with only 21 million bitcoins that will ever come into existence and the fact there are 47 million millionaires in the world, not every millionaire can own 1 BTC. With the narrative already starting and distribution consolidating, it’s a fair assumption that the millionaire-to-btc ratio will be a valid indicator of price.

But millionaires aren’t equal, the median millionaire is worth around $10.6 million. Millionaires also have competition for bitcoin, as global asset managers and institutions are flocking to bitcoin as well. In October of 2020, the top 500 Global asset managers had AUM(Assets under management) totaling over $100 trillion. There is also the buying power of investors outside the top 1%, who control the other ~56% of global wealth per adult. So, what will be the equilibrium price between human nature of liking whole numbers creating a frenzy to own 1 bitcoin and deciding it’s too pricey?

A general rule of thumb for gold is 5–10% of one’s wealth. Each millionaire can’t own one, they can own about 0.4468 each. Disregarding the $100 trillion of the top 500 Global asset managers, since there’s bound to be some overlap between there AUM and the net worth of the millionaires, and also disregarding the bottom 99% of people since they will be easily priced out in this scenario, it would be the top 0.4468% of wealthy individuals that would end up with 1 BTC. Since the median of all millionaires is $10.6 million, we’ll assume the cutoff for the top 0.4468 is around $11.5 million. In order for these individuals to price out the bottom half of the millionaires, and assuming the 5–10% rule of gold will translate to BTC so the top is comfortable with the amount of wealth they are putting in, the fair value comes in between $575,000 and $1,150,000. We’ll split the difference for the sake of having a single number, it comes out to $862,500. But that’s assuming the top 0.4468% all had a net worth of $11.5 million, which makes this an even more conservative estimate (since we already excluded the bottom 99%, institutional investors and global asset managers, and the bottom 0.5532% of the 1 percenters.) The Credit Suisse Global Wealth Report makes note that there are an estimated 175,690 ultra high net worth adults in the world, meaning net worth of more than $50,000,000. There are also an estimated 2153 billionaires in the world, and according to the Global Wealth Report, the top 1000 billionaires have a mean net worth of $84.8 billion. So, subtracting the billionaires from the UNHW individuals, we get 173,537. Assuming they all have just $50,000,000, it totals $8,676,850,000,000. Next, assuming the bottom 1153 billionaires have just $1 billion, that’s another $1,153,000,000,000. Now, the very top of the pyramid, the top 1000 billionaires wealth comes out to $84,800,000,000,000. Altogether, it comes out to $94.62985 TRILLION among the top 175,690 individuals. So, the $2.02 trillion they account for from the first estimate of the top .4468 is actually $92.6 trillion higher. This averages out to $527,064,716 for that top 175,690. Just these people putting 10% of their wealth into BTC would add $447,619 to the price, or $223,809 for 5%. Therefore, we’ll assume 7.5% for both estimates as the amount the top 1% would use as the equilibrium to own 1 BTC and not feel they are over investing. That comes out to $862,500 and adding the difference of $447,619 and $223,809, which is $559,523. The sum of these comes to $1.42 million as the number needed to own 1 BTC if every millionaire wanted one and was comfortable investing the rule of thumb for gold, 5–10%.

$1,420,000 (BTC Fair Value Estimate #2)

Summary: Assumed every millionaire wanted to own 1 BTC, which isn’t possible since there’s over 2 millionaires per BTC. Disregarding Institutional investors and people with less than $1 million, and assuming that the maximum amount willing to be invested was 5–10% of wealth since that’s the rule of thumb for how much to invest in gold, this would be the number to own 1 BTC and price out other millionaires without feeling as though they’re putting too much wealth in one asset.

Staying with the millionaire and gold theme, I’ll do one less complicated metric.

Gold isn’t fixed at a maximum supply like BTC. Gold supplies are thus far ever increasing, and with new technology and things like asteroid mining, gold supply may never dry up. But let’s pretend Gold is fixed right now at 187,000 tons mined with 57,000 in reserves. There are 32150.7 troy ounces in a ton. So about 6.012 billion ounces of gold mined, and about 1.8326 billion ounces in reserves, and a max supply of 7.845 billion troy ounces.

As for BTC, we don’t have to pretend that it’s fixed at 21 million. Currently, there’s 18,576,137 mined with 2,423,863 in reserves.

Gold is valuable because of it’s scarcity. However, if both were completely mined and at max supply, there would be 373.56 ounces of gold per bitcoin. Therefore, it is safe to say that bitcoin is 373x more scarce than an ounce of gold (in this example at least, since gold is actually much less scarce due to ever increasing supply.)

With the spot price of gold $1899.61, and since both are valued as a store of wealth capitalizing on supply and demand, 1 bitcoin should be 373x the price of one ounce of gold. In that case, 1 BTC would be valued at $708,554 at max supply.

But what would that value be today at current supply levels? With 6.012 billion troy ounces of gold mined, and 18,575,137 BTC mined, there is about 323.6 ounces of gold per BTC. With the same calculation, at the same spot price of $1899.61, the fair value of 1 BTC should be approximately $614,824, with about $94,000 upside until max supply is reached of both assets.

$614,824 (Fair Value #3 current value)

$708,554 (Fair Value #3 future value)

Summary: Gold and BTC are both good stores of value and both are valuable due to how scarce they are. 1 BTC is currently 323x more scarce than an ounce of gold. At gold spot price, and assuming BTC is valued according to how much rarer it is, $614,824 is the current fair value. At BTC max supply, and assuming gold was capped at current amount mined and in reserves with no new supplies added, BTC is 373x more valuable. Under the same implication, BTC would be $708,554 when max supplies are reached.

But let’s look beyond gold. Sure, bitcoin is a great place to store your wealth, but that’s not what it’s true purpose is. It is to “bank the unbanked” and create a way to send money globally without international fees, a checking account, or waiting a day or more for funds to clear. Most financial institutions run money transfers through a system called SWIFT, which handles roughly $5 trillion a day for various banking needs, about half of which is transfers. But SWIFT isn’t what we’re going to look at.

The global money transfer market, consisting of things such as PayPal, Cash App, Zelle, and more, is considered a $125 trillion market as of June 2019 when Visa entered the market. Now we’re in 2020 with a huge swath of new money being printed by governments, meaning more money to be sent. This also means a more unstable currency to send across the globe as inflation can cause exchange rates to fluctuate, not to mention the limits imposed which make sending large amounts tricky. So what if these payments were handled as bitcoin transactions? PayPal and Square (The parent company of Cash App) have already started buying up bitcoin and implementing it into their service, so what would happen if the value of printed money began to fall, and these companies all bought bitcoin to use as their $125 trillion currency of choice? (Again being conservative since these figures are from 2019 before all these companies reported record quarters through 2020, and the influx of new money coming into the world)

If bitcoin were to become the currency used for these payments, and excluding any holdings except that of the payment processors using it as the global currency for money transfers, that would be a conservative market cap of $125 trillion, at max supply equating to a $5,952,380 Bitcoin

$5,952,380 (Fair Value #4, at max supply of 21m BTC )

Summary: Global money transfers were estimated $125 trillion in 2019. Square and PayPal have been buying up bitcoin since then, which makes sense with the current conditions of fiat and the hurdles involved with using it. Global transfer market is likely much higher now since all of these companies have reported record quarters repeatedly in 2020 in terms of Gross payment volume and the introduction of much more money into several economies. But ignoring that, assuming nothing but these payment processors holding the $125 trillion in bitcoin to handle their transfers, the $125t marketcap implies $5,952,380 per BTC at max supply.

While none of these estimates are unreasonable, they are mostly for the purpose of estimating value in an array of scenarios that may or may not come to fruition. My goal is to help others see the value of a bitcoin and what it could be if that value is realized. Do not use it as investment advice, and always take any estimate from me or any analyst or “expert” with a grain of salt. The best way to enter a position, in my opinion, is to limit the position to 1% of your portfolio and to spread the buying over 3 weeks buying 1/3 at a time so if the price drops, your cost basis will be lower and if the price rises, you still have skin in the game. My investment strategy has always been to find the upside but prepare for the downside.

What do you think bitcoin’s fair value is? What’s your favorite coin? Comment below and let me know!

*Not investment advice. This article is to examine possible price points of BTC in the future and should not be the sole reason to invest. Do your research and come to your own conclusions*