Hao Wu

Date: Wednesday, September 6, 2017 at 11:17 AM
Subject: Crypto-currency Valuation Scenarios

Below are a few random thoughts on how to value cryptocurrencies like Bitcoin, Ethereum, Ripple and others.

1. Assume eventually all nations on earth agree to abandon their sovereign currencies and adopt cryptocurrencies for all transactions, value preservation and anything else that we do with physical bills (including the digital representation of them) today, we will use all generally accepted cryptocurrencies in circulation available at the time to represent all the wealth of the entire world. Further assume that it happens in the year 2100, and by then the total wealth of the entire world as denominated in today’s US Dollar is amount X, and the total possible non-extensible (some kind of weight averaged) units of cryptocurrency is Y, then each unit of the (weight-averaged) cryptocurrency would worth V = X / Y USD today. If Y is permanently capped at a fixed number, then over time we have V(t) = X(t) / Y, meaning that the value of each unit will increase as the world’s wealth continues growing.
   1. According to this report, the global monetary wealth at 2016 was about 256 trillion US Dollars. If Bitcoin were to become the only generally accepted cryptocurrency and replace all sovereign currencies in the world, with its by-design controlled supply of a total of 21 million coins, each Bitcoin would eventually worth more than 256 trillion / 21 million = 12 million USD in today’s dollars.
2. Assume in the near future cryptocurrencies are only used in black markets, underground economy, some open legal economic exchanges conducted by pioneering commercial entities and certain individuals for performing secure and private transactions, as is the reality at present, then the value of these cryptocurrencies is only manifested in their facilitating such transactions, rather than as a globally accepted sole representation of real wealth. In that case, the convenience value added by using cryptocurrency and the value of the traditional transaction costs that would have been incurred but are hence saved by using cryptocurrencies summed up should equal the total worth of all cryptocurrencies in circulation, in terms of a sovereign currency, for example the US Dollar. If that amount is X(t), and the total (some kind of weight averaged) units of cryptocurrency is Y(t), where t is the time (since X? and Y will be increasing over time), then the value of each unit at time t is V(t) = X(t) / Y(t).
   1. Need to estimate the total transaction value (in US Dollar) of Bitcoin and the likes in illegal transactions, such as those in black markets and underground economy, for instance drug deals, arms deals and other evil businesses.
      1. According to this article, the global black market value is estimated to be around 10 trillion USD in 2011.
   2. Need to estimate the total transaction value of Bitcoin and the likes in the legal exchange of goods and services by businesses and individuals that accept it.
      1. According to this paper, the global annual cross boarder transaction cost is about 1.6 trillion USD.
3. Another way to think about this is, what if gold is replaced by cryptocurrencies? According to this web page, there are about 187,200 tonnes of above-ground gold that has been mined throughout human history, and an estimated 57,000 tonnes still below ground. A (very conservative) estimate of all the gold in/on earth is about 250,000 tonnes, or 2.5 x 10^5 x 10^6 grams, which at the current gold price of $42.97 per gram would have a total value of 1.0743 x 10^13 US Dollars, or about 10 trillion USD. If Bitcoin were to become the only generally accepted cryptocurrency to replace gold for the purpose of preservation of value, with its designed total supply of 21 million coins, each Bitcoin would worth about 10 trillion / 21 million = 476190.47 USD, or roughly half a million.

Based on these estimates, the total worth of the few dominant generally accepted cryptocurrencies could be at least 1 trillion USD soon. Today the top 5 coins have a total market capitalization of about 130 billion USD.

Key Questions (that others have asked/answered or deemed stupid)

• What’s the guarantee that the supply of cryptocurrencies will not be infinitely expanded? After all, it’s just code. We can have whatever number we desire. If the supply is extensible, inflation is certainly going to happen.
• Of all the cryptocurrencies out there, are some better than others in terms of technology advancement? Which is the best?
• As people improve blockchain algorithms and peripheral technologies in general, chances are that better versions of cryptocurrencies will continuously be invented and supplied to the market. What will happen to older cyptocurrencies, like the Bitcoin?
  • An example would be Ethereum vs Bitcoin.
• Although cryptocurrencies do not necessarily require the endorsement of a central government or any authority, nothing prohibits governments and authorities from voluntarily backing certain cryptocurrencies but not others. They can even create their own. In fact, anyone who has the savvy to understand the code can have his/her own version of a cryptocurrency. That’s what’s happening with all the ICOs (Initial Coin Offerings) these days. How do we deal with that? Because, as you can imagine, once the US, or China, or Russia government decides to support a particular cryptocurrency, it effectively becomes the only generally accepted currency at least in that sovereign and all other cryptocurrencies will be dumped quickly. Truth is, that’s exactly what happened with Ethereum recently when Vladimir Putin met its creator Vitalik Buterin and speculators smelled possible support of Ethereum from the Russian government.
• In the advent of Quantum Computing, the cryptographic algorithms that blockchain technologies rely on could become easily breakable in the future. What happens then?

Speculation Essentials:

• Where are the major cryptocurrency exchanges located and who are running them?
• Who are the market makers?
• Who hold the most units today?
• What is the distribution of cryptocurrencies by country and region like?
• What is the distribution of transactions by country and region like?
• Refer to Tulip Mania and South Sea Bubble for how a bubble forms, develops and busts, and questions like
  • Whether to get in?
  • How and when to get in?
  • How and when to get out?

There must be ways to hack the algorithm/system to rob and/or steal cryptocurrencies