Some thoughts on Bitcoin valuation

Welcome to the blog. I am not too sure of what this blog will become in few weeks/months/years but I wanted to setup something to write down some stuffs I am thinking about.

I have never been a big Bitcoin believer, obviously I would be richer now if I had been but this has never stopped me to think about Bitcoin and especially what people say about it.

There is plenty of demonstrations on the web to explain that Bitcoin should be worth between 0 and 1 trillion dollars and I needed to add some comments. This has probably been explained elsewhere but I didn’t comb the many websites on the subject.

A simple model of incremental pricing

First, in order to start with a simple model, we will set the strong hypothesis that each current Bitcoin holder is a HODLER, that means that he will not sell whatever is the price. The price set everyday for each newly mint Bitcoin is therefore the amount of new investment divided by the number of new Bitcoin. At the time of writing, the daily new supply is roughly 900 coins per day, the spot price is 46 thousands dollars. For the spot price to remain stable, the network need an inflow of 41.4 millions dollars.

If there is less than 41.4 millions dollars and the spot price was still 46 thousands dollars, the last bitcoins produced on that day would not find a buyer, and could be worth zero. In reality the spot would come down until the market find a new buyer but probably at a lower price.

If there is more than 41.4 millions dollars of new investment, there would not be enough coins produced to satisfy the demand of the spot was to remain at 46 thousands dollars. The spot price is then likely to appreciate.

So in our simple model, the daily spot price can be defined by :

    \[   Spot\ price = \frac{daily\ inflow}{daily\  production}\]

So today, and for as long as the algorithm will produce 900 coins per day, you need a bit more than 40 millions dollars of investment to maintain the current spot price.

Where is the daily inflow of investments going?

Also it is interesting to note, that the daily inflow of investment is instantly burned into electricity. The daily investment is indeed the electricity invoice to maintain the Bitcoin network on that particular day. That money is paid by the new investors directly to the miners. And the miners pay their electricity bills with it. Forty millions dollars, everyday…

Indeed, the mining margin tend toward zero in the long term as you only need to plug more computers when the mining margin becomes positive. There will always be some short term arbitrages when you can source the cheapest electricity but these arbitrages will tend to disappear in the long term.

It is quite ironic to think that the money poured into this revolutionary new store of value is actually instantly burned into electricity consumption. There is nothing left but the hope that someone will still give you something in exchange of your coin tomorrow. In other words, that the investors of tomorrow will continue to pay the daily bill necessary to maintain the network.

This is also a way to see the purchase by Tesla of 1.5 billion dollars worth of bitcoin. They have basically sponsored the bitcoin network for 36 days. Now lets hope for them that there will be new sponsors after that.

So when someone is buying a coin, he is, in a sort, buying the proof that a certain amount of electricity has been consumed. In a society where more and more peoples and companies are trying to reduce their carbon footprint, and sometimes need to buy carbon credits, it is kind a weird that the proof of energy consumption can have a positive value, should not it have a negative value?

Good reads on the subject

Alex Hern on the quest to turn electricity into money

Tesla : carbon credits for bitcoins