Monthly Archives: February 2014

Bitcoin > Worthless

In recent months, we’ve started to see large amounts of venture capital being invested in Bitcoin companies, lots of mining equipment being added to the network, and a large growth in the number of wallets and users on the network.  Since people are putting real money into this new technology, it raises the question of how much is it really worth?

Until today, most of the discussion around how to value a bitcoin is based on comparing it to mature companies or assets.  While this is a good way to try and estimate the potential of a new startup entering an existing market, it has some flaws when trying value a technology that is creating its own virtual economy from scratch.  If Bitcoin survives as the leading platform in a crypto currency world, it will be used for so many different uses that we can’t even imagine.  It would be like trying to come up with the value of the Internet in the 1990s by comparing it to FedEx, since sending emails is like sending an overnight letter.

For example, take a look at Bank of America’s report that valued a bitcoin at $1,300. David Woo describes a scenario where Bitcoin gets a 10% market share for all Business to Consumer E-Commerce transactions, obtains a value component worth the market cap of Western Union, and also gets used as a store of value equaling the US American Eagle silver coin.  In this scenario, he adds these values up to a grand total of $15 billion, therefore valuing each bitcoin at $1,300.  Using this method has the benefit of being easily understood, however it does not necessarily seem scientific.


Who Cares?

More importantly, who actually cares what the value of a bitcoin is?  In my opinion, there are three types of people who should care.  First, we’re all too aware of the term “Bitcoin Speculators” used by the media.  These people are looking for an asset that will appreciate in price faster than the existing returns they can get today.  If there was a better model for predicting the value of a bitcoin, they could invest in bitcoins with more certainty and maybe throw off the label of “speculator”.

Second, there are the people who are investing into the Bitcoin eco-system.  This includes miners buying equipment that run the network and venture capitalists who are helping to build the companies that will make the network better in the future.  Currently, if you ask any forum or group whether you will “make money by mining” the answer is almost always a resounding “NO”.  The only explanation for the growth of mining must be that a certain group of people feels the rising value of bitcoins and the Bitcoin network will lead this to be a good investment today.  Additionally, the venture capitalists and entrepreneurs must think that the Bitcoin network will be worth a large amount of money in the future or they wouldn’t be willing to invest money and time to build these companies.  If there was a better method to predict the value of a bitcoin, then these people could more accurately calculate whether it makes sense to put money and time into it.

Finally, there are the normal people in the world who might want to use Bitcoin.  If they are concerned that it is just “Magic Internet Money” without a real value based on economics, it could prevent them from using it.  If a majority of the population thinks that a bitcoin has no real value, then it will prevent the network from gaining popularity and benefiting many people around the world.

What is the Value?

I have no delusions that my approach to valuing Bitcoin will be the end all be all.  It obviously has many flaws and estimates, but I hope that a fresh approach to looking at the Bitcoin network can bring some new ideas and discussion to the table.  Also, I have a very small personal holding in bitcoins, so I am obviously biased to want a higher price.  Please take the following as one person’s opinion and use your own estimates and rates that make sense to you.

If you were to see the following revenue chart for a high tech startup, what would you think about the future prospects of that company?


The chart above is actually showing the mining fees on the Bitcoin network.  Each time someone sends money across the network, they attach a very small fee to the transaction.  The miners on the network package all the transactions into the block chain, and get to keep this fee for doing the work.  Today, this is usually around 0.0002 BTC or roughly $0.15 per transaction.

If we look at the Bitcoin network as a whole, it can be thought of like a Distributed Autonomous Co-op.  When users send money across the network, they pay fees to the Co-op, which can be viewed as revenue.  Since there are no centralized costs for the Co-op, these revenues can be viewed as pure profit.  The Co-op then turns around and pays all earnings out to the workers who are actually the miners running the network.

In my valuation model, I value the Bitcoin network like a series of cash flows.  The earnings of the network are treated like the earnings of a company listed on a stock exchange.  If people are willing to pay a fee for using the Bitcoin, then inherently, they are placing a value on the network itself.  As the number of transactions and fees goes up, the value of the network itself must go up.  The value of these fees can then be projected into the future to come up with a present value of the network as a whole.

This is where it gets tricky though.  Since the network itself is so new and there are no previous technologies to compare it with, we must estimate the future growth rates of the network.  One possible way to do this could be to look at the adoption of the Internet and put Bitcoin on a similar trajectory.  First though, let’s take a look at the historical growth of transaction fees.  These fees are based on info published on  One caveat is that the dollar amounts are based on the current USD price of a bitcoin (at the time of writing the article), so in theory if historical prices were used, these growth rates could look much higher.

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With these charts, we see a clear trend of Month-over-Month, Quarter-over-Quarter, and Year-over-Year growth.  The growth rates can be calculated and projected into the future to predict how large it might be in 10 years.  The growth rate from 2012 to 2013 was approximately 3,000%.  However, if we used 3,000% year over year for 10 years, the numbers would be larger than imaginable.  For this valuation, we will round last years growth at 3,000% and assume that every year after now, the growth rate will be cut in half as adoption grows for 10 years.  For example, we will assume that the growth rate in 2014 will be 1,500%, 2015 will be 750%, 2016 will be 375%, etc.  After 10 years, we will also assume that adoption has peaked and growth will continue at 5% year after year.  The following chart shows projected mining fees:


For this projection, it shows the Bitcoin network generating around $18 billion in 2023.  To project the present value of these cash flows, we also must estimate a discount rate.  This is a crucial part of calculating any present value, and for this exercise I will choose a rate of 25%.  Of course, this value should be greater if you a see a higher risk for Bitcoin succeeding to become a global currency.  Admittedly, 25% is an arbitrary value on my part but was chosen in line with investing in emerging markets.  With the discount rate chosen, we can calculate the present value of the first 10 years of the cash flows to be approximately $14 billion.

Also, we must calculate the present value of the cash flows starting in 2024 once the network churns along at an annual rate of 5% growth.  To do this we can calculate a perpetuity starting in 2024 then discount it back to the present.  This leads to a present value for the perpetuity of approximately $3 billion.

If these two calculations are combined, we can value the entire network at approximately $17.5 billion. Since there will only be a total of 21 million bitcoins ever created, we can calculate that each bitcoin should be worth approximately $840 using this method.


I can guarantee with certainty the value of a bitcoin will not settle and stay at $840 in the future.  The choice of predicting the network growth rate and also a proper discount rate are inherently hard, and slight changes result in drastic differences in the outcome calculated.  Additionally, the future of fees is very uncertain, including changes to the Bitcoin network itself where fees for a transaction are calculated differently.  This could lead to dramatically lower fees on the network, although at the same time, a larger volume of transactions might actually increase it.

In writing this article, my hope was to show that there are other methods of trying to predict the value of the Bitcoin network, rather than trying to guess how big it might get by comparing it to existing companies. Most important though, it shows that Bitcoin has a value greater than $0 even if it can’t be precisely calculated.