My take on Cryptocurrency valuation
Here is the procedure I followed.
Currencies are valued for their 1)Transactional value 2)Investment value.
The most important factor in currency valuation is the number of units available. Lesser the units, more the value. In bitcoin, 21 million is NOT the number of units available. Because bitcoin is divisible upto 8 decimal places (0.00000001 BTC). So it turns out 2.1*10¹⁵ units of bitcoin are available.
Lets compare with traditional paper currency. The physical currency of the whole world is worth around 56 trillion USD. The total units of physical currency available is around 2,500 trillion USD(Because smaller denominations like cents are used all over the world. Here 2 cents is assumed to be the common least valued physical currency)
Let me make a wild assumption. Cryptocurrency completely replaces all physical currency. In that case, we get
0.00000001 BTC=2.5*10¹⁵*2/2.1*10¹⁵= 0.02 dollars(approx)
Or 1 BTC=$ 2,000,000
A more realistic assumption would be that 1% of all currency is bitcoin. Then bitcoin could be valued at $20,000 which was reached before.
Things change even more dramatically if seen as an investment.
Let’s compare with gold.
Common least quantity of gold is 1gm. And there are around 187,200 tonnes of gold mined till date in the world. So there are 1.7*10¹¹ units of gold available.
Let’s make another wild assumption that cryptocurrency completely replaces gold(It’s is never likely as the biggest consumer of gold, India, has deep traditional attachment with gold in marriage). Then,
0.00000001 BTC= 1.7*10¹¹/2.1*10¹⁵= 0.00008095238 gms of gold.
Or 1 BTC= $ 364,275
Now making the realistic assumption that 1% of all investment is gold, then we get, 1 BTC= 3,275 USD based on investment value alone.
- Total Money in the world. https://en.wikipedia.org/wiki/Money_supply https://gizmodo.com/5995301/how-much-money-is-there-on-earth
- Gold Reserves - http://www.bbc.com/news/magazine-21969100 https://en.wikipedia.org/wiki/Gold_reserve