Observation丨Who will have the last laugh in the battle over Bitcoin valuation models after “US$20,000”?

Note: Part of this article comes from Yahoo Finance

Golden Finance Blockchain December 21st News: As Bitcoin continues to soar and break through the historical high of $20,000, a large number of supporters have begun to appear in the market, and at the same time, there are also pessimistic voices. The two factions are operating independently, and each has brought out its own model to try to convince the other side. However, as Bitcoin attracts more and more attention from different types of investors, it is bound to set off a new wave of criticism and challenges among scholars, politicians, billionaires and businessmen, and the valuation model is likely to become the focus of everyone's debate.

When talking about Bitcoin valuation models, we have to mention the "stock-to-flow" valuation model given by Plan B, a very well-known Bitcoin market analyst on Twitter. According to this model, the value of Bitcoin will increase 10 times within 1-2 years after the halving. However, the Bitcoin valuation given by the "stock-to-flow" valuation model cannot be taken seriously. Some people in the crypto community also believe that the model has flaws.

Another well-known model is the Claude Erb model, created by Claude Erb, a former professor of commodity investment and finance at Duke University. In the Claude Erb model, based on the total supply of 21 million Bitcoins, the maximum price per BTC is expected to be about $73,000. Although this number does not seem small, it is still somewhat low compared to the predicted valuations given by other specially designed Bitcoin valuation models. And Claude Erb also warned that his theory is based on the analysis of all mined Bitcoins, and it may take 120 years to finally reach the high of $73,000.

Claude Erb currently works at the National Bureau of Economic Research in Cambridge, Massachusetts. He recently published a book on gold research, The Golden Dilemma. In the book, Claude Erb proposed the concept of "fair market value" of precious metals. According to Claude Erb's analysis, after the end of the Great Depression in the United States, the fair market value of gold was less than half of its price. In other words, people nowadays seem to have little interest in gold as an inflation hedge. The price of gold once plummeted by $600 due to this view. It should be noted that Claude Erb is not against gold, and in the past he would choose to hold gold when managing client portfolios.

Now, Claude Erb has published another paper, "Bitcoin is Exactly Like Gold Except When it Isn't", which aims to question the fair market value of Bitcoin. Based on his past work experience in commodity research, Claude Erb has come to a conclusion: the price of gold can be decomposed into the "golden constant" fair price and fair price deviation. If Bitcoin is used as an inflation hedge, value storage and safe haven, there is no historical data to follow in these aspects. The paper also wrote in the abstract: It can be said that it is questionable whether the price of Bitcoin can be decomposed into the "Bitcoin network" fair price and fair price deviation. But it is worth mentioning that Claude Erb is not against Bitcoin. Perhaps like other traditional financial economists, he doesn't know where to start when he sees the Bitcoin valuation model. Perhaps he just thinks that using Bitcoin as a "safe haven" asset is questionable.

Just as Claude Erb is skeptical about the inflation hedging properties of gold, he also does not think that Bitcoin has "anti-inflation" qualities, because in order for an asset to have a good inflation hedging advantage, it is necessary to maintain price stability first, and Bitcoin's performance in this regard is obviously unsatisfactory. The ratio of Bitcoin to the consumer price index has soared from almost 0 to 73. However, Claude Erb's theory seems to be somewhat contradictory. For example, he believes that gold should not be used for "inflation hedging purposes", but the ratio of gold to the consumer price index is only between 3-8.

It is also important to note that Claude Erb incorrectly assumes in his model that each BTC in the Bitcoin "social network" represents only one user, and therefore believes that the price of Bitcoin is overvalued. In fact, each Bitcoin can be infinitely decomposed (in a decimal way), making user accessibility infinite. Although Claude Erb's model does follow the linear proportional trajectory of Bitcoin, the analysis results will naturally not be correct because the basic issues are not carefully considered. For those experts who analyze Bitcoin based on the logarithmic proportional model, they believe that Bitcoin assets will grow to $170,000 in 2028.

Of course, for traditional economists, focusing on the strong network effect of Bitcoin is indeed a good starting point, but it cannot be said to be completely correct. Everyone knows that Metcalfe's Law is a law about the value of the network and the development of network technology, that is, the more users a network has, the greater the value of the entire network and each computer in the network. If, based on this theory, it is believed that the growth of the value of a network is proportional to the square of the number of users, the current reasonable market value of Bitcoin should be about $12,315 (as shown in the figure above), but the actual situation is not the case. Not only that, Charles Edwards, the founder of digital asset management company Capriole Investments, also designed a valuation evaluation method for Bitcoin specifically based on Metcalfe's Law, but the results showed that the fair price of Bitcoin was only $6,600.

After analyzing the above two models, do you support Plan B's "stock-to-flow" valuation model or the Claude Erb model? You should know that "stock-to-flow" is just an interesting mathematical model designed by an active anonymous analyst on Twitter, while Claude Erb is an economist, professor and portfolio manager with rich experience in commodity markets. Although the current cryptocurrency community does not recognize the Claude Erb model analysis, after all, there has been nothing like Bitcoin in the century-long financial history, so it is too early to assert that a certain model must be accurate.

In fact, Bitcoin itself is not scared by the criticism. In addition to fighting against critics, it is also fighting against inflation and even precious metals. The price breaking through $20,000 is the best response (at the time of writing, according to Coingecko data, the price of Bitcoin has reached $23,687.18, with a market value of more than $440 billion). Not only that, from the perspective of return on investment, Bitcoin has also defeated the glittering gold in the past and won this battle.

Of course, this war without the smoke of gunpowder is still going on quietly, and the concepts of traditional markets and emerging markets are still colliding. No one can assert that their analysis model is correct, so let the future tell us the answer!