Name: Why Now May Be A Good Time to Buy Bitcoin
Uploaded: 2018-05-04
Duration: 5 min 49 s
Description: ‘Cryptoassets’ co-author Chris Burniske explains why.

[ MUSIC ]. In your book Cryptoassets, you've actually laid out a model for valuing some of these crypto assets, I mean a lot of people think BitCoin, just trades on whatever the headlines are or whatever the hype is. What people are saying on Twitter but you've said that actually there might be some more fundamentals underpinning all of this. Mm- hm Part of the thinking with cryptoassets is they're not businesses, right? And they don't have business models, they don't have profits. They're really single or multi good economies that deal in these digital services. So what I end up doing is I use an equation known as the equation of exchange. Which is MV equals PQ, where, in the left side of the equation you have M, which is the size of the monetary base, multiplied by V, which is the velocity of that money. The number it times it turns over in a year. So, if you take, say, the US dollar, monetary base of roughly four trillion right now, velocity of roughly five. That equals 20. On the right hand side of the equation, you have PQ. P is the average price of the basket of goods offered by that economy and Q is the quantity of goods. And together that represents the size of the economy. So again for the US, that's 18 trillion, but approaching 20 trillion. And so those two sides need to match. Umm what I end up doing... Which is a little unorthodox, is I solve for the necessary monetary base of a crypto asset to provision an economy of size, PQ, at velocity, V. And so that requires me setting up models that actually look somewhat like a DCF. If you were to just look at them from 30, 000 feet, In terms of each year I'm projecting out the prices of basket of goods. Say it could be file storage or transcoding or bandwidth. Or whatever it may be. The quantity of that good to give me a dollar size of that economy. Divided by a velocity of the CRYPTOASSET To let me know, okay in that year, what is the monetary base need to [ CROSSTALK ] How does this metrick work [ UNKNOWN ] currency for like a Bitcoin or Lightcoin, does it apply equally? I'm sure [ UNKNOWN ] basket of goods in that case? It does apply. It's a little bit more [ UNKNOWN ] say conceptually in terms of the good services actually a currency money over internet protocal But you can use for different example to break it down, if we were to take remittances say, remittances globally I think is roughly $ 500 billion. And if we say, okay of that flow, Bitcoin will provision 10 % and that means, there will be a flow of $ 50 Billion Using BitCoin's block chain, so really the economy of BitCoin moving money as a service. And then if I say, okay, BitCoin's velocity is going to be ten, I divide Divide that 50 billion by ten to get a monetary base of size 5 billion, specific to that use case. But then I can do it for gold, I can do it for business to business payments. I can do it for all kinds of things, and This year cases to get a network value of for these assets. And last year, the end of last year. People were talking about World being a bitcoin, is it a bubble, it's approcaching $ 20, 000. Now we're a litlle bit under 10, 000 How do things look through that lens of the network value and valuation metrics compared to where we were? Sure, the idea of a [ UNKNOWN ] ratio brings us into the relative valuation side, which can be instructive for where we are currently. And so the most common ratio used right now is called the network value to transactions ratio, where you have network value, which is really the number of coins outstanding multiplied by the price, divided by the on- chain transaction value. And the reason we use the on- chain transaction value there, cuz that's really the utility of a crypto network. Again, supporting this economy size PQ Just as the utility of a company is to create profits that benefits the shareholders, and so if you look at this ratio, this NVT ratio we were getting into bubble territory at the end of 2017 and so that was an indicator that things might be overheating that the market is valuing Bitcoin's network value At a richer valuation than it historically has given the transaction value. And we corrected, and we're right now, at least the last time I checked, in a historical norm situation. Norm, so we're about average, not relatively undervalued or overvalued? Around there. Around there, okay. So there's no clear signal whether it's a good time to buy or not. Well if you take say the avergae of the MBT ratio over time and then again it depends exactly how you calculate the enumerator, how you calculate the denominator, it's somewhere in the 80's So you can use that as a historical baseline. I don't know, again place holder now being a venture capital firm, I don't focus on the day to day of the markets like I used to at ARK Invest. But the last time I pulled these numbers, it was just below that historical norm, which would say it's a little under- valued. But I would caution people of reading into these indicators too much. It's still very early days for crypto. We have just about a decade of data, actually really less because markets really only started to come online and be robust with " Mt Gox ". Robust. And so we need more data. We need more historical norms. And I think a lot of the theory will conform to the fact. As these network values persist, as transaction values grow, we will just see these patterns and these ranges that these relative valuations fall into. [ MUSIC ]

Why Now May Be A Good Time to Buy Bitcoin

Finance

How to Decide if It's a Good Time to Buy Bitcoin?

‘Cryptoassets’ co-author Chris Burniske explains why.