Thursday, November 30, 2017

Matt Levine on Valuing Bitcoin

From Bloomberg View:

Bitcoin Frenzy and Trendy Computers
Also drug charities, OLA and stock buybacks.
Bitcoin 10,000! 11,000! 10,000! 9,000! 10,000! Whatever!
How do you value a bitcoin? I think you can reasonably put a range around the value:
  • On the downside, if people decide to stop using bitcoin as a means of exchange or a store of value or a speculative instrument, then its value will be zero. There is no scrap value for a bitcoin. 
  • On the upside, if bitcoin becomes the sole currency for all transactions in the world, you could take Dan Davies's back-of-the-envelope valuation methodology from 2014, plug in a gross world product of about $100 trillion, and get a value per bitcoin of about $500,000. (Here is a talk from Mike Novogratz along related lines.) But that methodology treats bitcoin as just base currency; if you assume that it also replaces all financial assets then you should probably scale that number up by an order of magnitude or so. 
So let's say that in the most pessimistic scenario a bitcoin will be worth $0, and in the most optimistic scenario it will be worth $5 million. So! Great! Now all we have to do is to figure out the likelihood that everyone decides bitcoin is a fraud and stops using it, and the likelihood that bitcoin becomes the sole means of exchange and sole store of value, and the distribution of possibilities in between, where it fills some smaller or larger niche with some smaller or larger value.

I suppose that that is a hard and interesting intellectual problem, though more hard than interesting. Certainly no one seems to be answering it in any particularly rigorous way, nor do I think it is obvious that you even could. ("Macro guys are generally intuitive," says Novogratz; "they’re trying to play the futures, they’re trying to make bets on less information than the normal investors are.") The main question is: In one or five or 50 years, will everyone on earth want to use bitcoin, or a lot of people, or a few people, or nobody? There are no fundamentals, no cash flows or price-earnings ratios, to evaluate. It is pure speculation about speculation, a Keynesian beauty contest where all the pictures are blank.....MORE, so much more
BTC  $9,401.30