A PDF version of the writeup below can be found here.

Introduction

Bitcoin (“BTC”) has enjoyed a meteoric climb from ~$1K at the beginning of the year to around $10K currently. “Bitcoin 101” topics, such as its consensus mechanism, throughput, “Tokenomics”, etc. have already been well covered by others. As such, this article aims to explore less covered topics, specifically: Titan’s illustrative framework for estimating BTC’s valuation and the associated catalyst paths that we think can bridge the asset’s current state to such valuations.

Please note our valuation assumptions are highly illustrative. The purpose of such analysis is not so much to set an explicit price target as to force us to focus on the key value drivers. These drivers are backed by our estimates of total addressable markets (TAMs), crypto’s share within such markets, BTC’s share within crypto, and the sustainability of such market shares. These price targets are also subject to continuous change as the landscape continues to evolve and our thinking updates accordingly.

Summary

We believe BTC’s longer-term valuation (by ~2030) could reach ~$200K/coin, driven primarily by the store of value use case and secondarily by the unit of account and medium of exchange use cases. We believe buying BTC at current levels of ~$10K/coin results in a favorable risk/reward, generating ~25% IRR in our base case.

Valuation Detail

We approach BTC valuation from first sizing the TAMs that BTC participates in, and then approximating BTC’s shares within such TAMs.

We believe the primary use cases for BTC include:

Store of value (“SoV”) Medium of exchange (“MoE”) Unit of account / common currency within crypto

From a probability, adoption timeline, and risk-adjusted perspective, we believe the SoV use case ranks highest, followed by MoE, and finally unit of account / global currency.

Additionally, we believe that given the capped token supply of BTC and that the holder base of BTC is focused on multifold returns generated over a longer period of time (so-called “HODLers”), the BTC supply curve is relatively inelastic compared to traditional assets. This implies that capital inflows contribute to a near-one-for-one addition to the asset’s market cap; e.g. $1 of incremental inflow adds ~$1 of market cap. This is a central assumption in our below analyses.

Store of Value

SoV is defined as any form of wealth that maintains its value without depreciating¹. Consensus sentiment within the crypto community largely reflects that BTC is able to claim this designation alongside gold and other precious metals. Outside the crypto community there is a range of perspectives, from tepid spectators who are withholding judgment for now to outspoken naysayers who believe BTC is a fad or bubble.

Given BTC’s currently large price moves and comparatively high volatility, we acknowledge that BTC as it stands today is not ready for widespread SoV adoption. That said, we believe that the conditions are in place for BTC to credibly become a bellwether SoV asset alongside gold in the mid- to long-term. We believe that during an asset’s path to being recognized as a SoV, two things typically are required: 1) the asset’s association with value storage gains mindshare, and 2) the asset trades like a safe haven asset during market risk-off periods. BTC has made progress in both areas during 2017.

Note that “bitcoin store of value” as a search query has gained in popularity over time, especially in 2017².

Additionally, news articles and advertisements typically visualize BTC as a gold coin with the BTC logo on it. As we know, BTC is fundamentally a digital concept and does not exist in a physical form. Though seemingly immaterial to this discussion, we believe that marketing BTC as similar to gold, by calling it “digital gold”, is a big component to lowering investor psychological barriers, gradually conditioning the public to the idea of BTC as a SoV.

Such mindshare gains are accompanied by a transformation in the way BTC is traded as well, with BTC correlations mirroring that of gold. For instance, during 2016, gold traded up alongside the VIX 43% of the time, while BTC saw only 27% on the same basis. During 2017YTD however, gold traded up alongside the VIX 24% of the time, while BTC saw 41%³ on the same basis.

We believe this narrative is ultimately self-fulfilling and reflexive. As BTC continues to trade similarly to gold, the narrative that BTC indeed is “digital gold” will continue to take hold, driving traders and algorithms to continue trading BTC with the VIX and gold.

Over the next few years, we can expect BTC to be further de-risked as a SoV asset as financial institutions significantly increase allocation into the crypto space, led by family offices and hedge funds in the near-term, and larger financial institutions (pension funds and endowments) over the long-term. In the near-term, CME and CBOE’s launches of cash-settled BTC futures allows otherwise sidelined family office and hedge fund capital to participate in crypto (we believe there is net positive interest that would push the BTC futures curve higher), while further legitimizing the asset as a SoV. Over the long-term, we expect larger financial institutions (pension funds and endowments) to purchase BTC as industry-grade custodial services become available. ETFs, while further out in implementation, would encourage even more adoption among both institutional and retail capital.

Furthermore, citizens in countries where purchasing power is impaired by high inflation and/or local currency devaluation are relying on BTC as both a SoV and medium of exchange. Currently, BTC adoption in Zimbabwe and Venezuela is particularly high, where BTC trades at a premium to most exchanges. For example, BTC traded at $13K/coin in Zimbabwe when the general market traded at ~$7K/coin.

Risks

We see little risk for BTC to fail in claiming the SoV use case. As mentioned, we believe the self-fulfilling “digital gold” narrative has high staying power. Meanwhile, we believe tracking how BTC trades with the VIX and gold is an important leading indicator. To the extent that BTC stops trading up with the VIX and gold, we would be more cautious on the trajectory of BTC’s solidification as a SoV asset. We also see little risk for BTC to lose out on the SoV status to another crypto token, especially now that a BCH “flippening” no longer looks likely. Additionally, we recognize stablecoins as a potential source of disruption in claiming SoV; while we currently do not have a view on stablecoins, we will be monitoring their developments closely.

Base Case Valuation

We take a top-down approach to estimating BTC’s value from SoV by taking global wealth (growing it ~3%/year to ~$400T by 2030), estimating crypto’s penetration into 4% of global wealth holdings (to equate ~$16T), and BTC to constitute ~16% of crypto market cap (to equate ~$2.6T). This results in a value of ~$132K/BTC from SoV.

We believe these assumptions are reasonable:

Global wealth to grow at ~3%/year (~$400T)⁴. While 3% is a deceleration from current levels of mid-single digit growth, this growth rate also accounts for any recession-induced contractions in the years leading to 2030.

4% of global wealth stored in crypto (~$16T). As a sanity check, current global gold inventory held for investment totals ~$3T, or ~1% of current global wealth. We believe crypto is a fundamentally better SoV product than gold (more details below), which justifies a higher share of global wealth. As an additional benchmark, $16T of crypto market cap is ~20% of today’s global equity market cap of ~$76T⁵, which sounds achievable given the focus on the crypto space and the economic nature of most crypto tokens (most token values are closely related to the transaction throughput of the respective network or dapp, which are typically higher than equity values of organizations that participate in said networks).

BTC share of ~16% of crypto market cap. As crypto continues to develop, we believe other protocol, utility, and application layers will continue to outgrow BTC, driving down BTC’s share of total crypto market from current levels of 56% down to ~16% by 2030.

Finally, our BTC market cap estimate of $2.6T represents only ~1% of current global wealth. We believe this is reasonable.

Note that a few BTC commentators’ estimates of crypto SoV start with gold’s SoV TAM of ~$3T of private investment and central bank holdings⁶, which we believe materially undersizes BTC’s TAM. We believe that BTC is fundamentally a better SoV product than gold: it has much less friction to move and store (much lower transfer cost; costless to store; faster to move), easier to acquire (and obviates need for trusted third party custodians or agents), is digital (no physical size and weight) and is censorship-resistant / available globally. We believe these factors lower the barriers to crypto ownership and boost its value proposition relative to existing substitutes. Consequently, crypto’s TAM for SoV likely overtakes that of gold.

Downside Case Valuation

Notwithstanding our above argument for why crypto and BTC’s features should allow it to garner a larger value than gold’s value from SoV, we consider BTC’s downside value from the perspective of gold. Even if we assume BTC’s TAM is capped by gold’s current SoV use case of $3T and BTC captures only 20% of such market, we can justify $600B of value, or ~$30K/BTC for the SoV use case. As such, we believe BTC has limited downside at current entry levels of ~$10K.

Upside Case Valuation

Recently, notable bulls John McAfee and James Altucher predicted that BTC would reach $1M/BTC by 2020. $1M/BTC would imply $20T of market cap, equal to ~7% of current global wealth or ~25% of current global equity market cap, which we believe to be too aggressive of a price target. Therefore, for BTC to be fundamentally worth $1M/BTC, we believe BTC needs to be seen/used as more than primarily a SoV asset; it would need to achieve global medium of exchange and unit of account status rivaling those of major fiat currencies. For now, we believe $1M/BTC is too high of a value for BTC to attain on a fundamental basis commensurate to the SoV use case, but we are flexible and will update our estimates accordingly if our thinking changes.

Medium of Exchange

We view MoE as transactions encompassing the B2C, B2B, G2C, and P2P subset use cases. Referencing how Visa and MasterCard first gained traction in B2C due to comparatively lower barriers before penetrating other subset MoE use cases, we believe crypto MoE adoption is likely to follow a similar roadmap.

Starting with B2C, we believe the infrastructure, including digital wallets (e.g. Alipay, WeChat Pay, PayPal/Venmo, etc.) and payment gateways/processors (BitPay, Coinbase, Braintree, Stripe, etc.) are well positioned to facilitate crypto consumer and merchant adoption. The digital wallets have already made significant progress in signing up both parties, while most of the major payment gateways/processors have already integrated payment acceptance for BTC.

Among crypto MoE tokens, we believe BTC has mixed prospects. On the one hand, BTC benefits from first-mover advantages, with multiple payment gateways/processors accepting BTC. As such BTC has the highest merchant adoption among crypto tokens. In Japan, this lead is even more pronounced as BTC enjoys legal tender status; as many as 260K merchants accept BTC during mid-2017⁷. That said, BTC’s limited block size and lack of layer 2 solutions at a time when the current mempool backlog is ~half a day long has led to long confirmation times and high transaction fees relative to other tokens. Anecdotally, we have heard of merchants discontinuing BTC acceptance in favor of cheaper and faster crypto tokens, such as BCH and LTC.

We believe the implementation of Lightning Network (“LN”) would alleviate these concerns, though we need to perform more comprehensive technical due diligence on this topic. We believe under an optimistic case, LN would likely take half a year for testing and another half-year to get implemented. Following this, merchants and consumers alike would likely take another few months to establish the necessary state channels. Given this lead time, we believe there is a window of opportunity for BCH and LTC to dramatically increase merchant adoption over the next couple of years to widen its lead over BTC in the medium of exchange use case.

For example, BCH’s ‘Accept Bitcoin Cash Initiative’ is currently targeting merchants who already accept BTC to increase its adoption. As of today, despite having only come into existence less than four months ago, BCH is only slightly behind BTC on large merchant adoption⁸. From cursory research, we have not seen significant merchant adoption for LTC in the Western world, though it appears to be a popular payment rail in Asia and its core team has clearly positioned the asset to compete in the medium of exchange use case. While we would need to dig deeper into implementation technicals, generally speaking, we believe that once merchants are set up to accept either one of BTC, LTC or BCH, scaling to accept the other two cryptocurrencies would be relatively less difficult, as all three share the same foundational tech stack (i.e. all are BTC forks).

Valuation

We estimate global transactions to total ~$1,200T by 2030, with crypto facilitating ~5% (~$62T), and BTC to claim 10% of such crypto transactions (~$6T). Assuming a money velocity of 5.5x⁹ implies ~$1.1T of BTC value to facilitate the ~$6T of global MoE.

We believe these assumptions are reasonable:

Global transactions to grow by 3%/year (~$1,200T)¹⁰. While 3% is a deceleration from current levels of mid-single digit growth, this growth rate also accounts for any recession-induced contractions in the years leading to 2030.

5% of global transactions facilitated by crypto (~$62T). As global transactions continue to digitize, we believe there is significant opportunity for crypto to take share.

BTC share of ~10% of crypto transactions (~$6T). We believe there is fierce competition for the MoE use case within crypto, including BCH, LTC, DASH, etc. While we believe LN would eventually aid BTC in participating in this TAM, we also give credit to other tokens’ focused efforts on gaining share.

Unit of Account / Common Currency Within Crypto

BTC (and other large market cap crypto tokens like ETH) benefits as capital flows into the crypto space due to two reasons: 1) BTC is used as a common currency as it is commonly used to bridge exchanges between fiat and another token, and 2) BTC is used as a unit of account for such tokens alongside fiat (i.e. it has the most trading pairs in the crypto space).

We believe the USD provides a useful historical analogy. The USD has enjoyed increased demand for its currency post-Bretton Woods as a consequence of serving as 1) the world’s reserve currency and global trade settlement currency (common currency / petrodollar) and 2) unit of account for global trade. Countries and businesses settle trade in USD without involving US counterparties.

Similar to how demand for USD grows in-line with global trade, demand for BTC grows in-line with altcoin demand growth as a common currency. We estimate BTC currently facilitates as a common currency for >90% of inter-token trading volume.

Risks

Near-term risks to BTC’s common currency hegemony lie in losing market share to other large market cap tokens such as ETH and BCH. To the extent that crypto exchanges expand the number of token corridors for competing large market cap tokens, such corridors’ liquidities increase, and bid/ask spreads narrow over time, BTC would cede market share. Over the longer-term, atomic swaps and other cross-chain solutions pose a risk to BTC’s use case as a common currency. That said, obstacles for widespread atomic swap adoption include the necessity for such tokens to first adopt LN, technical compatibility solutions, political/governance considerations, and ultimate timeframe to adopt (likely 2+ years out).

Valuation

We estimate Altcoins trading volume (non-Altcoins/fiat) to total ~$5.3T by 2030, with BTC facilitating ~20% of such volume as the common currency (~$1T). Assuming a 15x crypto turnover¹¹, ~$70B of BTC is needed to facilitate the ~$1T of annual Altcoins trading volume.

Supply Inelasticity

Most assets in traditional markets operate on a relatively elastic supply curve in the long-term. Companies issue equity when price runs ahead of internal valuation estimates, commodity companies mine/drill when commodity prices are high, real estate developers start new construction when existing home sale prices are elevated, etc. Crypto is different in that tokens’ supply releases are predetermined, and some have a cap. In BTC’s case, that cap is 21M coins.

We believe the supply cap in BTC and other tokens is perhaps the most powerful driver in accruing value to the token holder by ensuring the supply curve is extremely inelastic due to limiting the marginal source of supply to the existing holder base. Furthermore, BTC’s holder base exacerbates the inelasticity of the supply curve, given most current holders are early technology adopters focused on long duration (HODLers). Unlike other situations (i.e. tech stocks bubble) where institutional money invested first, with retail inflows and outflows causing the dramatic bubble and subsequent pop, BTC is unique in that the first dollars in comprise a retail base that is less willing to sell as the price goes up, while stable institutional money is gradually coming in from the sidelines. This set of circumstances mean the already inelastic supply curve due to the capped supply is made even more inelastic given all holders — retail and institutional — are deploying patient capital.

[1] ^ Investopedia.

[2] ^ Google Trends.

[3] ^ Titan analysis: counted the number of instances where the VIX index, gold, and BTC traded up one standard deviation (trailing 3 months) or more by daily returns.

[4] ^ Credit Suisse: estimate of global wealth of $280T in 2017.

[5] ^ Bloomberg World Exchange Market Cap index.

[6] ^ World Gold Council: global above ground gold stocks of private investment and official sector (central bank holdings) estimated at ~72K tonnes per World Gold Council. This represents ~2.5B oz of gold. At ~$1300/oz, total gold market cap is ~$3T. Note that this $3T is in contrast to the $8T figure that some commentators quote, which includes ~$4T from jewelry.

[7] ^ Bitcoin.com.

[8] ^ The Accept Bitcoin Cash Initiative.

[9] ^ US M2 velocity.

[10] ^ eMarketer: estimate of global retail sales at $28T in 2017. We assume global retail sales (or primarily B2C) is ~3% of total global transactions that include B2B, G2C, and P2P. This is supported by data from the US’ Census Bureau ($5.4T of total US retail sales in 2015) and Federal Reserve ($178T of total US noncash transactions in 2015).

[11] ^ Coinmarketcap: ~4% of crypto market cap trades per day * 365 = ~15x.