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From: NewsBTC, Author: Jordan, Translated by: PANews Original title: "After Bitcoin reached $20,000, is the model that Bitcoin is worth at most $74,000 reliable?" On December 16, 2020, Bitcoin broke through $20,000 for the first time in history. Just when the cryptocurrency market was jubilant, some people began to pour cold water, with one opponent warning that Bitcoin's current price is already twice its fair market value. In addition, if you look at it in the long run, the highest value that Bitcoin can reach is "only" $74,000. Although $74,000 is not a "small number", it is still somewhat low compared to the predicted valuation results given by other specially designed Bitcoin valuation models. For example, Plan B, a very well-known Bitcoin market analyst on Twitter, gave a "stock-to-flow" valuation model. According to the results calculated by this model: Bitcoin prices 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. After all, some people in the crypto community believe that the model has flaws.
Crypto industry critics continue to emerge, mostly focusing on valuation models
As Bitcoin hits its all-time high of $22,309.84, a large number of "most heroic" supporters and "most evil" critics flock to it. Some people who are not optimistic about Bitcoin are even dubbed "Dr. Doom", a name that aptly expresses the sense of evil, but Bitcoin is not scared by the criticism! The price breaking through $20,000 is the best response. (PANews Note: Dr. Doom refers to economist Nouriel Roubini, who has been attacking, criticizing and pessimistic about Bitcoin.)
In addition to fighting critics, Bitcoin is also fighting inflation. Throughout 2020, Bitcoin has been fighting against precious metals based on the safe-haven asset and digital gold "narrative" - there is no doubt that Bitcoin has won this battle, at least in terms of investment returns, beating the shiny gold of the past. Of course, not everyone in the traditional market is pessimistic about Bitcoin. Some people do not believe that gold can be used as a hedge, so they begin to turn their attention to the more disruptive Bitcoin. Claude Erb is a former professor of commodity investment and finance at Duke University and currently works at the National Bureau of Economic Research in Cambridge, Massachusetts. He recently published a new book, The Golden Dilemma. Barron's, a world-renowned financial publication, recently published an article titled "5 Reasons Not to Buy Gold", which quoted Claude Erb's views and 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. After the publication of the article “Five Reasons Not to Buy Gold”, the price of gold fell by $600 per ounce, as shown in the chart below. Source: XAU/USD trading pair on TradingView.com: In other words, people don’t seem to be very interested in gold as an inflation hedge these days. It’s worth mentioning that just after the Barron’s article was published, the price of gold plummeted by $600. Now, Claude Erb has released another paper that aims to question the fair market value of Bitcoin. Claude Erb’s latest paper is titled “Bitcoin is Exactly Like Gold Except When it Isn’t”. Based on his past experience working in commodity research, he concluded that 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 concludes 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.
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. At the same time, Claude Erb is not against Bitcoin. Perhaps like other traditional financial economists, he does not 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. However, this is actually the key point where things start to get confusing. Seeing economists like Claude Erb question Bitcoin, you might think that "old people" simply cannot grasp the true power and network effects of this emerging technology. If Claude Erb uses the traditional fair price valuation model to explain Bitcoin, it is like people used Metcalfe's Law to explain why networks like Facebook can grow exponentially. (PANews Note: Metcalfe's Law is a law about the value of the network and the development of network technology. The more users a network has, the greater the value of the entire network and each computer in the network.) For traditional economists, focusing on the strong network effect of Bitcoin is indeed a good starting point, but it is not completely correct. Take Metcalfe's Law as an example. This law states that the growth of the value of a network is proportional to the square of the number of users. If based on this theory, the reasonable market value of Bitcoin should be about $12,315, but this is not the case in reality. The following figure shows the comparison between the Bitcoin price trend based on Claude Erb's theory and the actual Bitcoin price trend since 2010: Why Bitcoin is More Than Just a “Network”
Claude Erb incorrectly assumes that each BTC in the Bitcoin "social network" represents only one user, and therefore thinks that the price of Bitcoin is overvalued. But in fact, he is wrong, because 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 considered carefully. In fact, there are many different analysis results in the crypto market. For example, for those experts who analyze Bitcoin based on the logarithmic scale model, they believe that Bitcoin assets will grow to $170,000 in 2028.
As the financial publication Barron's pointed out, in any case, economists always want people to seriously consider their own analytical models. After all, there is no other valuation method that is "more empirically reasonable". But is it really so? Charles Edwards, founder of digital asset management company Capriole Investments, designed a valuation evaluation method for Bitcoin specifically based on Metcalfe's law. The results showed that the fair price of Bitcoin is only $6,600. This conclusion seems "not very reasonable" (as shown in the figure below, source: BTC/USD trading pair on TradingView.com): According to Claude Erb's model, based on the total supply of 21 million Bitcoins, the expected maximum price per BTC is about $73,000. Claude Erb also warned that his theory is calculated based on the analysis of all mined Bitcoins, but one conclusion drawn from the theory is shocking: it may take 120 years to finally reach the high of $73,000! 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. But the problem is that Claude Erb's analysis results sometimes seem to contradict themselves. 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. There is no doubt that the cryptocurrency community does not recognize Claude Erb's model analysis, but as Bitcoin attracts more and more attention from various types of investors, it is bound to trigger a new wave of criticism and challenges among scholars, politicians, billionaires and businessmen, and the valuation model may become the focus of everyone's debate. If you strongly support Plan B's "stock-to-flow" valuation model and sneer at Claude Erb's model, you might as well consider this question: Plan B is an anonymous analyst who is very active on Twitter. "Stock-to-flow" is just an interesting mathematical model designed by him, while Claude Erb is an economist, professor and portfolio manager with rich experience in commodity markets. Of course, we can't think that the "stock-to-flow" valuation model is useless. In fact, there has been nothing like Bitcoin in the 100-year history of finance, so it is too early to assert that a certain model must be accurate. |
