Stock markets tend to price in future events that they are certain will happen. These events include buybacks, earnings growth, dividends, and many other variables. In the case of the crypto market, it is widely believed by new investors that known future events are built into the Bitcoin price.
Stocks issuing a dividend is a guaranteed event that has an impact on price through financials. The same goes for events like a merger between two companies or any other value creation.
The Bitcoin price is a function of how many people are buying vs how many are selling. The same goes for gold and silver, which is why they are often compared with each other. For this reason alone, it is impossible to try to factor in most events.
Let’s take the example of the Bitcoin ETF. Hypothetically, if the SEC were to accept Bitwise and Wilshire Phoenix proposals to launch a retail-focused ETF, how would we go about finding how much value this adds to Bitcoin?
Short and sweet: it’s impossible. There is no way to find the absolute demand that this event would create, so it is impossible to price this into Bitcoin. When the price is solely a function of demand and supply, you simply cannot forecast the impact of these future events.
Gold also faces the same valuation effect, but there are some key differences. You can project demand for gold that arises from various sectors such as central banking, jewelry, and industrial goods. But by doing this, you entirely emit the demand that comes from investors.
Since Bitcoin doesn’t even have tangible use cases arising due to its chemical composition, as gold does, it is all the more difficult to estimate demand.
The closest we can come to doing so is building in scarcity using a stock-to-flow model. This essentially takes the ratio of demand to supply over time, then projects future demand and supply based on incoming supply and a similar degree of demand.
It’s time to stop considering valuation techniques that are used on assets like stocks and bonds for a revolutionary asset like Bitcoin. Quite honestly, there is no reliable way to forecast an intrinsic value and we should stop trying to do so.
Too many believe that the upcoming block reward halving is already priced into Bitcoin at a near $10,000 price – and that is simply absurd.
Halvings have historically been priced in after the event because the price surge is caused by halving itself. And because the effect the halving will have on Bitcoin’s price is unknown, people cannot try to price it into as it is a naturally occurring economic phenomenon.
So just take a step back and understand the gravity of this situation. For the first time ever, there is an asset whose value and price are fully representative of how many entities want it. Bitcoin is by far the closest humans have come to developing a free market, and the historical data points stand as a testament to this.