Editor’s note: This article is the third in a three-part series. Plain text represents the handwriting of Greg Voss, while the italic version represents Jason Sanson’s handwriting.
In the first and second installments of this series, we reviewed many of the basic concepts needed to understand credit markets, both in “normal” times and during contagion. To end this series, we would like to explore some of the ways in which Bitcoin valuation can be accessed. These will be dynamic calculations, admittedly somewhat subjective; However, it would also be one of many responses to the claim often made by non-coin makers that bitcoin has no intrinsic value.
Before doing so, we want to mention five basic principles that underlie our thesis:
- Bitcoin = Math + Code = Truth
- Never bet on open source platforms
- Money has always been a technology to make our labor/energy/time expenditures available for tomorrow’s consumption
- Bitcoin is a programmable cash power…a store of value that can be transferred on the world’s most powerful computer network
- Fiat programmed to degrade
First evaluation method: Fulcrum index
I think Bitcoin is the “anti-fiat”. As such, it can be considered as insurance against default on a basket of sovereign currencies/fiat currencies. This concept has a value that can be calculated quite easily. We call this calculation the “fulfillment index,” and it shows the cumulative value of CDS insurance over a basket of G20 sovereigns multiplied by their funded and unfunded obligations. This dynamic calculation forms the basis of the current valuation method for Bitcoin.
Why is Bitcoin “anti-fiat”? Simply put, it cannot be reduced. The absolute width is fixed. still. This is the opposite of the current global fiat currency system. How, then, can it be considered “default insurance” on a basket of sovereign currencies/fiat currencies? Basically, the value of an insurance contract increases with increasing risk, and (credit) risk increases as the credit impression continues.
Let’s use the United States as an arithmetic example. The federal government has more than $30 trillion in outstanding debt. According to usdebtclock.org, as of this writing, it also has $164 trillion in unfunded liabilities in Medicare and Medicaid liabilities. Thus, the total funded and unfunded liabilities are $194 trillion. This is the deposit amount that must be secured in the event of a default.
At the time of writing, the five-year CDS premium for the US is priced at 0.12% (12 basis points or basis points). Multiplying this by total debt obligations ($194 trillion), the CDS is $232 billion. In other words, based on default swaps market data, this is the amount of cash deposit that the cumulative total of global investors is expected to spend to purchase default protection in the US over the next five years.
If the five-year debt-repayment swaps spreads were widened to 30 basis points (to match Canada at the time of writing), the value would rise to $570 billion. Note: This account uses a term of five years. However, the weighted average liability remaining is greater than five years, due to Medicare and Medicaid, and so we decided to extrapolate to 20 years. Using a term calculation, the US 20-year implied CDS premium is 65 basis points. In other words, just using the US as a component of the G20 basket, we have a valuation of $194 trillion multiplied by 65 basis points = $1.26 trillion.
Expanded now to a broader view, our current G-20 support index count is over $4.5 trillion.
Anyway, according to this methodology, the fair value of bitcoin is around $215,000 per bitcoin today. Note: This is a dynamic arithmetic operation (because input variables are constantly changing). It’s somewhat subjective, but based on valid criteria using other clearly noted default swaps markets.
At the current price of around $40k per bitcoin, the pivot index is that bitcoin is very cheap at fair value. As such, since every fixed-income portfolio is exposed to sovereign default risk, it makes sense for every fixed-income investor to have bitcoins as default insurance on that portfolio. My view is that as the premiums for sovereign default swaps increase (reflecting the increased risk of default), the intrinsic value of Bitcoin will rise. This will be the impetus that allows the Pivot indicator to continuously revalue Bitcoin.
Second Valuation Method: Bitcoin vs Physical Gold
Some have called Bitcoin “Gold 2.0”. The debate about this is beyond the scope of this article. Anyway, the actual market value of gold is around $10 trillion. If we divide this amount by the specified supply of 21 million bitcoins, the result will be approximately $475,000 per bitcoin.
Valuation method 3: Bitcoin as a percentage of global assets
As I recall, the Institute of International Finance estimated the total global financial assets in 2017, including real estate, at $900 trillion. If Bitcoin captures 5% of that market, we can calculate $45 trillion divided by 21 million to find a value of $2.14 million per bitcoin, in today’s dollars. With a market share of 10%, this is over $4 million per bitcoin.
Fourth evaluation method: Expected value analysis
Based on the expected value, bitcoin is also cheap, and as the bitcoin network survives every day, the left side (towards zero) of the probability distribution continues to decline while the skewness to the right side is maintained. Let’s do a simple analysis using the numbers calculated above. We will formulate a distribution containing only five outcomes, with probabilities assigned randomly.
| Evaluation method | Approximate Rating | Probably |
|---|---|---|
|
Bitcoin Fail |
0 dollars / bitcoin |
75% |
|
support indicator |
$215,000/Bitcoin |
15th% |
|
Bitcoin vs physical gold |
475,000 dollars / bitcoin |
7% |
|
5% of global assets |
$2.1 million / bitcoin |
2% |
|
10% of global assets |
$4.3 Million/Bitcoin |
1% |
The expected value result for this example is greater than $150,000 per bitcoin.
Looking at recent bitcoin price levels, if you think this is in line with is yours Calculating the expected value, you will buy with both hands. Of course, there is no certainty that I am right. And this is not financial advice to run and buy bitcoin. I simply offer an evaluation methodology that has served me so much during my 32-year career. Do. is yours. king. research.
For the record, my base case is much higher than that, as I believe there is a real chance that bitcoin will become the reserve asset of the global economy. The turning point in this event is when Bitcoin is adopted as the global unit of account for trading energy commodities. I think it makes sense for countries selling their precious energy resources in exchange for worthless fiats to switch from US dollars to bitcoins. Interestingly, Henry Ford predicted this when he long ago said that it would replace gold as the basis of money and would be replaced by the world’s indestructible natural wealth. Ford was in Bitcoin before Bitcoin even existed.
Digital cash energy stored on the world’s largest and most secure computer network in exchange for energy to run power networks around the world is a natural evolution based on the first law of thermodynamics: the conservation of energy.
Conclusion
These are huge numbers, and they clearly show the potential for asymmetric returns from the Bitcoin price curve. In fact, the probability/price distribution is continuous, bound at zero and with a very long tail to the right. Given their skewed payout distribution, I believe that not being exposed to bitcoin is more risky than holding a 5% portfolio position. If you are not long in bitcoin, you are irresponsibly short.
If you’re a fixed income investor today, math isn’t on your side. The current yield to maturity for the high yield index is around 5.5%. If you factor in expected and unexpected losses (due to default), add the management expense ratio, and then factor in inflation, you end up with a negative real return. Simply put, you are not earning an adequate return on your risk. The high-yield bond market is heading towards a major balance sheet.
Don’t think about it too much. Reduce the time you prefer. Bitcoin is the purest form of monetary energy and is a wallet insurance for all fixed income investors. In my opinion, it’s cheap in most logical expected value outcomes. But again, you can’t be 100% sure. The only things for sure:
- death
- taxes
- Fiat wrecking in progress
- Fixed supply of 21 million bitcoins
Study math…or you end up playing silly games and winning silly prizes. The danger comes quickly. Bitcoin is a hedge.
Conclusion
It seems that everyone should understand the basics of the credit-based monetary system that our governments and countries operate on. If we are to defend the ideals of the democratic republic (such as Lincoln said“…Government of the people, by the people, for the people”), then we must demand transparency and integrity from those we have chosen as leaders. It is our duty as citizens to hold our leaders accountable.
But we can’t do that if we don’t understand what they’re doing in the first place. In fact, there is a severe lack of financial literacy in today’s world. Unfortunately, it appears to have been by design. Our public education systems have 12 years of teaching and thus allow us to think critically and challenge the status quo. Through this process of community empowerment, we strive to achieve and achieve a better future collectively.
Yet it is the same process by which we decentralize power. And this, without a doubt, is a threat to those at the top of the system. Often this power is concentrated in the hands of a privileged few (and the rest) due to the disparity in knowledge. Thus, we find it tragic that there was even a need to write an essay like this… However, perhaps Satoshi’s greatest gift to the world was to kindle the fire of curiosity and critical thinking in each of us. That’s why we are bitcoins.
never stop learning. The world is dynamic.
This is a guest post by Greg Foss and Jason Sansone. The opinions expressed are their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.