How much should bitcoin cost?

[Attention! This is not investment advice, and I am not responsible for the consequences of your relationship with bitcoin]

1. Brief description of the method

Without claiming to be an accurate result, I want to share an evaluation method borrowed from astrophysics.



Suppose you want to know what the atmospheric pressure is on planet Plyuk. There are measurements of this quantity, but they are all obtained indirectly by methods, depend on fuzzy assumptions, are monstrously noisy and do not agree with each other hundreds of times. What to do? The approach in this case may be as follows:



1. We make a list of measurements obtained in fundamentally different ways.

2. Write down their values. Suppose it is 0.01, 0.18, 7, and 10 atmospheres.

3. We calculate their geometric mean M = (0.01 x 0.18 x 7 x 10) ^1/4 = 0.6 of the atmosphere.



In the first approximation, this will be more or less a decent assessment of the true pressure on the planet Plyuk, with the lack of information available.



People familiar with the statistics can indicate both the possibility of improving the method (for example, the introduction of confidence weights when calculating the geometric mean) and the limitations of its applicability (for example, if the estimates are correlated or their distribution is not lognormal). And they will be right. On this topic, you can write a separate dissertation. However, even in such a primitive form, this method is useful, so in this article I will confine myself to it.



As you may have guessed, it is proposed to do the same with bitcoin. If possible, collect independent estimates of its prospective market value and then take their geometric mean.



Why does this mathematical shamanism still work?



One can imagine that, ideally, in the mind of some clever and all-knowing economist-mathematician, there can be some True Function of predicting the price of Bitcoin at infinity. In practice, no one knows her; it may not even be computable. But we assume that our imperfect assessments somehow somehow capture some aspects of this function. The values ​​they give can be thought of as True Function values, distorted errors (such as simplifications or ignorance of important input parameters). These errors by their strength are such that they make us erroneous not at percentages, but at times. But these errors (the second assumption) are also random in nature, for each method simplifies and misses something of its own. Therefore, if you multiply a large pile of such estimates, then errors, on average, mutually compensate each other and the result will be closer to the truth. Again, statistics can tell at what speed and with what limitations such an answer will converge to the correct one, but I will not go into that.



And just go to the estimates.

2. Grades

1. The Winkvols brothers, as geektimes recently wrote ^[1] , think bitcoin is a variant of digital gold and believe that the total value of this currency should be equal to the value of gold in circulation, that is, $ 7-8 trillion dollars. Since there are 21 million bitcoins in nature, this gives a valuation of $ 3.57 * 10 ⁵ per cue. A more careful consideration of the same issue in [9] comes to the figure of $ 514,000 per bitcoin. Since both methods come from similar assumptions, using only different input data, we will consider them as two differing dimensions of the same type and take their geometric mean of $ 428 thousand as an estimate by the method of comparison with gold.



2. You can look at bitcoin as a payment system. Visa, with a market value of $ 252 billion, works out about 150 million transactions per day ^[2] . Bitcoin - much less, about 500 thousand. If we consider it a means of transferring money, competing with Visa, then, obviously, the entire Bitcoin network should be proportionally less, that is, only $ 840 million dollars, or $ 40 per coin.



3. At the beginning of December, mining of bitcoins consumed about 0.15% of the total world energy ^[3] . Obviously, to infinity, this growth can not go. Conducting crude analogies to oil production, and remembering that it takes 10–20% of the energy produced in it, the oil contained in it can be expected that the world is unlikely to be ready to give more bitcoins to production than to oil production, i.e. 6% of energy. Mining should be difficult to rest against this ceiling. This is about 30 times the energy margin. Here ^{[4] they} write that today bitcoin consumes 37 terawatts * hours of energy per year. 30 times less, i.e. 1.2 teravatt * hours per year, it consumed in February 2013, according to ^[5] . If we proceed from the simple extrapolation of these figures from the past to the future, then we should expect another 4.5 years of growth in the price of Bitcoin to ~ $ 4 million per share.



4. In [8] a different, rather amusing estimate is given. The author believes that bitcoin will grow as long as its minimum indivisible unit - one satoshi - does not equal in value to the minimum indivisible component of the dollar. That is, one cent. It is doubtful, of course. Why not with a penny? But this is also an independent way, containing a rational estimate from above - for it is difficult to imagine a running currency, the minimum unit of which is significantly more expensive than a running item in a store. If this is true, then Bitcoin in the future should cost no more than $ 1 million.



5. But there is a counter-argument to this. Today, a bitcoin transaction costs about $ 20. A credit card transaction is about 1.5% of the amount. Serving 30 purchases per month for a $ 3,000 credit card costs, thus, $ 45. If bitcoin were a currency for daily purchases, then a typical American man in the street would have to pay $ 600 for their services. To be competitive, a bitcoin transaction must cost 13 times less. If (very, very simplifying) to assume that it is proportional to its cost, then it turns out that bitcoin is too expensive to be such a currency, and should cost about $ 1,100 per piece.



6. No one has canceled the government. Who love to regulate everything. Sooner or later, one way or another, they will do it with cryptocurrencies. How? History suggests several ways. First, to force all points of exchange of bitcoin for fiat currency to collect information about transactions, and then to demand this or that tax from people who bought bitcoin. Secondly, to prohibit sellers in the country to conduct operations in bitcoin. And only allowed in local tugriks. Thirdly, to flood the market for bitcoin-bitcoin transactions with agents and catch the largest ones individually. Fourth, monitor electricity consumption by individuals and legal entities and send checks to suspicious points. You can think of a fifth, sixth, etc. The adoption of such measures, of course, does not "turn off" bitcoin. But at the limit he criminalizes him and drives him into a tiny niche of illegal transactions and the shadow economy. If its volume is about 1% of the world economy ^[10] , and it will be served Bitcoin (gross simplification, of course), and if we assume that today's criminal economy is served mainly in cash (another simplification), the legal amount of which is in circulation today is $ 4.6 trillion ^[11] , then the value of all bitcoins will be about $ 46 billion, or $ 2,190 per coin.



7. Bitcoin also has a potential backup profession. It can be ... a network for notarial public records. In block megabytes. Let the size of the archived document for storage - 10 kilobytes. So, in the block, you can store about 100 notarial entries - this is for one bitcoin. In the States, one notarial record costs about $ 30. One hundred records == $ 3000. Based on this argument, bitcoin shouldn’t cost less than this amount. Ps . Although it was rightly suggested to me in the comments that the block today is not 1, but 12.5 BTC, and that, of course, this figure is not constant. So this assessment should be excluded from the results.



8. Finally, here ^{[13] the} author compares bitcoin with a business like Salesforce and, drawing primitive price-to-earnings analogies, comes to an estimate of $ 300 per bitcoin.

3. Result

A simple geometric average of eight given estimates gives the expected prospective Bitcoin cost of $ 10,506 (ten and a half thousand) per piece. The expected average spread is in the range of $ 2392 to $ 46139. Ps. After the exclusion of a clearly erroneous estimate of №7, the geometric mean is obtained at the level of $ 12.6K.



Of course, I am aware of the imperfection and incompleteness of these assessments. They can and should be improved, you can add your own, you can modify the method of combining the results together. In particular, it can be stated that bitcoin is not “gold or Visa”, but “gold and Visa”, and therefore its value should be the sum of the values ​​of its qualities. To which, however, it can be argued that in the modern world, under the pressure of competition, businesses often have to choose only one of their strongest qualities and develop them, and this is the choice of "or". Such reasoning only illustrates how difficult this question can become when it is examined in detail, and that in such cases it is sometimes better to get even less accurate, but more stable result, deliberately breaking the chain of refinements.



In conclusion, I repeat once again that everything written here is solely my personal opinion. For the consequences of taking (or not taking) him seriously, I am not responsible.



Congratulations to all readers of Hicktimes Happy New Year,

Yevgeny Bobukh.