Bitcoin seems to have completed yet another high-low cycle over recent months, with the cryptocurrency falling precipitously from an all-time high just shy of $20,000 in mid-December 2017 to under $6,000 earlier this month, before recovering to around $9,000 currently. While interest in Bitcoin has definitely fallen from the peak levels seen late last year, we estimate that the Bitcoin still warrants a price of around $10,000 based on our interactive Bitcoin Price Estimator using the average activity level for year-to-date 2018 as the inputs. This represents a figure about 15% higher than the current Bitcoin price.
How Does One Value A Cryptocurrency?
In a recent note, we pointed out that the value of a particular cryptocurrency or token largely depends on three factors: its utility, the underlying technology and its visibility. The fact that the underlying technology and (to a larger extent) visibility play a critical role in determining the value of cryptocurrencies shows that the value of a cryptocurrency is essentially determined by how much investors perceive its value to be. This is supported by the fact that Bitcoin prices are considerably higher than that for any other cryptocurrency (even after adjusting for different number of coins mined and in circulation for each of them), although pure economics would suggest that technologically-similar cryptocurrencies should have similar values because their utility values are generally comparable.
Accordingly, a key starting point in trying to value a cryptocurrency is to try and gauge how “visible” that cryptocurrency is. Now, there are several factors that affect visibility, like marketing & PR efforts undertaken, number of exchanges the cryptocurrency is listed on, and even the media hype surrounding the cryptocurrency. But at the end of the day, if more people use a particular cryptocurrency, it is bound to be valued higher – a notion supported by Metcalfe’s Law. Additionally, if two cryptocurrencies have similar number of users, but the volume of transactions carried out in Cryptocurrency A is well above that for Cryptocurrency B, then Cryptocurrency A should be valued higher.
A Simple Model To Estimate Bitcoin Price
As we explained above, the price of a Bitcoin should depend primarily on the number of Bitcoin users, and the volume of transactions carried out on the Bitcoin network. Based on this, we built the Trefis Bitcoin Price Estimator which uses the following inputs to predict the price of a Bitcoin:
- No. of Active Bitcoin Users: This represents the number of users active on the Bitcoin network worldwide on a given day. We use the number of unique Bitcoin addresses as compiled by Blockchain.info as a proxy for the number of Bitcoin users
- Daily Transaction Volume: This represents the volume of Bitcoin transactions completed in a given day (expressed in U.S. Dollars). We use the corresponding figure as compiled by Blockchain.info
We used monthly averages for unique Bitcoin addresses as well as daily transaction volume to smooth out the sharp fluctuations in these figures from one day to the next, and regressed these variables with the average historical Bitcoin price to come up with our model. The model tracks the actual Historical Performance of the Bitcoin over 2011-17 with an Accuracy Rate of more than 96%. You can compare the changes in Actual Bitcoin Price and the Estimated Bitcoin Price in the charts below.
Could Bitcoin Reach $25,000 By The End Of The Year?
We believe the recovery in Bitcoin prices over the last few days could mark the beginning of a fresh rally in the cryptocurrency – fueled by a steady increase in the number of users as well as transaction volume each month this year. Our analysis forecasts an average increase of about 8% each month in the number of unique addresses over the rest of the year, accompanied by a roughly 10% increase in transaction volume each month over this period. This indicates a potential price in excess of $25,000 by the end of the year – representing a gain of almost 200% over the next ten months. Of course the price depends on much more than these fundamental factors, so we will have to wait and see how the currency performs.
