What is Bitcoin worth? You're not alone if you've ever asked this question when trying to make sense of Bitcoin's price fluctuations. Bitcoin has no intrinsic value or underlying cash flows that can be analyzed. Its price is determined by supply and demand, including the dynamics of bitcoin supply and demand, which various factors, including market sentiment, news events, and macroeconomic trends, can influence. Understanding how to value Bitcoin can help you make sense of its price fluctuations and enable you to make informed decisions as a Bitcoin investor or holder. This guide will cover key Bitcoin valuation models to help you get started.
Once you know how to value Bitcoin, you can use Bitcoin analysis, a tool offered by Bitcoin Magazine Pro, to help you achieve your goals as a Bitcoin investor. This resource provides detailed, easy-to-understand reports on Bitcoin's valuation according to different metrics.
What Determines the Value of Bitcoin?
Before looking at popular Bitcoin valuation methods, let’s first discuss why Bitcoin has value. The factors that drive Bitcoin’s value the most are the digital currency’s:
Limited Supply
Bitcoin has a fixed supply of 21 million units. No one can print or mine more coins than that. Unlike fiat currency, where more money can be printed into the circulating supply with the push of a button at the central bank, Bitcoin has a fixed supply that has been met with increasing demand.
Hard-Coded Monetary Policy
Bitcoin also has a monetary policy written in code that ensures that new coins are brought into circulation at a decreasing rate to reduce supply pressure over time. This policy, combined with growing demand, helps to push up the price of digital currency.
Censorship Resistance
Bitcoin provides a censorship-resistant store of value that allows individuals to own their money truly. When someone holds Bitcoin in a personal wallet, to which they only have private keys, they are the only person who can access the coins. As a result, no bank, regulatory authority, or government can easily freeze or seize funds held in Bitcoin.
While you may feel your money is safe in your bank, the people of Cyprus may look at it differently after experiencing not being able to access their funds during the 2013 banking crisis and subsequent depositor bail-ins.
Ability to Process Near-Instant Borderless Payments
Bitcoin enables users to send and receive near-instant borderless payments at a minimal cost. For individuals relying on remittances to feed their families, Bitcoin provides a much-needed remittance rail that doesn’t require a bank or payment processor.
Many people in El Salvador, where Bitcoin was legal tender in September, are already receiving low-cost Bitcoin remittance over the Bitcoin Lightning Network. They can then easily convert it into US dollars or spend it at merchants and retailers using the country’s official Chivo Bitcoin wallet.
Network Effect
Bitcoin has benefited from the network effect, boosted by its first-mover advantage and brand recognition.
The network effect has helped countless tech startups turn into large corporations by ensuring that each new user benefits from the increased use of a platform or service. As more people use the Bitcoin network, Bitcoin becomes exponentially more valuable for each user.
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How to Value Bitcoin? Top 12 Most Popular Bitcoin Price Models
1. Network Value-to-Transactions (NVT) Ratio
The Network Value-to-Transactions Ratio compares the dollar value of Bitcoin transaction activity to its network value, measured using the digital currency’s market capitalization.
The NVT Ratio is similar to the Price to Earnings (P/E) ratio used to value traditional companies, though Bitcoin, of course, has no earnings.
The formula is NVT Ratio = Market Cap/Transaction Volumes
Calculating the NVT Ratio
Take the Bitcoin market capitalization and divide it by its most recent 24-hour trading volume to get the NVT Ratio. The NVT Ratio can then be used to compare Bitcoin with other currencies, making it a relative valuation method.
The Origin and Rationale Behind the NVT Ratio
The NVT Ratio was developed by Willy Woo in 2017. He explained the thinking behind this valuation method in a Forbes article, reasoning that since Bitcoin is fundamentally a payments network, looking at the money flowing through the Bitcoin network could serve as a proxy to a company’s earnings.
Interpreting the NVT Ratio and Its Implications
A large NVT ratio for Bitcoin could indicate high speculation because the price is high compared to network activity. While this could signal a bubble, it could also imply that investors predict that the network’s utility will rise in the future.
2. Token Velocity
Token velocity is calculated as a function of transaction volume and average network value. Velocity can be measured over any period but is often measured annually.
This valuation method calculates Bitcoin's total transaction volume by its average network value over one year.
The formula is Token Velocity = Total Transaction Volume / Average Network Value
A high token velocity indicates that while a token’s exchange volume is high, the value of the underlying network may not be expanding at the same rate.
3. Daily Active Addresses (DAA)
Daily active addresses are used to estimate the number of users conducting transactions on a blockchain network daily. It’s the equivalent of daily active users.
Many daily active addresses indicate that the network has many active users. An increasing DDA figure over time suggests that a blockchain network is starting to benefit from the network effect. DDA also complements Metcalfe’s law and the Network Value-to-Transactions (NVT) ratio in detecting new and continuing trends.
4. Metcalf’s Law
Metcalfe’s law, which originally intended to measure communication networks, is another prominent valuation tool for Bitcoin. The law says that the worth of a network system is equivalent to the square of the number of the network’s nodes or end-users.
Daily Active Address (DAA) is the number of connected network users per day and market capitalization as the network value to compute the Metcalfe’s Ratio (MET).
So the formula is MET Ratio = Market Cap/Total Assets (Daily Active Address)²
Metcalfe’s law is a great way to examine how a network grows relative to its daily users.
5. Store of Value (SoV)
The Store of Value (SoV) thesis suggests that a digital asset’s value depends on its ability to store monetary value for its investors. The better a digital asset acts as a store of value, the more valuable it will become in the future.
With Store of Value (SoV) in mind, a way to value Bitcoin would be to determine how much it would be worth if it reached the level of gold as a store of value.
Bitcoin's Potential Market Cap and Price Target
The total market value of gold is currently around $11.5 trillion. Assuming that Bitcoin reaches the same level of gold as a store of value and its total network value reaches $11 trillion, you could estimate the price of Bitcoin by dividing $11 trillion by 21 million BTC, which would equate to a Bitcoin price of around $548,000.
6. Valuing Bitcoin using gold's market cap
For around 6,000 years mankind has used gold as a store of value. The term store of value (often abbreviated to SOV) refers to any item that holds its purchasing power into the future. Gold is effective as an SOV because it possesses key characteristics like scarcity and durability.
The problem with gold is that it is an analog SOV in an increasingly digital world.
- You can’t send gold over the internet.
- Physically buying and storing it is difficult and entails significant risks.
- It isn’t easy to validate gold’s purity
- The market for selling physical gold is inefficient for a small investor
Bitcoin is often described as digital gold because it is the first digital asset with a similar property of scarcity - what is described as unforgeable digital scarcity.
The Digital Scarcity of Bitcoin
In simple terms, that means it exists in digital form, but unlike any file on your desktop, Bitcoin cannot be copied or created at will—which is a big deal. There are rules for how Bitcoin comes into existence (mining) and a cap on the total supply (21 million).
Valuing Bitcoin as Digital Gold
If you agree that Bitcoin is digital gold, you can find a simple way to value Bitcoin by looking at the current market for gold and dividing it by the Bitcoin's known maximum supply. This Bitcoin price model is only as good as the numbers we feed in, so we will look at two approaches and numbers provided by the World Gold Council.
Estimating Bitcoin's Potential Value Based on Gold Supply
Using total gold supply to value Bitcoin, the best estimates suggest that around 201,296 tonnes of gold has been mined throughout history.
With the current price of gold at $1,700 an ounce, this equates to a price of roughly $57,000,000 per tonne. This gives us a total market capitalisation for gold of $11,473,872,000,000—so $11.4 trillion for short.
If we simply divide that number by 21 million—Bitcoin's fixed supply cap—the total gold supply approach gives a predictive value of $564,375 per Bitcoin. This is not a fancy or complicated model for predicting Bitcoin’s price, but it is based on reasonably sound logic, assuming you regard it as an equivalent or better SOV to gold.
7. Stock to Flow (S2F) Model
The stock-to-flow (S2F) model is a commonly used method for valuing commodities. Stock refers to a commodity's current total inventory, while flow refers to its annual new production.
The ratio of stock to flow is typically less than 1 for agricultural products and various industrial metals, which means that the total inventory of these commodities is usually less than the annual new production. Agricultural products can only be stored temporarily, and industrial metal storage costs are high, and there is a risk of rusting. Therefore, producers typically produce an appropriate quantity based on the projected demand for the next six months or one year.
The Scarcity of Gold
Commodities like gold, which serve as stores of value, are very different. Approximately 187,000 metric tons of gold are in the world, representing the total amount of gold mined over thousands of years. Once gold is mined, it cannot be destroyed and will exist indefinitely. The annual new production of gold is around 3,000 metric tons.
The Stock-to-Flow Ratio of Gold
The Stock to Flow ratio for gold is calculated as 187,000 / 3,000 = 62.3. This ratio means that the amount of gold stored in vaults or held by individuals worldwide equals 62 year’s production. When you invert this ratio, 3,000 / 187,000 = 1.6%, which indicates that the annual inflation rate of gold is approximately 1.6%.
The Predictable Supply of Bitcoin
One significant characteristic of Bitcoin is that the new supply entering circulation each year is predetermined. This means that both the stock and flow of Bitcoin can be precisely calculated, whereas other commodities rely on less accurate production estimates. The total supply of Bitcoin is 21 million, with 19.41 million already mined. New Bitcoins are mined as miners validate transactions on the blockchain, following a predetermined schedule. The last Bitcoin is expected to enter circulation around 2140.
Comparing the Stock-to-Flow Ratios of Gold and Bitcoin
Miners receive a reward of 6.25 Bitcoins per block, with a new block mined approximately every ten minutes. This results in an annual mining of 328,500 BTC. The current stock-to-flow ratio for Bitcoin is roughly 59 (19.41 million / 328,500), which is very close to the ratio for gold (62).
As the production of Bitcoin halves every four years, the recent halving reduced the block reward to 3.125 BTC. This means that the flow of Bitcoin halved, doubling the stock-to-flow ratio.
The Impact of Bitcoin Halving on Price
Bitcoin halving leads to a significant reduction in newly produced Bitcoins. If the investment demand for Bitcoin remains unchanged while the supply decreases, scarcity increases, driving up the price of Bitcoin.
PlanB's Bitcoin Stock to Flow model charts the price of Bitcoin with the stock-to-flow ratio. The yellow line in the chart represents the model-calculated Bitcoin price, while the colored line represents the actual Bitcoin price. PlanB's S2F model demonstrates a close relationship between the price of Bitcoin and the stock-to-flow ratio for quite an extended period.
8. Bitcoin 1+ Year HODL Wave
HODL stands for “hold on for dear life”. If investors don’t want to sell an asset, it means the asset is more valuable. That’s the logic behind the Bitcoin 1+ Year HODL Wave metric. Put simply, it measures the percentage of Bitcoins on the blockchain that have not moved wallets in a year or more.
When you sell Bitcoin, it usually moves to a new wallet. So if Bitcoin hasn’t switched wallets, it implies that it hasn’t been sold. I.e., the higher the HODL Wave, the more HODL’ers will be HODL’in.
9. Number of Bitcoin wallet addresses
A network is more valuable when more people use it. If more people use Bitcoin, the number of wallet addresses increases. Assuming the total number of Bitcoin wallet addresses keeps increasing, the network should become more valuable over time.
10. MVRV Z-Score
The MVRV Z-Score uses blockchain data to find the Realized Value (RV) of Bitcoin and compare it with the Market Value (MV).
The MV is the easy part. It’s the current Bitcoin price times all the coins on the blockchain. You can look up the MV on coinmarketcap.com. With MV, all Bitcoins have the same price (i.e. the current market price you see on a Bitcoin exchange).
Understanding Realized Value (RV) in Bitcoin
Realized Value (RV) is a bit trickier to calculate. Here, each Bitcoin (or fraction of a coin) could potentially have a different price—its market price when it was last moved on the blockchain. This movement could represent the last time that coin was sold. So, the RV takes the price of each coin at that time and adds them all up.
Side note: You can move Bitcoin to a different wallet without selling it, so the RV is only an estimation of the last selling price of a coin.
Dividing the MV by the RV gives you the MVRV Ratio. If the ratio is low, the current market price of Bitcoin on an exchange (MV) is low relative to the last sale price of all the existing Bitcoins. In that case, Bitcoin’s current price might be a bargain, according to the indicator.
Then there’s the MVRV Z-score. This uses statistics to make the MVRV ratio a more reliable measure of Bitcoin’s value. You can read my MVRV Z-Score guide for a deeper explanation.
11. Fear and Greed Index
I get the irony of using yet another Warren Buffet quote in the context of Bitcoin. But here’s another one you probably know: “Be fearful when others are greedy, and be greedy when others are fearful.”
Buffet’s sentiment makes perfect sense as a Bitcoin valuation tool. If everyone panic-sells their satoshis, Bitcoin will probably be trading at a decent bargain. And if everyone is lining up to buy Bitcoin, it’s probably time to take some profits off the table.
The Fear and Greed Index gives you an actual indicator to measure how much fear or greed there is in the BTC market at any given time. It does this by taking a bunch of different market sentiment factors and making an index with them. These include things like:
- Market volatility
- Momentum
- Bitcoin dominance
- General BTC vibe on social media
When the index is closer to 100, investors are incredibly greedy. When the index is closer to zero, they’re extremely fearful. Be fearful when others are greedy, and greedy when others are fearful.
12. Bitcoin Open Interest
The Bitcoin game has 2 teams:
- Investors who buy and hold actual Bitcoin (i.e. “spot”) for the long run.
- Traders who use BTC derivatives to profit from Bitcoin’s volatility in the shorter term.
Both teams can make money if they know what they’re doing. But it's usually a dangerous sign when too many traders start piling into Bitcoin with high leverage. When traders buy Bitcoin with high leverage, they’re much more likely to get “wrecked” if the price moves against them. So, they become forced sellers much faster than long-term investors.
That’s why you’ll often see Bitcoin have 20 – 40% drops (even in a strong uptrend). It’s mostly leveraged traders who are forced out of their positions as investors buy their coins.
Bitcoin Open Interest
The Bitcoin open interest measures the number of open derivatives contracts on Bitcoin exchanges. This can give you a good idea of how much leverage is in the market at any time (since derivatives use leverage). When open interest is low, it typically means there’s less hype in the market, which could mean Bitcoin is trading at a better value.
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