2013 Bitcoin valuation model now points to $6,629

The calculation using two public data points that nailed the bitcoin price

In April 2013, bitcoin surpassed $130, and much of the financial press had already written it off as a bubble. An internet calculation said exactly the opposite: the reasonable price was around $49.94. Three months later, with the currency trading between $88.10 and $97.50, the same formula returned $88.97. Margin of error: around 1%.

The formula had nothing to do with finance. It relied on three data points: the $13 quotation from early December 2012, the 10,498,000 bitcoins in circulation at the time, and the 45,200 wallets registered on blockchain.info. The idea was simple: if the number of holders grows, the value of each coin grows in the same proportion.

The two public data points feeding the formula

The entire model relies on something that does not exist in the real economy: an open accounting registry accessible to anyone. The amount of bitcoins issued is exact and public in each block; the number of created wallets is also no secret. With that, and a simple rule of three, comes a valuation that depends on no central bank or quarterly balance sheet.

The specific formula is 13 × (current wallets / 45,200) × (10,498,000 / bitcoins in circulation). It is multiplied by 13 because that was the starting price; it is divided by new coins because each issuance dilutes the previous ones.

There were objections from the start. Most coins are held by people who do not use third-party hosted wallets, and newcomers behave very differently from veterans. The author himself admitted that assuming an average capital per wallet was false and that it only served as an approximation. Nevertheless, he defended the data: a novice’s first move upon entering is to create a wallet, so it serves to measure growth.

The spread went from +176% to +4% in three months

The series of valuations issued between April and July 2013 reveals the pattern:

• 05/04/13: valuation $49.94 against a quotation of $130.24-144.94. Spread +176%.
• 14/05/13: valuation $72.83 against $109.42-119.80. Spread +57%.
• 23/05/13: valuation $76.93 against $123.00-126.90. Spread +62%.
• 13/06/13: valuation $83.86 against $97.50-103.70. Spread +20%.
• 01/07/13: valuation $88.97 against $88.10-97.50. Spread +4%.

The overvaluation did not correct because the price crashed; it corrected because the number of wallets grew faster than the coin issuance. In other words, the model simply caught up. That is the interesting finding, and also its main weakness: if the indicator is contaminated, the result is contaminated with it.

The 0.6% daily exponential gave the same warning

A second method, independent of wallets, reached a similar conclusion. Taking the average daily revaluation of 0.6% throughout the history of MtGox quotations, the formula Value = 0.1845 × exp(0.0059 × day), with day 1 fixed on July 17, 2010, placed the valuation on November 15, 2013, at $243.74 against a quotation of $436.34: a spread of +79%.

The extremes marked by that model deserve a review. Maximum overvaluation in June 2011, at +2215%; April 2013, +234%. Maximum undervaluation in October 2010, at -80%, and December 2012, at -64%. Two different methodologies, with different data, pointing to the same euphoria peaks.

Why does the model fall short over the years?

Because its two assumptions degrade. The first: blockchain.info no longer concentrates the same proportion of the ecosystem’s wallets, thus underestimating the real growth in the number of holders. The second: millions of bitcoins are lost forever, and the calculation distributes them equally to those still active.

It is estimated that between one and three million coins are unrecoverable. This money, which can no longer be moved, should not trade, yet it inflates the denominator. Correcting both biases pushes the valuation upward, although no one knows by how much: there is no way to accurately measure lost wallets or those that never passed through an online service.

From $2,571 to the calculation bottleneck

With bitcoin at $2,571, the model marked a spread of -17%: for the first time in years, the estimated valuation exceeded the quotation. A few hours later, with the currency at $2,299, the spread widened to -46%. In January 2018, with the market in full hangover, someone applied the formula and got around $4,000; another version, with 33 million wallets and 17.5 million coins, yielded $6,000.

The last known revision yields $6,629, with 38,941,254 wallets and 17,735,863 bitcoins in circulation. Its author is the first to acknowledge that the number is below the objective valuation, and by rough estimate places it above $11,000. Against the thesis of state backing, another school of analysis holds that bitcoin is fiat money like any other, only backed exclusively by the confidence of those who accept it.

This is where the calculation stalls. A two-variable model works as long as the variables measure what they claim to measure. No one knows how many bitcoins have been lost forever, no one knows what percentage of the market blockchain.info now collects, and the adjustment needed to plug these two holes is, literally, a guess.