A few weeks ago, @elvismercury shared a Bitcoin valuation simulator. This simulator uses what it calls a Schrodinger model, named after the famous physicist. I haven't done a particularly systematic exploration of the model, but I said I would write up some thoughts about it and I've fiddled around enough to do that.
The Model
This model describes how Bitcoin should be valued in the present for its future potential to serve as a store of value. The premise of the model is that Bitcoin has a probability of usurping from other assets their roles as stores of value.
- For each asset, it's assumed that Bitcoin either absorbs it's role as a store of value completely or not at all, with a probability attached to those binary outcomes.
- Each asset also has its own timeframe for Bitcoin usurping its role as a store of value.
- There's a discount rate that allows calculating present discounted value, based on the estimated future value.
- Each asset has a market cap and estimated monetary premium.
I would prefer a model that used a continuous variable for the probability of capturing shares of each asset's monetary premium. However, that would require making a bunch of assumptions about the exact shape of the distribution. Still, I think you could roughly interpret the probability as the share of monetary premium you expect Bitcoin to absorb after a certain amount of time.
Estimated Valuations
The site has four preprogrammed scenarios: Bearish, Base, Bullish, Hyper. Those range in present discounted value from about $150k to $6,000k. That's a pretty wide spread, but even the "bearish" scenario suggests Bitcoin is still well under half of its proper valuation.
The simulator allows you to adjust all of the aforementioned parameters. According to @grayruby, you can get Bitcoin's present valuation as high as about $300 million, but that has more to do with just how unrealistic of parameters the simulator allows.
From what I've seen time matters more than probability. Halving all of the probabilities of capturing the monetary premia has much less effect on the valuation than doubling the time to capture.
How to Proceed as though We're Right
I would say approximately 1000x as much discussion has taken place about eventual valuation than time to adoption. In a way that makes perfect sense. We have much better tools for doing these back of the envelope future valuation calculations than we have for estimating when people will finally see the light.
The problem is that acting rationally in the present requires an estimate of present discounted value and that hinges more on when than how much.
Where we can resolve some uncertainty (at least if we have the courage of our convictions) is to say that Bitcoin will absorb every other asset's monetary premium. There are good theoretical reasons for thinking that in equilibrium there will be one money and it will act as the store of value for society (as well as unit of account and medium of exchange). So, if we believe Bitcoin is the best money, then we should conclude it will eventually eat every other assets monetary premium.
My Estimate
In the spirit of "stay humble" and "it's still early", I used the most bearish model, but increased all of the probabilities to 1. That's certain capture over the next 10 to 30 years, depending on the asset.
That yields a present discounted value of over $600k and that's just for the store of value function of Bitcoin. The estimated value for 30 years from now is over $14 million dollars. Incidentally, that's roughly the same as the estimates I've seen for Bitcoin's eventual medium of exchange value.
So, attaching no value to the unit of account function, if we're right about Bitcoin being the best money, then it's almost certainly worth well over $1 million right now. That just happens to be the same sat-cent parity many of us expressed feeling in my first big SN post: #221151.
Zap well!