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Copyright© 2018 - BlockNovum GmbH 1
Rank 1
Market Cap (M) $ 121,470
Free Float Tokens (M)
17.1
Maximum Supply (M)
21.0
Inflation Rate 3.9%
Avg. Daily Transaction Vol. - 2018 (M)
$ 1,305.6
52 Week Price Range ($/Token)
$ 3,212 - $ 19,476
30 Day Volatility 3.5%
Cryptoasset Category: Cryptocurrency
Function: Store of value, Payments, Gateway
Blockchain Base: Bitcoin
Consensus Mechanism: Proof of Work
Hash algorithm: SHA-256
Avg. Block Creation Time: 10 Minutes
Development Stage: Deployed
Website: Bitcoin.org
Price Target and Ratios
CR
YP
TOA
SSET
RES
EAR
CH
Bitcoin (BTC)
Remo Kyburz
Initial assessment yields BUY recommendation with $8,000 price target based on fundamental valuation
Executive Summary:
• Valuation: BlockNovum establishes an initial price target of $8,000 per
Bitcoin (BTC). We see this price justified by the present value of the
underlying future utility values of modeled Bitcoin use cases. The store
of value (digital gold) use case, along with usage as a gateway to other
cryptoassets, promises a substantial addressable market size for Bitcoin.
We expect 66% of today’s BTC PV to be based on current utility and 34%
on speculation of future utility value.
• Further Analysis & Qualitative Assessment: Cost-based valuation
predicts a price range of $7,440 and $8,670 per BTC, validating our
fundamental valuation result. NVT ratio analysis indicates that BTC is
currently supported by fundamentals, however NVM suggest potential
short-term overvaluation if fundamentals don’t develop as expected.
The qualitative assessment confirms BTC’s strong positioning in six
assessment categories, which supports its leading status in the
cryptoasset space.
• Recommendation: We issue a Buy rating for BTC, as long as the market
price stays below our target price of $8,000. BTC shows substantial long-
term price appreciation potential if use cases mature and gain more
market share.
Recommendation
Buy
Valuation PV
$ 8,053
P/M & NVT-Ratio
0.31 | 48.1
Market Data
Cryptoasset Description Cryptoasset – Key Data
Bitcoin is a consensus network
that enables a new payment
system and a completely digital
store of value. Transactions are
recorded in a public distributed
ledger (Bitcoin Blockchain) that
is powered by its users with no
central authority or middlemen.
Price ($/Token)
$ 7,100
August 7, 2018
Bitcoin (BTC)
August 7, 2018 Copyright© 2018 - BlockNovum GmbH 2
Table of Contents Introduction to Bitcoin .................................................................................................................................................... 3
Fundamental Valuation ................................................................................................................................................... 5
Valuation Methodology ............................................................................................................................................... 5
Bitcoin Valuation Explained ......................................................................................................................................... 7
Bitcoin Valuation Outcome ......................................................................................................................................... 9
Alternative Valuation Approaches................................................................................................................................. 11
Cost-based Valuation ................................................................................................................................................. 11
Network Value to Transactions Ratio (NVT) .............................................................................................................. 13
Price to Metcalfe Ratio (P/M) .................................................................................................................................... 14
Network Value to Metcalfe Ratio (NVM) .................................................................................................................. 14
Qualitative Assessment ................................................................................................................................................. 17
Decentralization Edge ................................................................................................................................................ 18
Product-Market Fit .................................................................................................................................................... 18
Issuance Model .......................................................................................................................................................... 19
Community and Developers ...................................................................................................................................... 20
Network Security of Cryptoasset ............................................................................................................................... 22
Support and Partnerships .......................................................................................................................................... 23
Recommendation .......................................................................................................................................................... 25
Risks ............................................................................................................................................................................... 26
Disclosures and Further Information ............................................................................................................................. 27
Bitcoin (BTC)
August 7, 2018 Copyright© 2018 - BlockNovum GmbH 3
Introduction to Bitcoin
Bitcoin1 is a digital currency and was created in 2009 by a programmer, or a team of programmers, under the name
Satoshi Nakamoto. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms
and is operated by a decentralized authority, unlike government-issued currencies.
Blockchain: Bitcoin was built upon a number of existing technologies, such as Reusable Proofs of Work and BitGold,
to create the first digital token which effectively implemented a distributed ledger that economically incentivizes
participation. This innovation introduced by Bitcoin is now known to the wider public as the Blockchain technology.
A blockchain is a growing list of records, called blocks, which are linked using cryptography. Together they make up
an open, distributed ledger which is immutable, has high availability, is very secure, and increases transparency and
trust. In short, the Blockchain represents an innovation in information registration and distribution that eliminates
the need for a trusted party to facilitate digital relationships.
Token Supply: Leveraging the blockchain technology, Bitcoin is one of the first digital currencies to use peer-to-peer
technology to facilitate instant payments. The value of Bitcoin is based on the principal of digital scarcity, as the
maximum supply of tokens is capped at 21 million. Until that cap is reached, Bitcoin’s supply is inflationary as some
of the network’s participants called “miners” receive rewards (release of new Bitcoin) and transaction fees paid in
Bitcoin. Miners are independent individuals or companies, who supply governing computing power to the network
to enforce the credibility and validity of the transactions within the network. The miners basically solve a
computationally difficult puzzle to discover a new block, which is then added to the blockchain. Once a new block is
discovered, a message is broadcast to the mining network and verified by all recipients. The block reward for mining
a new block started at 50 BTC in 2009, but is cut in half roughly every 4 years, which leads to a current block reward
of 12.5 BTC.
One Bitcoin is divisible to eight decimal places (100 millionth of one Bitcoin), and this smallest unit is referred to as a
Satoshi. Therefore, investors can also acquire only a fraction of a Bitcoin.
Use Cases: Bitcoin is the largest digital token by market capitalization and also has one of the largest user bases,
which steadily grew over the last few years. One popular metric is Bitcoin dominance, which shows the percentage
of Bitcoin’s market capitalization compared to the total cryptoasset market cap. At the time of writing this report,
Bitcoin dominance was at 47%. Even though Bitcoin’s initial purpose was solely for peer-to-peer transactions, its use
cases have changed. While online payments and remittances are still valid use cases for Bitcoin, the majority of Bitcoin
users holds it as a store of value. In this context it is often referred to as digital gold. Hence, many investors hold
Bitcoin in search for long-term price appreciation, to diversify their portfolios with a new asset that shows different
correlation characteristics compared to traditional asset classes, and to “store” capital in a safe place.
Furthermore, due to Bitcoin’s dominance, it serves as a gateway to the digital token economy. Most regulated fiat-
to-cryptoasset exchanges offer only a handful of cryptoassets that can be bought with traditional fiat currencies (e.g.
USD, EUR, CHF, or Yen). Bitcoin is almost exclusively always among them. As a result, the majority of other
cryptoassets can be exchanged for Bitcoin and prices are often listed in BTC for other cryptoassets. This leads to a
constant demand for Bitcoin and enables high liquidity with low spreads on exchanges.
1 Nomenclature generally distinguishes between Bitcoin (the network protocol / ecosystem) and bitcoin (the currency / token). For simplicity we consistently use “Bitcoin” with a capital B in this report. BTC is also used interchangeably.
Bitcoin (BTC)
August 7, 2018 Copyright© 2018 - BlockNovum GmbH 4
It also has to be noted that the Bitcoin protocol serves as the basis for many other popular cryptoassets. This includes
for example Bitcoin Cash, Dash, or Bitcoin Classic.
Recent developments: Bitcoin saw an enormous rise in prices in 2017 that peaked in the speculative bubble in
December. The market was following a bearish-trend for the first seven months in 2018 that resulted in prices coming
down by 60% compared to the peak of the bubble in December. After prices dropped below $6,000 in early July,
some signs of a turnaround appeared in mid July with BTC currently being traded a bit above $7,000.
Figure 1: BTC Price Development
Bitcoin is still recovering from some reputational damages in its early years following the cases of the Silk Road, the
bankruptcy of Mt. Gox Bitcoin exchange, or some ransomware acts. Over the last few years, Bitcoin’s reputation is
slowly improving since it has been shown that the use of Bitcoin in illegal activities is almost negligible and vast
improvements in security and KYC-regulations are underway.
It should also be noted that Bitcoin’s volatility (currently 3.5% 30-day BTC/USD volatility) has been steadily decreasing
over time since its launch in 2009. This is not unusual since new assets often start out with high volatility, until the
market finds a balance over time. In addition, the widely-anticipated launch of a Bitcoin ETF is still delayed as the
Winklevoss Bitcoin ETF was recently rejected by the SEC. As a result, approval of a Bitcoin ETF in the US does not
seem realistic at least until 2019. The introduction of a BTC ETF would raise investor confidence in Bitcoin significantly
and provide a more accessible way for investors to get exposure to the cryptoasset. For comparison, gold prices
increased by 350% after the first gold ETF was launched in 2004. Nevertheless, there are various other ways for
institutional investors to get exposure to BTC.
This report aims to provide investors with guidance to decide on a fair market value for Bitcoin and to support
investment-related decisions. Our fundamental-based assessment and valuation approach is focused on the long-
term value of Bitcoin and is described in the next section.
Bitcoin (BTC)
August 7, 2018 Copyright© 2018 - BlockNovum GmbH 5
Fundamental Valuation
BlockNovum’s valuation approach follows a fundamental analysis methodology. Our financial model aims to indicate
if an investment in Bitcoin is worthy of long-term capital allocation, given the discounted utility value of one BTC
token. Consequently, this analysis aims to assess the long-term potential of Bitcoin and identifies if the asset is under-
or overvalued today.
It is crucial to note that cryptoassets are not companies and hence they don’t have cash flows. Traditional financial
models used by asset managers, such as discounted cash flow (DCF), are not suitable for cryptoassets.
Valuation Methodology Valuation framework: The used methodology is based on the assumption that cryptoassets should be valued similar
to commodities, with markets priced by balance of supply and demand.
Hence, the valuation frameworks derives utility value by:
1. Forecasting demand for the underlying resource or service that the cryptoasset network provisions (the
network’s ”GDP”). This can be just one specific use case or multiple, as in the case of Bitcoin.
2. Dividing this demand by the monetary base available of the respective cryptoasset (supply) to obtain the per-
unit utility value.
In other words, the cryptoassets utility value is eventually determined by assessing how much the respective token
needs to be worth for it to serve the “economy” (use cases) it supports. Our model calculates the cryptoasset’s utility
value for the next ten years. Since our services target investors globally, BlockNovum uses USD as the base reporting
currency.
Finally, the present value (PV) of the cryptoasset can be derived from future expected utility values using
conventional discounting.
This valuation methodology employs the theoretical framework of the equation of exchange, MV=PQ, which allows
us to calculate the “demand” (the monetary base necessary to support the token’s economy).2
“M” represents the size of the cryptoasset-specific monetary base and is the key number that we are solving for.
“V” is the velocity of the asset, meaning the number of times each token is transferred per year.
“P” equals the price of the digital resource of a specific use case.
“Q” represents the quantity of the digital resource of a specific use case (P*Q together represents the market size in
USD of the specific use case).
The token supply is calculated for each year, depending on the cryptoasset-specific supply schedule. In the case of
Bitcoin, this is the number of BTC mined per year, taking into account changing block rewards. Furthermore, the
number of BTC in circulation is reduced by the estimated amount of tokens that are “lost”.
2 Our financial model bases on the pioneering research conducted by Chris Burniske, Alex Evans, Dmitry Kalichkin and others, who laid out the foundation for cryptoasset valuations.
Bitcoin (BTC)
August 7, 2018 Copyright© 2018 - BlockNovum GmbH 6
Figure 2: Valuation
Supply
2017A 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E
New Bitcoin [BTC] Mined 699,100 657,000 657,000 465,375 328,500 328,500 328,500 232,688 164,250 164,250 164,250 116,328
Total Bitcoin Released (EOY) 16,776,450 17,433,450 18,090,450 18,555,825 18,884,325 19,212,825 19,541,325 19,774,013 19,938,263 20,102,513 20,266,763 20,383,091
in % of Total 80% 83% 86% 88% 90% 91% 93% 94% 95% 96% 97% 97%
% of Bitcoin Released that are out of
Circulation 13% 13% 13% 13% 13% 13% 13% 13% 13% 13% 13% 13%
Bitcoin Available for Transactions 14,555,568 15,125,593 15,695,619 16,099,387 16,384,400 16,669,413 16,954,426 17,156,310 17,298,816 17,441,323 17,583,829 17,684,758
Demand
In $ Billion2017A 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E
Market Size of Use Cases
Store of Value 8,732$ 8,773$ 9,437$ 10,152$ 10,920$ 11,747$ 12,636$ 13,593$ 14,622$ 15,728$ 16,919$ 18,200$
Online Payments 3,265$ 3,706$ 4,206$ 4,774$ 5,419$ 6,069$ 6,797$ 7,613$ 8,374$ 9,212$ 10,133$ 11,146$
Remittances 461$ 495$ 532$ 572$ 614$ 660$ 709$ 761$ 799$ 839$ 881$ 925$
Unbanked 1,736$ 1,810$ 1,888$ 1,969$ 2,054$ 2,142$ 2,234$ 2,331$ 2,431$ 2,535$ 2,644$ 2,758$
Gateway 303$ 116$ 139$ 167$ 201$ 241$ 289$ 347$ 416$ 500$ 599$ 719$
Other 2,057$ 2,139$ 2,225$ 2,314$ 2,406$ 2,503$ 2,603$ 2,707$ 2,815$ 2,928$ 3,045$ 3,167$
Growth Rates of Use Case Markets
Store of Value 0.5% 7.6% 7.6% 7.6% 7.6% 7.6% 7.6% 7.6% 7.6% 7.6% 7.6%
Online Payments 13.5% 13.5% 13.5% 13.5% 12.0% 12.0% 12.0% 10.0% 10.0% 10.0% 10.0%
Remittances 7.4% 7.4% 7.4% 7.4% 7.4% 7.4% 7.4% 5.0% 5.0% 5.0% 5.0%
Unbanked 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3%
Gateway 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%
Other 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%
Market Share of Bitcoin
Store of Value 1.8% 2.5% 3.6% 5.0% 6.9% 9.4% 12.5% 16.2% 20.5% 25.0% 29.5% 33.8%
Online Payments 0.3% 0.5% 0.7% 1.0% 1.4% 2.1% 2.9% 3.9% 5.1% 6.5% 7.9% 9.3%
Remittances 0.6% 0.8% 1.0% 1.3% 1.7% 2.3% 3.0% 3.9% 5.0% 6.3% 7.9% 9.7%
Unbanked 0.2% 0.3% 0.4% 0.7% 1.0% 1.5% 2.2% 3.2% 4.4% 5.9% 7.5% 9.1%
Gateway 60.0% 60.0% 55.0% 55.0% 50.0% 50.0% 45.0% 45.0% 40.0% 40.0% 40.0% 40.0%
Other 0.6% 0.9% 1.3% 2.0% 2.9% 4.2% 5.9% 7.8% 10.0% 12.2% 14.1% 15.8%
Market Capacity ("GDP") supported by Bitcoin - [P*Q]
Store of Value 65.5$ 93.4$ 141.8$ 213.2$ 316.7$ 463.1$ 663.4$ 926.7$ 1,257.3$ 1,651.5$ 2,098.2$ 2,581.1$
Online Payments 10.4$ 17.3$ 28.9$ 47.8$ 78.2$ 124.5$ 194.4$ 295.8$ 428.5$ 598.7$ 804.1$ 1,038.5$
Remittances 2.6$ 3.7$ 5.3$ 7.6$ 10.7$ 15.1$ 21.3$ 29.6$ 39.9$ 53.2$ 69.8$ 90.1$
Unbanked 3.2$ 5.1$ 8.2$ 13.0$ 20.6$ 32.1$ 49.3$ 73.8$ 107.0$ 149.0$ 198.3$ 251.6$
Gateway 181.8$ 69.7$ 76.7$ 92.0$ 100.4$ 120.5$ 130.1$ 156.1$ 166.5$ 199.8$ 239.8$ 287.7$
Other 11.9$ 18.9$ 29.7$ 46.3$ 70.8$ 105.7$ 152.7$ 212.2$ 281.5$ 356.1$ 430.3$ 499.6$
Assumed Annual Velocity - [V]
Store of Value 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5
Online Payments 5 5 5 5 5 5 5 5 5 5 5 5
Remittances 5 5 5 5 5 5 5 5 5 5 5 5
Unbanked 5 5 5 5 5 5 5 5 5 5 5 5
Gateway 10 10 10 10 10 10 10 10 10 10 10 10
Other 3 3 3 3 3 3 3 3 3 3 3 3
Required Monetary Base of Bitcoin - [M]
Store of Value 43.7$ 62.3$ 94.5$ 142.1$ 211.2$ 308.7$ 442.3$ 617.8$ 838.2$ 1,101.0$ 1,398.8$ 1,720.7$
Online Payments 2.1$ 3.5$ 5.8$ 9.6$ 15.6$ 24.9$ 38.9$ 59.2$ 85.7$ 119.7$ 160.8$ 207.7$
Remittances 0.5$ 0.7$ 1.1$ 1.5$ 2.1$ 3.0$ 4.3$ 5.9$ 8.0$ 10.6$ 14.0$ 18.0$
Unbanked 0.6$ 1.0$ 1.6$ 2.6$ 4.1$ 6.4$ 9.9$ 14.8$ 21.4$ 29.8$ 39.7$ 50.3$
Gateway 18.2$ 7.0$ 7.7$ 9.2$ 10.0$ 12.0$ 13.0$ 15.6$ 16.7$ 20.0$ 24.0$ 28.8$
Other 4.0$ 6.3$ 9.9$ 15.4$ 23.6$ 35.2$ 50.9$ 70.7$ 93.8$ 118.7$ 143.4$ 166.5$
Total BTC Monetary Base Required 69.0$ 80.8$ 120.6$ 180.4$ 266.7$ 390.4$ 559.2$ 784.0$ 1,063.7$ 1,399.8$ 1,780.7$ 2,192.1$
Valuation
In $
Investment Horizon in Years 0.4 1.4 2.4 3.4 4.4 5.4 6.4 7.4 8.4 9.4 10.4
Utility Value of each BTC in
Circulation
(Required Monetary Base of Bitcoin
/ Bitcoin Available for Transations) 4,742$ 5,341$ 7,681$ 11,207$ 16,277$ 23,418$ 32,981$ 45,698$ 61,492$ 80,260$ 101,266$ 123,954$
Discount Rate 30%
Present Value of Bitcoin 8,053 <= PV of Bitcoin Value that supports estimated economic activites of selected use cases in 2028
Bitcoin [BTC] Valuation based on Fundamentals
July 2018
Bitcoin (BTC)
August 7, 2018 Copyright© 2018 - BlockNovum GmbH 7
Bitcoin Valuation Explained Use Cases: There are a number of potential use cases for Bitcoin. For the valuation we focused on what BlockNovum
views as the top five use cases of Bitcoin. They are - store of value, online payments, remittances, banking for the
unbanked, and gateway to other cryptoassets. The last one meaning that the majority of cryptoassets can currently
only be bought with Bitcoin or Ether. Other use cases, such as micro-transactions, black/grey market activity, and
future functionalities are captured under the “Other” category.
We strongly believe in the store of value (SoV) use case of Bitcoin, where Bitcoin is held long-term as some form of
digital gold. Next to the diversification benefits and the long-term price appreciation potential, Bitcoin is also highly
attractive for safe capital storage. This is especially true for individuals living in nations with tight capital controls,
unstable national currencies, or political instability. Real world examples, such as Venezuela and China, illustrate the
high popularity of Bitcoin as a “safe haven” for capital. In addition, an increasing number of institutional investors are
holding Bitcoin to diversify from the equity markets and to get exposure to long-term return potential outside of
traditional markets, which are currently at high valuations.
Modeling Use Case BTC Demand [P*Q]: For above reasons, we model the SoV use case as the main value capturing
application of Bitcoin. Instead of looking at the whole SoV market (gold, silver, collectibles, real estate etc.), we focus
solely on physical gold as a proxy. We believe that focusing on just one comparable SoV asset represents a more
realistic basis to value Bitcoin as “digital gold”.
Even though Bitcoin’s use for online payments is currently not widespread, we see significant potential here as well
due to technological advancements in Bitcoin’s technology. For instance, deployment of Bitcoin’s Lightning Network,
a "second layer" payment protocol on top of Bitcoin, can significantly increase speed and scalability while reducing
transaction costs dramatically. We expect Bitcoin to also facilitate the other four use cases, where Bitcoin’s role as a
gateway to other cryptoassets stands out. However, we expect the gateway case to deteriorate over time, once more
and more cryptoassets can be acquired directly via fiat currency.
Figure 3: Calculate base addressable Market Size
For each application the model attempts to forecast the demand for Bitcoin. We first calculate the market size of
each use case given official market research for this sector. As an example, Figure 3 highlights how the current market
size for the SoV use case was calculated.
Demand Use Case 1: Store of Value
Bitcoin [BTC] Economy Inputs
Metric Assumption
Price per ounce of Gold (end of 2017) [P] 1,302.60$
Price per ounce of Gold (end of Q2 2018) 1,252.00$
Annual Price growth - Gold 5.98%
Total number of above ground Gold (2017, in tonnes) 190,040
CAGR for Gold supply increase (5y avg.) 1.5%
% of total market addressable 42%
Total supply of gold (in ounces) - [Q] 6,703,463,729
GDP of Store of Value Economy (Gold) - [P*Q] 8,731,931,853,263$
Total addressable SoV Economy (2017) 3,667,411,378,370$
Figure 4: Modeling Market Share Development
Bitcoin (BTC)
August 7, 2018 Copyright© 2018 - BlockNovum GmbH 8
The market size is then forecasted for the next 10 years based on researched growth rates. Next, we model the
estimated market share gained by Bitcoin for each of the use cases (see Figure 4). The market share development
follows an S-curve, since most new technologies typically exhibit an S-shaped adoption pattern. For example, we
assume that Bitcoin’s demand as a store of value asset will reach an equivalent of 50% of gold’s SoV market by 2040.
As a next step, the model calculates the yearly market size supported by Bitcoin (the “GDP” of the network) for each
use case, given the estimated market share of Bitcoin. For example, we forecast that in 2020 Bitcoin captures a market
size equivalent to 5% of the gold SoV market, which results in a market capacity of $213 billion supported by Bitcoin
(equivalent to P*Q in the framework).
Velocity [V]: According to our valuation framework we next have to find the velocity, i.e. how many times one Bitcoin
changes hands per year. Calculating velocity is based on many assumptions and one can’t expect to get a very
accurate number. Nevertheless, a good approximation can be calculated by dividing the annual BTC transaction value
in USD by the average USD market cap of that year.
Our calculations yield a velocity of Bitcoin of around 5.5 for last year (July 2017 – July 2018). Since velocity varies by
use case, we assign every use case an approximate velocity level that is then weighted by the “GDP” of each use case.
Hence, all weighted velocity use cases together yield an overall velocity of 5.5 again. For example, the SoV use case
only has a velocity of 1.5, since most Bitcoin bought for this purpose are held for a longer time period. In contrast,
online payments have a higher velocity of around 5.
Required Monetary Base of Bitcoin [M]: Finally, as stated in the equation of exchange “PQ” can be divided by “V” to
get “M”. We are then able to calculate the required monetary base in Bitcoin for each use case (i.e. how much does
Bitcoin’s total supply need to be worth to facilitate the use case economies). To illustrate this, let’s look at the SoV
case again. At the end of 2018 we expect around $62 billion worth of value to be stored in Bitcoin. Hence, knowing
the current supply level of Bitcoin, we are able to calculate how much one BTC needs to be worth (its utility value) to
enable the aforementioned level of SoV. We repeat this for every use case to get the fundamental utility value of
each Bitcoin in circulation. The calculated utility values of BTC for each year can be observed in Figure 2 (last row
above the discount rate).
Discount rate: The model employs a high discount rate of 30% to account for the uncertainty regarding the modeled
outcomes ten years out. Depending on the cryptoasset maturity, an even higher discount rate could be chosen. For
comparison, venture capital normally uses discount rates in the range of 30% to 60% depending on the stage of the
investment. Since Bitcoin is the most established cryptoasset with a long track-record of network usage, it can be
viewed as the “blue chip” of cryptoassets. Therefore, we argue that the aforementioned discount rate is appropriate.
It can also be argued that cryptoassets are a riskier investment than stocks by an assumed multiple. Given the long-
term average annual return of 7% by the S&P 500, we can calculate a discount rate of ~30% (assuming Bitcoin is
around 4x more risky).
Bitcoin (BTC)
August 7, 2018 Copyright© 2018 - BlockNovum GmbH 9
Bitcoin Valuation Outcome Result: We calculate Bitcoin’s current (end of July 2018) present value (PV) at slightly above $8,000 by discounting
the utility value of BTC in 2028 until today. Taking into account the current market outlook and Bitcoin’s future
potential, especially as a store of value / digital gold, BlockNovum is of the opinion that the calculated present value
of $8,053 is justified.
Compared to its current price level of around $7,100, BTC is currently priced below what we consider its fair value.
Our PV result also corresponds with the resistance level at $8,000 that has been observed several times over the last
few months.
Opinion: The present value can also be decomposed into its two components – utility value today and discounted
expected future utility value (speculation). This shows that a big part (34%) of Bitcoin’s value still relies on speculation
of future utility value.
Figure 5: Composition of Value
One annotation to expected future value: newspaper articles and other blockchain experts often predict Bitcoin to
hit $100,000 at some point. We are of the opinion that this outcome is a possibility, but fundamentals only predict
such a price in a timeframe of eight to ten years, as shown in our valuation model. Nevertheless, this result is highly
uncertain and is dependent on Bitcoin establishing the utility for the various discussed use cases at scale.
Figure 6: Utility Value Forecast
Metric Value Percentage of Value
Current Utility Value (end of 2018) 5,341$ 66%
Discounted Expected Utility Value 2,713$ 34%
Bitcoin (BTC)
August 7, 2018 Copyright© 2018 - BlockNovum GmbH 10
It also has to be noted that the outcome of the valuation is highly dependent on a few key variables, such as the
chosen velocity and discount rate. Therefore, even though the obtained result is not exact science, we argue that the
obtained result still provides a fundamental realistic price range and is useful for investors to assess the current
market price levels.
To illustrate the varying outcomes depending on the chosen discount rate and velocity, a range of present values for
BTC can be observed in below sensitivity analysis. Note that here all use cases assume the same velocity, which
changes the result as well (e.g. SoV has the same velocity as online payments). Hence, the below present values
cannot directly be compared to the previously obtained result, but nevertheless give an overview about the range of
potential valuation results.
Figure 7: Sensitivity Analysis (BTC PV of Utility Value in 2028)
Consequently, depending on investors risk appetite reflected in the discount rate, Bitcoin’s present value is
substantially higher or lower. BlockNovum is of the opinion that $8,000 is a justified current fair value of Bitcoin
(standing end of July 2018).
As a next step, the result of our valuation model is verified with alternative valuation approaches. As a final step, we
also consider various qualitative factors to assess Bitcoin as an investment.
$3,155 20.0% 25.0% 30.0% 35.0% 40.0%
2.0 20,085 13,126 8,723 5,887 4,030
2.5 16,068 10,501 6,978 4,709 3,224
3.0 13,390 8,751 5,815 3,924 2,687
4.0 10,043 6,563 4,361 2,943 2,015
5.5 7,304 4,773 3,172 2,141 1,465
6.5 6,180 4,039 2,684 1,811 1,240
8.0 5,021 3,282 2,181 1,472 1,007
Velocity
Discount Rate
Bitcoin (BTC)
August 7, 2018 Copyright© 2018 - BlockNovum GmbH 11
Alternative Valuation Approaches
In this section, we evaluate four additional valuation approaches to verify our fundamental valuation result.
Cost-based Valuation Methodology: An alternative valuation approach to “mineable” tokens is to look at their cost of acquisition. Instead
of buying the desired token on an exchange, an investor could also acquire a miner and run it to mine the token. In
the mining example one has a series of cashflows, which includes the initial miner acquisition cost, the annual
electricity expenditure, and the payout in token value. In theory, there should be a point where a rational actor is
indifferent between buying Bitcoin or mining it. The calculated mining value represents the total costs required to
acquire one Bitcoin and discounts the net present value of these cashflows at our chosen discount rate. At this NPV,
one would be indifferent between buying Bitcoin or mining it. This value can also be seen as a lower bound of the
current token value.
Figure 8: Cost-based Valuation of one Bitcoin
Data: For the cost-based valuation we chose to use an Antminer S9, one of the best and most available Bitcoin miners.
With 13 TH/s and power usage of 1323 W, it comes at a price point of $2,000. Electricity cost is assumed at $0.12 per
kWh, which corresponds to the average electricity price in the US or Russia. While China and India can offer costs as
little as $0.08 per kWh, many other western mining locations charge in the range of $0.15 / kWh or higher. Therefore,
we find the chosen 12 cents to be a suitable average. For continuity, we use the same 30% discount rate as in our
fundamental valuation.
The estimated mining duration until one Bitcoin is mined varies by source. While online data forecasts a mining
duration of around 4.3 years, our own calculations show that it can take up to 8 years for one BTC to be mined. This
takes into account growth of the network hash rate.
Result: Figure 8 shows that depending on the assumed mining duration, the cost-based valuation results in a Bitcoin
price between $7,440 and $8,670. This calculation, performed independently of the fundamental valuation, shows a
similar price range for one token of BTC. Our calculated PV of Bitcoin at $8,000 actually lies in the middle of the cost-
based valuation boundaries.
Net Discount Cost
Hardware Opportunity Cost 3,380$
Year 1 Electricity (NPV) 1,391$
Year 2 Electricity (NPV) 1,070$
Year 3 Electricity (NPV) 823$
Year 4 Electricity (NPV) 633$
Year 5 Electricity (NPV) 487$
Year 6 Electricity (NPV) 375$
Year 7 Electricity (NPV) 288$
Year 8 Electricity (NPV) 222$
Indifference Point - 8y 8,668$
Indifference Point - 4.3y 7,443$
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Alternative cost-based valuation: As an alternative, instead of calculating the cost of mining 1 BTC with one miner,
we can calculate the total electricity cost spent by the network to mine one Bitcoin instantly. Given the total network
hash rate of around 47 million TH/s towards the end of July 2018, on average one would need to control around 3.8
million TH/s to mine 1 BTC in the next block. To illustrate, this corresponds to over 288,000 Antminer S9’s. The total
electricity cost to run this network of miners for 10 minutes (the Bitcoin block time) is calculated at around $7,600.
Again, this result comes pretty close to our previously obtained valuations of Bitcoin.
Opinion: To sum up, our cost-based calculations confirm that today’s fundamental value of one Bitcoin at around
$8,000 is realistic and justifiable by the costs incurred to mine one BTC.
Next, we analyze some of the most common ratio’s that are used to evaluate cryptoassets.
Figure 9: NVT Ratio vs. BTC - Time Series
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Network Value to Transactions Ratio (NVT) Ratio analysis serves as a fast method to evaluate cryptoasset, while still being a good proxy of fair value. One of the
most popular ratio to analyze cryptoassets is the Network Value to Transactions ratio (NVT).3 In this context it is often
also compared to the P/E-ratio (Price-to-Earnings) used in equity analysis.
Methodology: Similar to the P/E-ratio, where the earnings metric in the denominator serves as a proxy for the created
underlying utility of the firm for shareholders, one can use transaction value as a similar metric for cryptoassets. The
reason for this is that the total value of all transactions in a cryptoasset network correspond to the level of utility
users derive from the specific blockchain. We only take into account on-chain transactions and use adjusted
transaction values that exclude certain volumes mainly driven by speculation, e.g. trading activity on exchanges. The
network value corresponds to the market capitalization of the respective cryptoasset.
Data: Our data source is from Coinmetrics and Coinmarketcap.
Result: The NVT ratio is mainly used to detect (Bitcoin) price bubbles, meaning periods where price valuations are
not supported by fundamentals (the value of transaction volume serving as a proxy). Furthermore, it can be used to
compare the valuations of different cryptoassets with each other. We follow an adjusted NVT formula pioneered by
Dmitry Kalichkin, who showed empirically that the Kalichkin NVT predicts price bubbles the best.
The Kalichkin NVT is calculated by dividing the daily network value by the 90 day-average daily transaction volume.
Figure 10: NVT Results – No signs of overvaluation, however trend towards a bubble is a possibility
Our calculations yield an adj. NVT ratio of around 48 for Bitcoin (25 for original transaction volume numbers). Looking
at the long-term time-series in Figure 9, one can observe that whenever the NVT ratio entered the yellow or red chart
area a bigger price correction followed.
Opinion: Looking at the chart, we conclude that Bitcoin’s price is currently supported by the fundamentals. However,
investors need to be cautious since we observe a trend towards the yellow chart area. Prices high above $10,000, as
observed towards the end of 2017, were definitely driven by pure speculation. A move towards this direction, without
an underlying improvement in fundamentals, might increase the chances for a price correction again.
3 Methodology and content based on the research by Chris Burniske, Willy Woo, Dmitry Kalichkin, and Coinmetrics.
NVT Ratios - Valuation Result
Current Kalichkin NVT Ratio 25.11
Current Kalichkin NVT Ratio (adj. Transaction volume) 48.14
Outcome:
Ratio currently below yellow or red zone indicating that
prices are supported by fundamental activity (no bubble).
However, the trend shows that movement towards another
bubble is a possibility if fundamentals don't grow
accordingly.
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Price to Metcalfe Ratio (P/M) Metcalfe’s law is used to describe the network effects of communication technologies and networks such as the
Internet, social networks, and other digital technologies. It is recently also being used to value the network of
cryptoassets.
Methodology: Similar to the NVT ratio, the current price of a cryptoasset network (expressed by market cap) is
compared to the underlying theoretical network value (expressed through Metcalfe’s law). By dividing the network
value (price) by the Metcalfe network value, we obtain a ratio that is compared to the Price-to-book ratio (P/B) for
equity analysis by some exponents.
The Metcalfe network value is calculated by squaring the number of active network addresses. To smooth out daily
fluctuations, we take the 30 day moving average of the Metcalfe network value.
Data: Daily number of active Bitcoin users and market cap from Coinmetrics.
Result: We obtain a Price-to-Metcalfe ratio of 0.31 for Bitcoin for end of July 2018. The ratio is mainly used as a
comparative indicator regarding cryptoassets network valuation. Therefore, Bitcoin’s ratio will be compared with
other cryptoassets, such as Ether or Litecoin, in future research.
Opinion: Generally, the higher the P/M-ratio, the more overvalued a certain cryptoasset is compared to its underlying
network value. We currently can’t draw a conclusion yet from the obtained P/M ratio.
Network Value to Metcalfe Ratio (NVM) Finally, the Network Value to Metcalfe Ratio (NVM) is an indicator proposed by Dmitry Kalichkin4 to estimate if the
price of a cryptoasset is supported by the network’s activity. As a combination of the NVT and P/M ratio, a time series
of the NVM ratio can indicate if a cryptoasset is over- or undervalued.
Methodology: As in the two previous indicators, the actual network value corresponds to the cryptoasset’s market
cap. The NVM is calculated by using two definitions for Metcalfe’s law. First, we use the original Metcalfe’s law which
states that Network Value (NV) = n2. Second, a variation of Metcalfe’s law called Odlyzko’s law, states that NV = n *
ln (n). Again, n corresponds to the network’s daily active addresses.
Research has shown that the original law probably overestimates a cryptoasset’s network value, while Odlyzko’s law
underestimates its network value. Therefore, we can use them respectively as an upper- respectively and lower-
bound for the indicator. It has been shown that Bitcoin’s price is best predicted by Metcalfe’s law, when a natural log
is applied and a 30-day moving average is used. Two constants (a and b) are included to build the narrowest corridor
possible (of upper- and lower- bound) that still describes all the movements of network value.
4 Methodology and certain data (constants) are based on Kalichkin’s research.
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The fundamental network value can then be calculated with the following formula:
Figure 11: Fundamental Network Value 5
Next, since we calculated the fundamental network value by the above logic, we can now deduct the NVM-ratio.
Figure 12: Network value to Metcalfe Ratio (NVM) 5
Finally, the NVM is normalized so that it stays between -1 and +1. The NVM then describes a cryptoasset’s network
value position relative to the upper and lower bounds given by Metcalfe’s law, and thereby quantifies any
overvaluation or undervaluation.
Data: Daily active addresses and market cap from Coinmetrics, estimated constants (a and b) from Kalichkin’s data.
Result: Applying the NVM methodology to Bitcoin, we obtain a current NVM of 0.64 (normalized 0.29). When we
look at the NVM over a longer time-series, the ratio indicates if Bitcoin is over (red)- or undervalued (green).
5 Source: Kalichkin - Rethinking Metcalfe’s Law applications to cryptoasset valuation.
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Figure 13: Network Value vs. NVM Ratio
Figure 13 highlights that Bitcoin might still be overvalued. Even though most of the high NVM ratio can be explained
by an unusually low number of daily active addresses, there are indications that today’s Bitcoin price could be too
high given the current level of fundamentals.
Opinion: Figure 13 provides us with more insights regarding Bitcoin’s market cap compared to the fundamental value
expressed through NVM (theoretical network value through Metcalfe’s law). The NVM is historically still quite high,
which are signs for an overvaluation. However, since the daily active addresses have been lower than usual for the
past few months (probably due to the current bear market), we are not too concerned about a bubble. This is also
based on the additional analysis performed for the other indicators, which have not shown a clear overvaluation.
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Qualitative Assessment
In addition to the previous quantitative analysis and valuation, BlockNovum also applies a qualitative assessment
framework to evaluate cryptoassets as a potential investment for our clients. The assessment framework consists of
several elements to provide a holistic view on any cryptoasset’s investment potential and suitability.
Assessment Framework: Figure 14 lists the eight key factors that BlockNovum views as relevant to qualitatively assess
any cryptoasset or blockchain startup for its investment potential. For each factor, we qualify how well the
cryptoasset performs and form an opinion on the investment eligibility. We also provide an indicative rating in the
range of “High”, “Medium”, “Low” to classify the cryptoasset’s positioning within the respective factor. Note that the
White Paper analysis is mainly reserved for early stage projects (ICOs) that don’t have a functioning product yet.
Furthermore, BlockNovum does not currently perform any technical due diligence and viability checks of
technological claims made in a project’s whitepaper.
Figure 14: BlockNovum's Qualitative Assessment Framework 6
6 Factors in the framework were partly inspired by Chris Burniske’s writing in his book “Cryptoassets”.
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We are now applying the framework to Bitcoin to assess its investment potential and to also qualify the provided
valuation of $8,000. Note that future reports that cover early stage projects, will place a bigger emphasis on the
qualitative assessment than this report for Bitcoin, which is already a well-established cryptoasset.
Decentralization Edge Description: This factor assesses whether the specific cryptoasset gains any advantages from using a blockchain.
Some questions we ask ourselves: Is there an actual problem that needs to be solved in a decentralized way? Is there
a realistic use case for leveraging a blockchain, or does the project merely want to profit from the blockchain trend?
Opinion: Bitcoin was the first application that introduced and successfully implemented the blockchain technology.
The main motivation of Bitcoin was to become a global consensus network and digital currency that offers a
decentralized payment system without a central authority. For these reasons and due to its pioneering role, Bitcoin
had and still has one of the best justifications for using a blockchain. We see the use case of a fully digital decentralized
and autonomous currency that is free from any government control, still as one of the most convincing cases for
blockchain usage.
Rating: High
Product-Market Fit Description: The term Product-Market Fit (PMF) was coined by world-famous venture capitalist Marc Andreessen as
“being in a good market with a product that can satisfy that market.” Tren Griffin elaborates that the term Product-
Market Fit describes “the moment when a startup finally finds a widespread set of customers that the product
resonates with.” It is rather difficult to quantify PMF, therefore we stick to a qualitative assessment of the offered
product/service in the context of customer demand and expectations. Referencing Alexander Osterwalder's Business
Model Canvas paradigm, PMF can be interpreted as having a clear value proposition, customer segment, relationship,
and channel.
Opinion: Given Bitcoin’s market capitalization of over $121 billion and track record of almost ten years of existence,
it is evident that it provides value and that it fulfills a demand of a certain customer segment. Its original purpose of
becoming a fully digital currency and decentralized payment system has a clear use case with a huge potential market
size. As laid out in more detail in the valuation section, Bitcoin actually supports various use cases. Bitcoin’s
advantages of fast transactions, low fees, full control, security, and transparency all address problems inherent to
some of the markets it targets. The current payment system is slow and plagued by high fees, especially for cross-
border transactions. These characteristics make it especially attractive for online payments and remittances, with the
latter suffering from notorious high fees for middlemen. In addition, we particularly see the demand for a digital store
of value asset with appreciation characteristics (similar to gold), as the key use case where Bitcoin has Product-Market
Fit.
As our valuation showed, Bitcoin is still far away from capturing substantial market share and reaching mass adoption
in some of these target markets. It also has yet to be seen, if all, only a few, or none of the mentioned use cases
actually will have widespread adoption of Bitcoin. Nevertheless, BlockNovum is convinced that Bitcoin offers multiple
use cases for which a clear market demand exists. Due to the uncertainty regarding PMF for some target markets,
we rate this category as “Medium/High”.
Rating: Medium/High
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Issuance Model Description: The issuance model of a cryptoasset entails the method of how tokens are issued to users. The rate of
supply is a crucial factor to consider for a cryptoasset economy, since a high rate of supply can erode an asset’s value
if the underlying utility doesn’t grow at the same pace. The total number of units ultimately also has an effect on
asset value in the future.
One has to differentiate between issuance through mining or issuance through other channels, such as an ICO,
airdrops, or tokens released from a developer foundation.
In the mining case, we consider if the distribution is fair. Practices such as “premine”, where tokens are mined by the
creators before the network is publicly launched, create an unfair advantage and are a controversial practice to profit
through the early accumulation of network assets and power.
Identically for ICOs and other issuance models, we examine if the assigned pots and percentages of raised capital to
developers, foundation etc. are justified and follow market best practice. One way for unethical founders to profit is
by immediately paying out a large sum of the ICO capital to themselves, without having a long-term issuance plan in
place. As a result, the long-term success of a project can be endangered through wrong incentives set at the issuance
model level.
To sum up, we analyze if the issuance model chosen by the cryptoasset fits the use case and sets the project up for
long-term success.
Opinion: Bitcoin pioneered the space of cryptoassets and therefore through mining uses the most traditional method
of issuing cryptoassets. The maximum supply of Bitcoin is capped at 21 million, which gives Bitcoin value based on
the principal of digital scarcity. While the initial supply rate was at 50 Bitcoin per block in 2009, it is cut in half roughly
every 4 years, which leads to a current block reward of 12.5 BTC. Hence, we are currently at an annual inflation rate
of tokens at 3.9%. This percentage is constantly decreasing though and going towards zero. We expect the issuance
rate to be at 0.4% in 2028.
In contrast, in 2018 the USD currently is expected to have an annual inflation rate of around 2.5%-2.9%. Other safe
fiat currencies, such as the CHF or EUR, are showing inflation rates of around 1%, respectively 2%. In this context,
Bitcoin’s inflation rate is currently only slightly above some of the most trusted fiat currencies, while in the long-term
the currencies’ supply rate will gradually decrease. This sets the preconditions for a stable / rising prices in the future,
without the danger of a future erosion of asset value.
We have to point out that Satoshi Nakamoto, the mysterious creator of Bitcoin, is estimated to have mined an amount
of 980,000 BTC during the beginnings of the network. Normally, this would be a concern for any cryptoasset since
such a large stash of tokens can heavily influence the network and prices. However, the tokens mined by Satoshi
were actually never moved out of the wallet and haven’t been touched since creation. Therefore, it is widely expected
that these tokens will are staying out of circulation for the long-term or are “lost” forever.
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For the above reasons, we rate Bitcoin’s issuance model as appropriate for the supported use cases and don’t see
serious warning signals that could impact the long-term success of the project or stability of the price. Due to some
uncertainties around founder holdings and “lost” assets, one could argue for a deduction in the rating. Nevertheless,
due to Bitcoin’s long-running and transparent issuance model, we issue a “High” rating for Bitcoin in this category.
Rating: High
Figure 15: BTC Supply
Community and Developers Description: This factor evaluates the cryptoassets community and developer team. In particular, teams of early stage
startups that conduct an ICO need to be vetted. The background, education, work experience, and commitment of
the founding and developer team have to be assessed. Especially in the ICO space, one needs to do a thorough check
to differentiate serious founders from free-riders or fraudulent actors.
In addition, we also analyze the community engagement of the cryptoasset to get a feel for the asset’s popularity.
For this we turn to social networks, such as Reddit, Twitter, and Facebook, and evaluate the community involvement
there.
Opinion: The Bitcoin Core project has a large open source developer community with many casual contributors to
the codebase. Since there is no fixed “team” or static group of people, the developer community is in constant
fluctuation. As Bitcoin is a well-established cryptoasset, a deep dive into developer and founder backgrounds is not
necessary. Furthermore, there are various independent teams that build applications on top of the Bitcoin blockchain.
Overall, Bitcoin has one of the most experienced and biggest developer community in the cryptoasset space.
Developer Activity: The Bitcoin development activity can also be measured by “code repository points”, a metric
compiled by CryptoCompare. The metric assesses a cryptoasset’s code repository and awards points according to the
number of stars, forks, and subscribers. Figure 16 highlights that Bitcoin is by far the most active cryptocurrency when
it comes to developer activity.
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Figure 16: Code Repository Points Comparison (July 2018) 7
Community Involvement: A similar metric also exists to assess a project’s community involvement. CryptoCompare
calculates the metric as the sum of following indicators: CryptoCompare Points, Facebook Points, Reddit Points,
Twitter Points, Code Repository Points, Total Page Views / 10,000. The points for the respective social network are
awarded for subscribers, comments, and active users. The CryptoCompare metric is one of the easiest ways to
visualize and compare community involvement for cryptoassets.
Figure 17 illustrates that Bitcoin again has a significant lead when it comes to community involvement. For instance,
Bitcoin has over 900,000 subscribers on Reddit with several thousand comments per day.
To sum up, Bitcoin is the unchallenged leader in the cryptoasset space regarding developer activity and community
involvement. This is probably due to it being the oldest and most established cryptoasset. Network effects and a loyal
community did play their part as well. As a result, Bitcoin has had the most time to establish itself as a market leader,
which is why we issue a “High” rating in this category.
7 Source: CryptoCompare
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Figure 17: Community Involvement Comparison (July 2018) 8
Rating: High
Network Security of Cryptoasset Description: A further indicator is the security of the cryptoasset’s network. For Proof-of-Work based systems,
security can be described by the number of miners and the combined network hashing (compute) power. One of the
only ways to attack a blockchain network is through a so called 51% attack, in which a malicious network participant
controls more than half of the network computing power. This allows the actor to process invalid transactions and
double spend money. As a result, we analyze the network security by looking at the network’s total computing power
and by calculating the cost to launch a 51% attack.
Opinion: Bitcoin’s network hash rate has grown from around 1.4 million TH/s at the end of July 2016 to almost 50
million TH/s at the end of July 2017. This astonishing increase shows that Bitcoin’s network computing power
continues growing with no signs of a slowdown. In return, the network gets more and more secure.
In contrast, Ethereum’s network hash rate sums up to around 290 thousand TH/s, whereas Litecoin is at only around
250 TH/s. These huge differences can mostly be explained by the availability of high performing ASIC miners for
specific cryptoassets. Nevertheless, in this comparison Bitcoin stands out as the most secure cryptoasset network in
terms of hash rate.
The cost to attempt an attack on Bitcoin’s network would sum up to more than $7.2bn at the time of writing at end
of July 2018. This number is obtained by calculating the number of Bitcoin miners that are needed to replicate the
current network computing power, in an attempt to reach control by owning more than 50%. One would need over
3.6 million Antminer S9 miners to achieve a hash rate equivalent to the current 50 million TH/s of Bitcoin. Given the
8 Source: CryptoCompare
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cost of $2,000 per miner, we calculated the above value. The feasibility of acquiring or building such a huge number
of miners would pose another major challenge.
Finally, the benefit of attacking the Bitcoin network would most likely be far smaller than the incurred cost. Therefore,
we conclude that Bitcoin’s network is amongst the most secure in the blockchain space and that it is very unlikely
that it is going to be successfully attacked.
Rating: High
Figure 18: Bitcoin Network Security 9
Support and Partnerships Description: This final indicator assesses various factors that describe market support for the cryptoasset. Depending
on the type of cryptoasset, these factors can include the number of merchants that accept the cryptoasset, the
number of exchanges that list the asset, the size of related venture capital investments, and user growth. They all
provide us with some information regarding the consumer / market’s view of the cryptoasset.
Opinion: Bitcoin is the most widespread cryptoasset due to its use case as a digital currency. According to
SpendBitcoins.com, there are over 100,000 merchants worldwide that accept Bitcoin. Coinmap.org also lists over
13,000 venues and shops that accept Bitcoin. As previously mentioned, Bitcoin is the main gateway asset to other
cryptoassets. Hence, it is also the most accepted token on cryptoasset exchanges. It is listed on hundreds of
cryptoasset exchanges and also the main currency on the most regulated exchanges, such as Coinbase, Gemini,
Kraken, or Bitstamp.
We also observe a constant growth in users, which is reflected in the increasing number of Bitcoin wallets.
Blockchain.info, one of the leading Bitcoin wallet providers, shows a growing number of wallet users. By the end of
July 2018 the number grew to almost 27 million wallet users, which corresponds to a growth rate of around 25% for
the first 7 months of 2018. It should be noted that this is only the data from one wallet provider. Hence, given the
9 Source: Blockchain.info
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fact that there is a wide range of wallet provider, the true number of users is a multiple of the Blockchain.info data.
The increasing number of wallets support our view that Bitcoin has a constantly growing user base.
Next to the store of value use case, the increasing number of real-world applications (represented by the number of
merchants and stores that accept Bitcoin) provides evidence for the plausibility of the digital payment use case.
In addition, there is a whole ecosystem of developers, startups, and corporations that build applications on the Bitcoin
blockchain or offer services related to Bitcoin. For instance, on August 3rd, Starbucks, NYSE parent Intercontinental
Exchange, Microsoft, and others, announced that they are working to launch a new company called Bakkt, which
creates a regulated, digital asset ecosystem to buy, sell, store and spend digital currencies. One mentioned use case
is the possibility to spend Bitcoin at Starbucks.
Venture capital funding for blockchain startups is also on its way to another consecutive record, with over $1.3 billion
investment volume globally in only the first 6 months of 2018. From the 200+ deals conducted in H1 2018, several
startups offer products connected to Bitcoin.
To sum up, we see Bitcoin currently as the most established cryptoassets when it comes to exchange listings, market
acceptance and number of users. It also has a thriving ecosystem of companies and technologies that build upon and
interact with Bitcoin.
Rating: High
Figure 19: Bitcoin Wallet Users 10
10 Source: Blockchain.info
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Recommendation
Based on the extensive fundamental valuation, BlockNovum establishes an initial price target of $8,000 per Bitcoin
(BTC). We see this fair value justified by the underlying use cases enabled by Bitcoin. The store of value (digital gold)
use case, along with the usage as a gateway to other cryptoassets, promises a substantial addressable market size
for Bitcoin. Other relevant use cases for Bitcoin include digital payments, remittances, and banking for the unbanked.
To account for the high uncertainty regarding Bitcoin’s future role in powering these use cases, we applied a high
discount rate of 30%.
The qualitative assessment confirms Bitcoin’s leading role as a cryptoasset. We are of the opinion that Bitcoin is
addressing challenges and offering solutions for the aforementioned use cases, e.g. lower fees for digital payments,
reduction of middlemen in remittances, need for secure store of value that is fully controlled by the owner, or
reduced risk through removal of central entity. Various indicators show continuing growth in network security, active
users, and use case support by the markets. Bitcoin also exhibits the highest amount of developer and community
activity among comparable cryptoassets. As a result, the qualitative assessment confirms Bitcoin’s strong and
continuously growing fundamentals which support our price target. Its leading role also make it an ideal candidate
for a first investment in the cryptoasset asset class.
The cost-based valuation predicts a price range of $7,440 and $8,670 per BTC and serves as a validation of our
fundamental valuation model.
Our ratio-analysis uses Bitcoin’s current network value (market cap) and compares it to various data points that serve
as a proxy for Bitcoins fundamental value. NVT shows that Bitcoin’s price is currently supported by fundamentals. In
contrast, NVM gives some indication that Bitcoin might be overvalued in the short-term. Consequently, a correction
in the upcoming months could be a possibility in case some fundamentals don’t pick up growth as expected. Despite
NVM’s potential warning signs, we don’t view Bitcoin’s current price as overvalued in the medium to long-term.
Conclusion: BlockNovum issues a Buy rating for Bitcoin, as long as the BTC price stays below our target price of
$8,000. Therefore, investors should aim to buy Bitcoin below the target price and account for their preferred margin
of safety. Bitcoin serves several promising use cases, which gives it fundamental value. In particular, the store of value
use case, where Bitcoin serves as digital gold, offers enormous market potential with an estimated market size of
$2.6 trillion served by BTC in 2028. Our qualitative assessment framework and ratio analysis confirms Bitcoin’s strong
and continuously growing fundamentals and further supports our price target. However, another short-term price
correction is a possibility if fundamental on-chain activity does not develop as expected.
Further arguments for an investment in Bitcoin are that it has a low or even negative correlation to traditional
equities. A study by Grayscale showed that Bitcoin achieved an average correlation of 0.01 for a whole basket of
popular equity benchmarks and fiat currencies. Bitcoin is also beneficial to portfolio performance. It is shown that a
global 60% equity / 40% bonds portfolio benefited significantly from allocating just 1% of the portfolio to Bitcoin. The
simulated cumulative return increased by 293 bps, without materially increasing volatility since the Sharpe Ratio
improved by 18%. 11
11 Source: Grayscale – A New Frontier, Observation period: 31. December 2016 – 31. May 2018
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In conclusion, an inclusion of Bitcoin in an investor’s portfolio at current price levels provides investors with price
appreciation potential, but is also likely to improve the whole portfolio performance through better diversification
and risk-reward characteristics.
Risks
Investing in Bitcoin and any cryptoassets will expose investors to a number of risks that are listed below. Cryptoassets
are a new asset class but shows similar characteristics to other alternative investment categories, such as venture
capital. Therefore, we expect investors to understand the high risk nature of investing in cryptoassets and that you
or the organization your represent possesses the appropriate income, net worth, and professional experience to
invest.
Investing in cryptoassets may include the following risks:
• Cryptoassets are subject to volatile price movements and in the short-term prices are often moved by market
sentiment.
• Changes in global Bitcoin demand through changing levels of acceptance by merchants, consumers, and
corporations may adversely affect Bitcoin’s long-term market potential and prices.
• Theft of Bitcoins and other cryptoasset tokens from a Bitcoin online wallet or hacking of exchanges can lead
to loss of BTC. However, this risk can be mitigated with the right precautions around storage and custody.
• Regulators are still catching-up to this emerging asset class. Therefore, changes in regulations may lead to
legal liabilities or even bans of certain cryptoassets and the related organizations. News announcements
around regulations might also affect cryptoasset prices. Bitcoin was classified by the SEC as a commodity,
however most other initial coin offering (ICO) tokens are classified as securities.
• Depending on the jurisdiction, investing in cryptoassets leads to tax liabilities. Often, there is no final
framework in place yet regarding how to tax cryptoassets, which leads to some uncertainty and requires you
to keep detailed records of all transactions.
• Bitcoin itself does not generate any cash flow. Most cryptoassets should be thoroughly assessed regarding
the associated token rights.
• Competition from other payment technologies, services, or other cryptocurrencies could lead to a lower
expected market share and negatively affect prices.
• Potential reputational damages due to relation with Bitcoin and/or other cryptoassets. Even though Bitcoin’s
reputation has gotten a lot better over the last few years, it still suffers from negative perception issues (even
though they might be misinformed or politically motivated views by incumbents that are threatened by this
new technology). This slows down consumer adoption and can deter institutional investors from entering the
space.
• The open-source software protocol of the Bitcoin network has to be maintained and further developed,
which is dependent on the community and a few core contributors.
• New technologies, such as quantum computing, might pose additional challenges to certain cryptoassets and
make them less secure.
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Disclosures and Further Information
At the time of publication, BlockNovum does not hold any amounts of BTC. However, the author has invested a small
amount in Bitcoin and related cryptoassets.
The information herein is based on sources that BlockNovum considers reliable, but its accuracy is not guaranteed.
All statements made in this report are strictly beliefs and points of view held by BlockNovum after conducting careful
research. Certain of the statements contained herein may be statements of future expectations and other forward-
looking statements that are based on BlockNovum’s current views and assumptions and involve known and unknown
risks and uncertainties that could cause actual results, performance or events to differ materially from those
expressed or implied in such statements. Neither BlockNovum, nor any of its employees shall have any liability,
howsoever arising, for any error or incompleteness of fact or opinion in it or lack of care in its preparation or
publication.
The information contained in this report are not a representation by this corporation / cryptoasset, nor is any
recommendation made here based on any privileged information. This information is not intended to be nor should
it be relied upon as a complete record or analysis; neither is it an offer nor a solicitation of an offer to sell or buy any
security or cryptoasset mentioned herein. Nothing contained herein constitutes investment, legal, tax or other advice
and is not to be relied on in making an investment or other decision. Investors should determine for themselves
whether a particular service or product is suitable for their investment needs or should seek such professional advice
for their particular situation.
This document is intended for those with an in-depth understanding of the high risk nature of alternative investments
and these investments may not be suitable for you.
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or otherwise. The information and expressions of opinion contained herein are subject to change without further
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©2018, BlockNovum GmbH. All content and figures are original and have been researched and produced by
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in any other publication, without the express written permission of BlockNovum.
About BlockNovum:
BlockNovum is a Swiss Blockchain and Cryptoasset investment research & consulting firm. We provide professional
assessments, fundamental valuations, and research reports for the emerging asset class of cryptoassets & blockchain
startups. BlockNovum positions its cryptoasset research reports and services analog to established equity sell-side
research providers. Therefore, our target clients include mainly institutional investors with an interest in allocating
capital to cryptoassets, or that plan to invest directly in blockchain startups. Additionally, we also offer our reports
and consulting services to accredited investors, such as angel investors.
Mission: Founded in 2018, we are a young startup that wants to advance the quality of fundamental cryptoasset
research to a professional level to provide institutional investors with high quality due diligence and valuations.
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