Jim Rickards Blog

BitCoin Valuation, Answered

Answer: $20,000 low-end-$95,000 high end, using today’s stats and prices.
Greetings,
I am a long time lurker and first time poster. As a student of financial history and capital markets I felt compelled to answer this question. Hopefully you enjoy the analysis and I look forward to some meaningful exchanges that arise out of it.
Assumptions:
In finance, to derive a value you need to have something comparable (“comp”) to the object being valued(1).
Gold:
For this exercise, I am operating under the pretense that Bitcoin (“BTC”) is a mechanism to store value, therefore gold has been chosen as the closest comp to BTC(2). Currently the cash cost to produce an ounce of gold is $150(3). Unfortunately, new industry standards will skew the direct cash cost of producing gold because of an industry push to include indirect costs or “all-in sustainable cash costs”(4). Since mining BTC does not incur the same type of costs (absent energy and upfront equipment) those indirect costs will be ignored for this exercise. At the time of writing this post, gold is valued at $1,290/oz(5). Using arithmetic, gold is valued at 8.6x (1,290/150) production costs.
BTC:
Using BlockChain(6), it costs $2,377 (Electricity Cost/(Blocks Mined * 25)) to mine one BTC. At the time of this post 129 blocks were mined. Applying our derived 8.6x production cost multiple, BTC is valued at $20,000 on the low end. Given that the gold market is heavily distorted through central bank intervention and derivatives the prices of gold is suppressed(7). The true value of gold is $6,000/oz if you agree in tying the price of gold to M1 currency supply (note that the author’s range is $3-7,000(8)), therefore our derived suppression multiple is 4.65x ($6,000/$1,290). When you apply our suppression multiple to $20,000, that multiples out roughly to $95,000.
Key Takeaways:
Buy in small chunks for the long haul. Smart government regulation will only benefit BTC as it will lead to wider adoption.
Footnotes:
1 http://en.wikipedia.org/wiki/Valuation_using_multiples 2 http://www.economist.com/node/16536800 3 http://www.besra.com/besra-q3-2013-results/ 4 http://www.theaustralian.com.au/archive/business/newcrest-cuts-production-costs-as-gold-fails-to-shine/story-e6frg9do-12266852627565 5 http://www.kitco.com/charts/livegold.html 6 https://blockchain.info/stats 7 http://www.caseyresearch.com/gsd/edition/jim-rickards-predicts-how-gold-price-suppression-will-end 8 http://www.youtube.com/watch?v=UeCqzwNnqyk&feature=youtu.be&t=16m38s
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