Thread by @TimmerFidelity

What’s a bitcoin worth? There are many opinions on the matter, ranging from zero to millions. While many of us tend to focus on price, whether it’s for stocks or bitcoin, what really matters is valuation. (THREAD)

Whether the S&P 500 index trades at 4,000 or 3,000 is meaningless without knowing anything about its valuation. The same applies to bitcoin. What’s the significance of 50k or 10k or 100k if we don’t know what the value is? /2

How do we value a new and aspiring asset class? It’s difficult to do, which is why price discovery tends to be volatile. In my past work, I have focused on the supply dynamics (via the stock-to-flow model) as well as the demand side (its exponentially growing network). /3

We know that bitcoin’s unique value proposition is that its supply is scarce and that its demand is growing exponentially. So, let’s create a P/E ratio of sorts for both sides. /4

For the demand side, let’s call it the price/network ratio (price per millions of addresses with a non-zero balance), and for the supply side let’s call it the price/S2F ratio (price divided by the ratio of total outstanding bitcoin to its annual growth). /5

The chart below shows bitcoin’s price growth against the growth in these two valuation multiples. The two valuation ratios are indexed to bitcoin’s price in 2010 in order to show an apples-to-apples growth chart. /6

We see that bitcoin's rise has been partly (but not entirely) supported by improving fundamentals in the form of supply scarcity and network effects. Everyone kind of knows this, but this chart puts numbers to the idea. All three lines are going up, but at different rates. /7

Forget, for a moment, whether bitcoin’s price growth is justified, and consider valuation: While Bitcoin is up 783,475x since 2011, its price/network multiple is up 1,094x. That's much less than the price growth, but it’s still a thousand-fold increase. /8

Next question: How much (if any) of an increase in the valuation multiple is justified? A skeptic might argue that the price/network ratio should stay flat over time (like a P/E ratio) because price should not grow more than the network. /9

But the history of first-mover, network-based growth stocks argues that both price and valuation should grow as the size of the network expands to the point of impenetrability. /10

I’m no security analyst but I took a fast look at Apple’s history, given its dominant hardware and software network, to see how network dominance translates into both price & valuation. /11

In this chart we see a massive expansion in price and in the price/sales ratio (815x vs 24x)./12

In other words, a dominant & growing network leads to price growth and valuation growth. Makes sense to me, given what we know about Metcalfe’s law, which holds that a network's impact is the square of the number of nodes in the network. /13

So I don’t know whether a thousand-fold increase in Bitcoin’s price/network ratio is justified, but bitcoin’s impressive rise can, I think, be explained along the same lines as other first-movers as they reached network dominance. /END

Here is the side-by-side showing price growth vs multiple-expansion.