On the Art of Bitcoin Valuation – BNY Mellon and the S2F Model

In a paper, analysts at asset manager BNY Mellon paint a picture of the Bitcoin store of value. PlanB’s stock-to-flow model is also discussed.

How do you rate Bitcoin? Financial analysts of all stripes have been plagued by the question of which rate represents a fair value for the No. 1 cryptocurrency for some time. The answer is non-trivial. After all, conventional means of asset valuation cannot be applied to Bitcoin. For example, analysts cannot simply discount Bitcoin’s future interest payments to today’s date, as is the case with bond valuation, for example. Furthermore, BTC is not a company – P / E ratio and dividend payments are also not available.

Nevertheless, Bitcoin’s value does not result from arbitrary speculation, but has solid reasons. Bankers from BNY Mellon have attempted to break them down. According to a paper that the analysts published in March of this year, Bitcoin is increasingly perceived as a store of value and less as a transaction medium. Metrics such as transaction throughput and general acceptance as a means of payment are therefore irrelevant to misleading. What gives Bitcoin its core value is its scarcity. So it says in the paper:

The majority of investors buy Bitcoin as a store of value and the holding period is increasing. This is similar to gold. The raw material is bought and sold as a store of value and very little used as a medium of exchange.

BNY Mellon

In this sense, according to the BNY-Mellon analysts, it is not a problem that BTC has little value as a medium of exchange. The market values ​​Bitcoin as a store of value where long-term activity makes sense.

Where is the journey going?

In their analysis, the bankers also reference the stock-to-flow model and many of its illustrious variations. Accordingly, Bitcoin is preparing to become the scarcest asset of mankind – with fabulous implications for the price. According to the stock-to-flow cross-asset model (S2FX), Bitcoin grows by an order of magnitude (tenfold in price) with every halving. At the same time, there is a change in the narrative with every halving. In the beginning, BTC was perceived as a gimmick, later as a kind of digital cash on the Internet and, at the latest, since Bitcoin’s market capitalization was valued at one trillion US dollars, as a serious financial asset.

If growth continues at this rate, one can expect BTC to reach the market capitalization of gold in the next cycle. That would make digital gold a $ 10 trillion asset and around $ 500,000 per BTC.

At the end of the day, BNY said, Bitcoin valuation is more “art than science”. The authors make direct reference to criticism of the stock-to-flow model, for example by Nico Corderio, who described PlanB’s evaluation method as a sham correlation. It is no coincidence that BNY Mellon of all people publishes a twelve-page Bitcoin analysis. The financial services provider, one of the largest in the world with $ 1.4 trillion in Assets Under Management (AUM), has been doing Bitcoin since February of this year. The company is working on a platform that offers and stores both traditional and crypto assets under one roof.

You can find the entire paper here.