Topic: Expected Value for Bitcoin in the Long Term (Read 8384 times)

I think those estimates make a lot of sense. We've barely scratched the surface of the potential for regular online and brick&mortar businesses to start accepting it.

The biggest problem for a lot of businesses will be that they'll be limited by the need to pay their taxes in their national currency. So if profit margins are 20% and they take 10% of their business in bitcoin, thats almost half of their profit that they'll have to find a way to spend in bitcoin.

Would be curious to hear if anyone has run into this problem much yet?

Looking at the chart this way makes more sense to me.

Someone needs to put up a chart with the market cap and the volumes traded of the various currencies in the world (if that data is even possible).

That would give a pretty good clue as to what the market cap of Bitcoin should be based on the trade volumes.

I don't think it is going to be that nice of a bell curve given the unpredictability of price change. Nice thought though!!

deathcode

Ah, I see more of what you're saying now... you're not as concerned about ability of miners to create coins as you are about the scalability of the architecture, fault resiliency, etc... ?? 

I have some of those reservations too, in particular as a VLDB type guy I suspect that replicating the block chain will slow transaction confirmations a lot at some point.   As for fault tolerance, bitcoin is really much like the internet itself and can continue to process transactions over network partitions etc.   

Here's more of where I'm coming from:  I've seen plenty of posts arguing about reasonable potential value for bitcoin, so I'm trying to make an informed conjecture by using the kind of reasoning equity analysts use to value a company (not the entire market) and make bets on its growth.  Some of the approaches are extremely mathematical (e.g. the start of this post) but devoid of market-oriented input.  Others (e.g. Max Kaiser, Rick Falkvinge ) are taking extremely broad-brush and talking about bitcoins being with $100K to $1M - after they replace trillions of dollars of GDP for multiple countries 20 years from now!

I'm trying to hit a middle ground and reason about bitcoin's possible prices by examining narrower industry segments where one might expect adoption, and only talking about orders-of-magnitude estimating: what if bitcoin reached 1% adoption in several specific industries, and scaled well enough to service that demand?  Are we talking about prices in tens, hundreds, or thousands per BTC?   I haven't seen many cogent attempts to assess this. 

The other thing doing is suggesting that there is indeed inherent value to cryptocurrency, based on the value of prime numbers.  It serves similar functions as gold but weighs nothing, is indestructible, etc.  I haven't seen a clear argument on that front either...


As for segfault -- Black-Sholes is an interesting idea, but that's for valuing time-limited derivatives based on some notion of expected rise or loss, right?  So you'd still need some input data on that... plus bitcoin is not derivative and does not expire..  but I bet people are already selling puts n calls on bitcoin..

Not sure how exact something like this would need to be. You could get lost trying to account for factors that may not really have a significant impact.

I'm of the belief that some rough measure of value expectation could be hashed out akin to Black-Scholes in the option space. It doesn't account for every market factor but provides a "good-enough" approximation of value at a point in time. Keeping in mind that there are more complex models that build on BS in order to account for different factors.

Okay, the things you've mentioned will mostly effect the rate of coin production, but from what I can see, not by an order of magnitude.  They would all impact these 'what if' scenarios; but I have some comments on specific items for discussion.

Directly related to bitcoin:

* Adoption rate (by users and merchants/by country)

The adoption rate is specifically what I'm speculating about, given existing adoption rates by market, then asking what might happen if we see similar adoption (to 1%) in other global industries. 

* Offer/Demand

Demand is driven by adoption rate, which we can put numbers on in these what-if cases.
Supply will grow in a gradual way from its current 10M to at most 21M (minus saved coins) over the coming years.

The considerations below will all affect how much Supply is available to circulate. In the worst case (for price) nobody would save and all 21M would get mined much sooner than planned.  This would double the amount in circulation at most - but that's not an order-of-magnitude difference.  If hoarding increases or mining slows, it would  reduces the supply which is good for price, ceterus paribus.   So, none of these factors would be likely to impact my guesses by more than say 50%.


* People's sentiment (hoarding/spending - speculative/circulative)
* Network power
* Bitcoin difficulty growth
* Currency reward halving
* Moore's Law fulfillment expectation (related to hashing power)
* Natural Disasters around the world (will affect technology production)
* Economic Disasters around the world (Will affect fiat currencies, people's mood)
* Energy production (electricity costs/fossil fuels cost)

As for the next 3, my operating assumptions for this what-if are:

a) that security flaws and hacks will continue to happen as the technology matures.  Personally, I think the bigger risk is architecture scalability - replication of the block chain can only go so far - and time to confirm transfers lagging as the network grows.    However, these kinds of issues are resolved by fixing and improving.   

b) If a competing/superior v-coin arises, there would be an exchange where you could buy the new coin for bitcoin -- it would be the fastest way to fund/sell the new coins.

c) as to legality, nobody has come up with a convincing case yet for how every nation on earth could make all virtual currencies illegal - and enforce it.  In fact the latest FinCen statements say that exchanges will be regulated, which means the most powerful legislative force is acting to legitimize virtual currencies.

* Security of the protocol
* Evolving of other e-currencies (LTC, Amazon, Ripple, FacebooKoins, deathcoINS, etc)
* Legality of the currency worldwide

Maybe I'm missing something  - for example I did not account for coin recirculation in calculating BTC price, I merely divided market demand by supply of 10M.   I know some modeler will have issues with that, and I'd love to see a better function for mapping likely price given demand....

Sure, here I go:

Directly related to bitcoin:
* Bitcoin difficulty growth
* Adoption rate (by users and merchants/by country)
* Offer/Demand
* Currency reward halving
* Legality of the currency worldwide
* Security of the protocol
* People's sentiment (hoarding/spending - speculative/circulative)
* Network power
* Evolving of other e-currencies (LTC, Amazon, Ripple, FacebooKoins, deathcoINS, etc)


Not directly related to bitcoin:

* Moore's Law fulfillment expectation (related to hashing power)
* Natural Disasters around the world (will affect technology production)
* Economic Disasters around the world (Will affect fiat currencies, people's mood)
* Energy production (electricity costs/fossil fuels cost)


That's just off the top of my head... I'm sure with more time I can think of many others...

thanks deathcode! 

one need not account for unknowns in conjecturing about markets or reasoning towards order-of-magnitude estimates, extrapolating from known bits of data is pretty common in these sorts of valuations... still, I'm looking for the big confounding factors so feel free to mention some...

there are so many unknowns and so many factors that you did not contemplate that I wouldn't even know where to start ripping it apart...
this posting should be sent to the recycle bin not to be recycled ever.

blog: how much is a bitcoin worth?
http://gruvr.com/blog/how-much-is-a-bitcoin-worth/

Okay, well I went ahead and wrote up a draft blog post, explaining my way of thinking about the innate value of bitcoins (they do exist physically, are 'backed' by prime numbers, governed by laws of nature like precious metal, have a face value similar to a discount coupon...)

If you could point me to the best of these similar industry-based analysis I'd appreciate it, and would love
to get constructive comments on this draft post so I can evolve it, thanks!

Hess, as a matter of fact it has been done quite a few times. Just looking at market cap and the size of online business, $10,000-$100,000 is not that unrealistic. But that requires quite some work on Bitcoin software to iron out the flaws.

 no legal or political backing. 
<<

this is what make it strong

Bitcoin is just a (virtual) commodity which functions as a medium of reliable value exchange.

Its price is set by fundamentals, by supply/demand, and by speculation.

Why not try to conjecture about future price targets by trying to infer a valuation, based on potential market etc.
This should yield at least an order-of-magnitude kind of number which would be better than nothing.

Using very rough numbers, if $1B worth of transactions are made using 10M coins, the price per coin should be somewhere
around $100/BTC, right?    We already have example market sizes and growth rates from Silk Road and 2 main gambling sites -- it would be an interesting
exercise to project that growth rate forward for those markets. 

The question of whether the current price is 'reasonable' could then be addressed.  Equities trade at some multiple of current earnings (commonly 15x) in anticipation of future growth...   

Has anyone tried to put together long-term targets using that kind of reasoning?  If not, I'll put up a blog post doing just that, of course for constructive  critique..

I wrote the equation as I did so that the two components of it would be separated out in an obvious fashion.  Namely, the growth factor and the risk factor.  You can attempt to simplify it if you wish, but I don't see the point.


You are getting distracted with the equation itself and losing sight of the model it is representing.  The intent here is to model two separate factors:

• 1.  The risk of systemic failure (brought on by a multitude of possibilities) modeled by S^n
• 2.  The growth, modeled by (1+R*exp(-d*(n-1)))^n

If you were to attempt to fit the model to real data, you would only use the equation from #2 above, not from #1, since #1 converts the formula from a long-term predicted growth model to a long-term expected value model.


If I had any interest in modeling the short-term future value of bitcoin, then I would choose a completely different model more suitable for such things (such as a biased random walk -- though I would not choose to use that model myself for reasons which are way outside the scope of this thread).  Again, I think you misunderstand what I am trying to do here, which is to compute a future expected value.

Let me go back to my lottery example which I used earlier.

If you are holding a lottery ticket in your hand and the lottery pays 1 million BTC, then what is the expected value of that lottery ticket?  It depends on how many lottery tickets have been issued.  If 100'000 tickets have been issued, the you can compute the expected value to be 10 BTC.  That is the average value of a lottery ticket.  999'999 tickets will be worth 0 BTC, and 1 will be worth 1 million BTC.

Similarly, I'm not exactly trying to predict how much a Bitcoin will be worth in 1 year, or 2.34 years, or whatever.  I'm trying to get an idea for the expected value of 1 BTC in my hand today based on long-term growth rates and risk factors.  My model is factoring risk into the equation and thus it is not predicting the actual value of BTC, but rather first predicting the actual value of BTC based on the growth portion of the equation, and then discounting the value based on risk factors.

The purpose of this is to develop a rational strategy for selling ones bitcoins so as to maximize the value returned.


Don't take this the wrong way, but once again you are showing that you do not understand what I am attempting to do.

Anyway, I have obviously made a mistake in bringing up this subject here and I will not repeat it again in the future.

Well, nothing is wrong with the model.

 V = (S^n)((1 + R*exp(-d*(n-1)))^n)

You could rewrite that as

( S * (1 + R*exp(-d*(n-1))))^n
( S + S*R*exp(-d*(n-1)) )^n

So, your parameters S and d are both slowing the growth, just one does it lineary, and the other does it exponentially with time.  Also, the influence of "d", and with it R, dies very quickly, and your model goes to S^n for large n, as long as "d" is not zero.   

My guess is that you could replace S and d with just one parameter.

Looking at this:
http://bitcoincharts.com/charts/mtgoxUSD#tgTzm1g10zm2g25zv

Any model would have problems in November 2011 if you look only at data up to that moment.

Another guess is that a simple quadratic polinomial model on a log chart would have all the power of your model.

By all means, fit the actual data and post the results.

Please do me the courtesy of at least reading what I wrote before asking questions which I have already answered.


The above is the general equation for my model.  If you want to call it, "garbage" then do so by pointing out what is wrong with the model, not with an arbitrary set of parameters.


The above values were used solely for illustrative purposes (e.g. to show you the shape of the curve).  It is obvious that by changing the values of the parameters you can change the peak and the maximal value to whatever you desire.

Also note that a couple of paragraphs later I wrote:


So if you want a set of parameters that are not "garbage," then why not go fit them into the model yourself and then see for yourself what results?

This is exactly the sort of strategy I'm using myself.  The trick, as you say, is picking your values.

The point of my attempt at a model was to act as an aid in picking some reasonable values, rather than just picking them arbitrarily.

I have some coins. When the dollar value of 1 BTC rises by a multiple. I convert a percentage of my remaining BTC into fiat.

If BTC collapses you get a consolation of having amassed a bit of fiat.
If BTC takes over the world you didn't make the mistake of selling out early.

Choose values depending on what you want in each scenario. On paper, its pretty easy to not lose. Gotta pick your values and stick to the plan though

I see you want straight away to an "attack the person" mode. No need to do that.

You took your R, or "initial growth" as 9, and your d, "grow decline" as 0.5.  Why?

Why not 30 for R, or 3.  Why not 0.01 for d, or 1? 

Basically, you made up those numbers, then your model spit out that the maximum "value" for bitcoin will be in 3.5 years.   That 3.5 is as good as your input parameters.  Garbage in, garbage out.