Bitblock Publishes Alternative Valuation Model That Suggests BTC Is Underpriced
Bitblock Capital has published an alternative mining valuation model for BTC. The company has published a report that examines data from July 2016 to Dec. 2018 that seeks to “explain the relationships between [BTC] price and its intrinsic value” using the model.
Bitblock Capital Proposes Alternative Mining Valuation Model for BTC
The report by Bitblock Capital argues that since 2017, “the real value of [BTC] has been the center of an increasingly vibrant discussion in the market,” noting that the price of BTC “behaves like a highly speculative security,” however, the crypto asset is “produced like gold.”
The paper asserts that there are currently three popular valuation theories pertaining to BTC: the currency model, supply and demand, and the mining model.
Bitblock states that there are several problems associated with the currency model, with the report highlighting the security characteristics exhibited by BTC price action, and concluding that the currency model “has very limited explanatory power” with regard to the value of BTC.
While the report finds that “Without additional price factors,” the supply and demand model “is able to analyze the equilibrium price of [BTC],” Bitblock also finds the supply and demand model to have a number of setbacks. In particular, the report notes that “it is extremely challenging to measure the position and elasticity of demand and supply curve accurately,” concluding that the model “has very limited practical use” – especially with regard to predictions of price movement.
Bitblock’s Mining-Based Valuation Model
The mining model is described as being “based on the non-arbitrage pricing or risk-neutral pricing model in financial economics” which states that “any riskless arbitrage opportunity is quickly taken up by well-capitalized market players,” maintaining prices at “the arbitrage-free price level”.
The paper utilizes a “revenue-cost model from the point of view of miners” to value BTC. The model is based on the assumption that there is “market equilibrium in the mining industry.”
Further, Bitblock assumes that the “value of [BTC] relies solely on considerations of mining power and electricity,” and disregards “irrational volatility and speculation” in the markets.
The report also appeals to the labor theory of value, describing the key property of BTC as a storage of value, adding that BTC “stores equivalent values from the ‘work of machines’.”
BTC Price Deviates Significantly From Bitblock’s Model
According to the “equilibrium price” generated by Bitblock’s valuation model, price and equilibrium value were balanced from July 2016 until late 2017, with BTC prices gradually increasing alongside a steadily rising hash rate.
The report asserts that from Nov. 2017 onwards, “price deviated from value significantly,” with BTC prices skyrocketing in spite of steadily rising hash rate. Following a brief correction in November that saw price realign with equilibrium value according to Bitblock’s model, the final leg of the 2017 bull run saw value deviate at the end of the year.
After price crashed during the start of 2018, the valuation model shows price consolidating near value for a few months, before drastically falling below the equilibrium price value produced by the model.
With regards to current market action, the report asserts that it is “irrational” for prices to remain significantly below the Equilibrium Price for a long period of time.
What do you think of Bitblock’s valuation model? Share your thoughts in the comments section below!
Images courtesy of Shutterstock, Bitblock
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