bitcoin (btc) price target and ratios h $8,000 price ... · one bitcoin is divisible to eight...

Copyright© 2018 - BlockNovum GmbH 1

Rank 1

Market Cap (M) $ 121,470

Free Float Tokens (M)

17.1

Maximum Supply (M)

21.0

Inflation Rate 3.9%

Avg. Daily Transaction Vol. - 2018 (M)

$ 1,305.6

52 Week Price Range ($/Token)

$ 3,212 - $ 19,476

30 Day Volatility 3.5%

Cryptoasset Category: Cryptocurrency

Function: Store of value, Payments, Gateway

Blockchain Base: Bitcoin

Consensus Mechanism: Proof of Work

Hash algorithm: SHA-256

Avg. Block Creation Time: 10 Minutes

Development Stage: Deployed

Website: Bitcoin.org

Price Target and Ratios

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Bitcoin (BTC)

Remo Kyburz

[email protected]

Initial assessment yields BUY recommendation with $8,000 price target based on fundamental valuation

Executive Summary:

• Valuation: BlockNovum establishes an initial price target of $8,000 per

Bitcoin (BTC). We see this price justified by the present value of the

underlying future utility values of modeled Bitcoin use cases. The store

of value (digital gold) use case, along with usage as a gateway to other

cryptoassets, promises a substantial addressable market size for Bitcoin.

We expect 66% of today’s BTC PV to be based on current utility and 34%

on speculation of future utility value.

• Further Analysis & Qualitative Assessment: Cost-based valuation

predicts a price range of $7,440 and $8,670 per BTC, validating our

fundamental valuation result. NVT ratio analysis indicates that BTC is

currently supported by fundamentals, however NVM suggest potential

short-term overvaluation if fundamentals don’t develop as expected.

The qualitative assessment confirms BTC’s strong positioning in six

assessment categories, which supports its leading status in the

cryptoasset space.

• Recommendation: We issue a Buy rating for BTC, as long as the market

price stays below our target price of $8,000. BTC shows substantial long-

term price appreciation potential if use cases mature and gain more

market share.

Recommendation

Buy

Valuation PV

$ 8,053

P/M & NVT-Ratio

0.31 | 48.1

Market Data

Cryptoasset Description Cryptoasset – Key Data

Bitcoin is a consensus network

that enables a new payment

system and a completely digital

store of value. Transactions are

recorded in a public distributed

ledger (Bitcoin Blockchain) that

is powered by its users with no

central authority or middlemen.

Price ($/Token)

$ 7,100

August 7, 2018

Bitcoin (BTC)

August 7, 2018 Copyright© 2018 - BlockNovum GmbH 2

Table of Contents Introduction to Bitcoin .................................................................................................................................................... 3

Fundamental Valuation ................................................................................................................................................... 5

Valuation Methodology ............................................................................................................................................... 5

Bitcoin Valuation Explained ......................................................................................................................................... 7

Bitcoin Valuation Outcome ......................................................................................................................................... 9

Alternative Valuation Approaches................................................................................................................................. 11

Cost-based Valuation ................................................................................................................................................. 11

Network Value to Transactions Ratio (NVT) .............................................................................................................. 13

Price to Metcalfe Ratio (P/M) .................................................................................................................................... 14

Network Value to Metcalfe Ratio (NVM) .................................................................................................................. 14

Qualitative Assessment ................................................................................................................................................. 17

Decentralization Edge ................................................................................................................................................ 18

Product-Market Fit .................................................................................................................................................... 18

Issuance Model .......................................................................................................................................................... 19

Community and Developers ...................................................................................................................................... 20

Network Security of Cryptoasset ............................................................................................................................... 22

Support and Partnerships .......................................................................................................................................... 23

Recommendation .......................................................................................................................................................... 25

Risks ............................................................................................................................................................................... 26

Disclosures and Further Information ............................................................................................................................. 27

Bitcoin (BTC)


Introduction to Bitcoin

Bitcoin1 is a digital currency and was created in 2009 by a programmer, or a team of programmers, under the name

Satoshi Nakamoto. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms

and is operated by a decentralized authority, unlike government-issued currencies.

Blockchain: Bitcoin was built upon a number of existing technologies, such as Reusable Proofs of Work and BitGold,

to create the first digital token which effectively implemented a distributed ledger that economically incentivizes

participation. This innovation introduced by Bitcoin is now known to the wider public as the Blockchain technology.

A blockchain is a growing list of records, called blocks, which are linked using cryptography. Together they make up

an open, distributed ledger which is immutable, has high availability, is very secure, and increases transparency and

trust. In short, the Blockchain represents an innovation in information registration and distribution that eliminates

the need for a trusted party to facilitate digital relationships.

Token Supply: Leveraging the blockchain technology, Bitcoin is one of the first digital currencies to use peer-to-peer

technology to facilitate instant payments. The value of Bitcoin is based on the principal of digital scarcity, as the

maximum supply of tokens is capped at 21 million. Until that cap is reached, Bitcoin’s supply is inflationary as some

of the network’s participants called “miners” receive rewards (release of new Bitcoin) and transaction fees paid in

Bitcoin. Miners are independent individuals or companies, who supply governing computing power to the network

to enforce the credibility and validity of the transactions within the network. The miners basically solve a

computationally difficult puzzle to discover a new block, which is then added to the blockchain. Once a new block is

discovered, a message is broadcast to the mining network and verified by all recipients. The block reward for mining

a new block started at 50 BTC in 2009, but is cut in half roughly every 4 years, which leads to a current block reward

of 12.5 BTC.

One Bitcoin is divisible to eight decimal places (100 millionth of one Bitcoin), and this smallest unit is referred to as a

Satoshi. Therefore, investors can also acquire only a fraction of a Bitcoin.

Use Cases: Bitcoin is the largest digital token by market capitalization and also has one of the largest user bases,

which steadily grew over the last few years. One popular metric is Bitcoin dominance, which shows the percentage

of Bitcoin’s market capitalization compared to the total cryptoasset market cap. At the time of writing this report,

Bitcoin dominance was at 47%. Even though Bitcoin’s initial purpose was solely for peer-to-peer transactions, its use

cases have changed. While online payments and remittances are still valid use cases for Bitcoin, the majority of Bitcoin

users holds it as a store of value. In this context it is often referred to as digital gold. Hence, many investors hold

Bitcoin in search for long-term price appreciation, to diversify their portfolios with a new asset that shows different

correlation characteristics compared to traditional asset classes, and to “store” capital in a safe place.

Furthermore, due to Bitcoin’s dominance, it serves as a gateway to the digital token economy. Most regulated fiat-

to-cryptoasset exchanges offer only a handful of cryptoassets that can be bought with traditional fiat currencies (e.g.

USD, EUR, CHF, or Yen). Bitcoin is almost exclusively always among them. As a result, the majority of other

cryptoassets can be exchanged for Bitcoin and prices are often listed in BTC for other cryptoassets. This leads to a

constant demand for Bitcoin and enables high liquidity with low spreads on exchanges.

1 Nomenclature generally distinguishes between Bitcoin (the network protocol / ecosystem) and bitcoin (the currency / token). For simplicity we consistently use “Bitcoin” with a capital B in this report. BTC is also used interchangeably.

Bitcoin (BTC)


It also has to be noted that the Bitcoin protocol serves as the basis for many other popular cryptoassets. This includes

for example Bitcoin Cash, Dash, or Bitcoin Classic.

Recent developments: Bitcoin saw an enormous rise in prices in 2017 that peaked in the speculative bubble in

December. The market was following a bearish-trend for the first seven months in 2018 that resulted in prices coming

down by 60% compared to the peak of the bubble in December. After prices dropped below $6,000 in early July,

some signs of a turnaround appeared in mid July with BTC currently being traded a bit above $7,000.

Figure 1: BTC Price Development

Bitcoin is still recovering from some reputational damages in its early years following the cases of the Silk Road, the

bankruptcy of Mt. Gox Bitcoin exchange, or some ransomware acts. Over the last few years, Bitcoin’s reputation is

slowly improving since it has been shown that the use of Bitcoin in illegal activities is almost negligible and vast

improvements in security and KYC-regulations are underway.

It should also be noted that Bitcoin’s volatility (currently 3.5% 30-day BTC/USD volatility) has been steadily decreasing

over time since its launch in 2009. This is not unusual since new assets often start out with high volatility, until the

market finds a balance over time. In addition, the widely-anticipated launch of a Bitcoin ETF is still delayed as the

Winklevoss Bitcoin ETF was recently rejected by the SEC. As a result, approval of a Bitcoin ETF in the US does not

seem realistic at least until 2019. The introduction of a BTC ETF would raise investor confidence in Bitcoin significantly

and provide a more accessible way for investors to get exposure to the cryptoasset. For comparison, gold prices

increased by 350% after the first gold ETF was launched in 2004. Nevertheless, there are various other ways for

institutional investors to get exposure to BTC.

This report aims to provide investors with guidance to decide on a fair market value for Bitcoin and to support

investment-related decisions. Our fundamental-based assessment and valuation approach is focused on the long-

term value of Bitcoin and is described in the next section.

Bitcoin (BTC)


Fundamental Valuation

BlockNovum’s valuation approach follows a fundamental analysis methodology. Our financial model aims to indicate

if an investment in Bitcoin is worthy of long-term capital allocation, given the discounted utility value of one BTC

token. Consequently, this analysis aims to assess the long-term potential of Bitcoin and identifies if the asset is under-

or overvalued today.

It is crucial to note that cryptoassets are not companies and hence they don’t have cash flows. Traditional financial

models used by asset managers, such as discounted cash flow (DCF), are not suitable for cryptoassets.

Valuation Methodology Valuation framework: The used methodology is based on the assumption that cryptoassets should be valued similar

to commodities, with markets priced by balance of supply and demand.

Hence, the valuation frameworks derives utility value by:

1. Forecasting demand for the underlying resource or service that the cryptoasset network provisions (the

network’s ”GDP”). This can be just one specific use case or multiple, as in the case of Bitcoin.

2. Dividing this demand by the monetary base available of the respective cryptoasset (supply) to obtain the per-

unit utility value.

In other words, the cryptoassets utility value is eventually determined by assessing how much the respective token

needs to be worth for it to serve the “economy” (use cases) it supports. Our model calculates the cryptoasset’s utility

value for the next ten years. Since our services target investors globally, BlockNovum uses USD as the base reporting

currency.

Finally, the present value (PV) of the cryptoasset can be derived from future expected utility values using

conventional discounting.

This valuation methodology employs the theoretical framework of the equation of exchange, MV=PQ, which allows

us to calculate the “demand” (the monetary base necessary to support the token’s economy).2

“M” represents the size of the cryptoasset-specific monetary base and is the key number that we are solving for.

“V” is the velocity of the asset, meaning the number of times each token is transferred per year.

“P” equals the price of the digital resource of a specific use case.

“Q” represents the quantity of the digital resource of a specific use case (P*Q together represents the market size in

USD of the specific use case).

The token supply is calculated for each year, depending on the cryptoasset-specific supply schedule. In the case of

Bitcoin, this is the number of BTC mined per year, taking into account changing block rewards. Furthermore, the

number of BTC in circulation is reduced by the estimated amount of tokens that are “lost”.

2 Our financial model bases on the pioneering research conducted by Chris Burniske, Alex Evans, Dmitry Kalichkin and others, who laid out the foundation for cryptoasset valuations.

Bitcoin (BTC)


Figure 2: Valuation

Supply

2017A 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E

New Bitcoin [BTC] Mined 699,100 657,000 657,000 465,375 328,500 328,500 328,500 232,688 164,250 164,250 164,250 116,328

Total Bitcoin Released (EOY) 16,776,450 17,433,450 18,090,450 18,555,825 18,884,325 19,212,825 19,541,325 19,774,013 19,938,263 20,102,513 20,266,763 20,383,091

in % of Total 80% 83% 86% 88% 90% 91% 93% 94% 95% 96% 97% 97%

% of Bitcoin Released that are out of

Circulation 13% 13% 13% 13% 13% 13% 13% 13% 13% 13% 13% 13%

Bitcoin Available for Transactions 14,555,568 15,125,593 15,695,619 16,099,387 16,384,400 16,669,413 16,954,426 17,156,310 17,298,816 17,441,323 17,583,829 17,684,758

Demand

In $ Billion2017A 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E

Market Size of Use Cases

Store of Value 8,732$ 8,773$ 9,437$ 10,152$ 10,920$ 11,747$ 12,636$ 13,593$ 14,622$ 15,728$ 16,919$ 18,200$

Online Payments 3,265$ 3,706$ 4,206$ 4,774$ 5,419$ 6,069$ 6,797$ 7,613$ 8,374$ 9,212$ 10,133$ 11,146$

Remittances 461$ 495$ 532$ 572$ 614$ 660$ 709$ 761$ 799$ 839$ 881$ 925$

Unbanked 1,736$ 1,810$ 1,888$ 1,969$ 2,054$ 2,142$ 2,234$ 2,331$ 2,431$ 2,535$ 2,644$ 2,758$

Gateway 303$ 116$ 139$ 167$ 201$ 241$ 289$ 347$ 416$ 500$ 599$ 719$

Other 2,057$ 2,139$ 2,225$ 2,314$ 2,406$ 2,503$ 2,603$ 2,707$ 2,815$ 2,928$ 3,045$ 3,167$

Growth Rates of Use Case Markets

Store of Value 0.5% 7.6% 7.6% 7.6% 7.6% 7.6% 7.6% 7.6% 7.6% 7.6% 7.6%

Online Payments 13.5% 13.5% 13.5% 13.5% 12.0% 12.0% 12.0% 10.0% 10.0% 10.0% 10.0%

Remittances 7.4% 7.4% 7.4% 7.4% 7.4% 7.4% 7.4% 5.0% 5.0% 5.0% 5.0%

Unbanked 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3%

Gateway 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%

Other 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%

Market Share of Bitcoin

Store of Value 1.8% 2.5% 3.6% 5.0% 6.9% 9.4% 12.5% 16.2% 20.5% 25.0% 29.5% 33.8%

Online Payments 0.3% 0.5% 0.7% 1.0% 1.4% 2.1% 2.9% 3.9% 5.1% 6.5% 7.9% 9.3%

Remittances 0.6% 0.8% 1.0% 1.3% 1.7% 2.3% 3.0% 3.9% 5.0% 6.3% 7.9% 9.7%

Unbanked 0.2% 0.3% 0.4% 0.7% 1.0% 1.5% 2.2% 3.2% 4.4% 5.9% 7.5% 9.1%

Gateway 60.0% 60.0% 55.0% 55.0% 50.0% 50.0% 45.0% 45.0% 40.0% 40.0% 40.0% 40.0%

Other 0.6% 0.9% 1.3% 2.0% 2.9% 4.2% 5.9% 7.8% 10.0% 12.2% 14.1% 15.8%

Market Capacity ("GDP") supported by Bitcoin - [P*Q]

Store of Value 65.5$ 93.4$ 141.8$ 213.2$ 316.7$ 463.1$ 663.4$ 926.7$ 1,257.3$ 1,651.5$ 2,098.2$ 2,581.1$

Online Payments 10.4$ 17.3$ 28.9$ 47.8$ 78.2$ 124.5$ 194.4$ 295.8$ 428.5$ 598.7$ 804.1$ 1,038.5$

Remittances 2.6$ 3.7$ 5.3$ 7.6$ 10.7$ 15.1$ 21.3$ 29.6$ 39.9$ 53.2$ 69.8$ 90.1$

Unbanked 3.2$ 5.1$ 8.2$ 13.0$ 20.6$ 32.1$ 49.3$ 73.8$ 107.0$ 149.0$ 198.3$ 251.6$

Gateway 181.8$ 69.7$ 76.7$ 92.0$ 100.4$ 120.5$ 130.1$ 156.1$ 166.5$ 199.8$ 239.8$ 287.7$

Other 11.9$ 18.9$ 29.7$ 46.3$ 70.8$ 105.7$ 152.7$ 212.2$ 281.5$ 356.1$ 430.3$ 499.6$

Assumed Annual Velocity - [V]

Store of Value 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5

Online Payments 5 5 5 5 5 5 5 5 5 5 5 5

Remittances 5 5 5 5 5 5 5 5 5 5 5 5

Unbanked 5 5 5 5 5 5 5 5 5 5 5 5

Gateway 10 10 10 10 10 10 10 10 10 10 10 10

Other 3 3 3 3 3 3 3 3 3 3 3 3

Required Monetary Base of Bitcoin - [M]

Store of Value 43.7$ 62.3$ 94.5$ 142.1$ 211.2$ 308.7$ 442.3$ 617.8$ 838.2$ 1,101.0$ 1,398.8$ 1,720.7$

Online Payments 2.1$ 3.5$ 5.8$ 9.6$ 15.6$ 24.9$ 38.9$ 59.2$ 85.7$ 119.7$ 160.8$ 207.7$

Remittances 0.5$ 0.7$ 1.1$ 1.5$ 2.1$ 3.0$ 4.3$ 5.9$ 8.0$ 10.6$ 14.0$ 18.0$

Unbanked 0.6$ 1.0$ 1.6$ 2.6$ 4.1$ 6.4$ 9.9$ 14.8$ 21.4$ 29.8$ 39.7$ 50.3$

Gateway 18.2$ 7.0$ 7.7$ 9.2$ 10.0$ 12.0$ 13.0$ 15.6$ 16.7$ 20.0$ 24.0$ 28.8$

Other 4.0$ 6.3$ 9.9$ 15.4$ 23.6$ 35.2$ 50.9$ 70.7$ 93.8$ 118.7$ 143.4$ 166.5$

Total BTC Monetary Base Required 69.0$ 80.8$ 120.6$ 180.4$ 266.7$ 390.4$ 559.2$ 784.0$ 1,063.7$ 1,399.8$ 1,780.7$ 2,192.1$

Valuation

In $

Investment Horizon in Years 0.4 1.4 2.4 3.4 4.4 5.4 6.4 7.4 8.4 9.4 10.4

Utility Value of each BTC in

Circulation

(Required Monetary Base of Bitcoin

/ Bitcoin Available for Transations) 4,742$ 5,341$ 7,681$ 11,207$ 16,277$ 23,418$ 32,981$ 45,698$ 61,492$ 80,260$ 101,266$ 123,954$

Discount Rate 30%

Present Value of Bitcoin 8,053 <= PV of Bitcoin Value that supports estimated economic activites of selected use cases in 2028

Bitcoin [BTC] Valuation based on Fundamentals

July 2018

Bitcoin (BTC)


Bitcoin Valuation Explained Use Cases: There are a number of potential use cases for Bitcoin. For the valuation we focused on what BlockNovum

views as the top five use cases of Bitcoin. They are - store of value, online payments, remittances, banking for the

unbanked, and gateway to other cryptoassets. The last one meaning that the majority of cryptoassets can currently

only be bought with Bitcoin or Ether. Other use cases, such as micro-transactions, black/grey market activity, and

future functionalities are captured under the “Other” category.

We strongly believe in the store of value (SoV) use case of Bitcoin, where Bitcoin is held long-term as some form of

digital gold. Next to the diversification benefits and the long-term price appreciation potential, Bitcoin is also highly

attractive for safe capital storage. This is especially true for individuals living in nations with tight capital controls,

unstable national currencies, or political instability. Real world examples, such as Venezuela and China, illustrate the

high popularity of Bitcoin as a “safe haven” for capital. In addition, an increasing number of institutional investors are

holding Bitcoin to diversify from the equity markets and to get exposure to long-term return potential outside of

traditional markets, which are currently at high valuations.

Modeling Use Case BTC Demand [P*Q]: For above reasons, we model the SoV use case as the main value capturing

application of Bitcoin. Instead of looking at the whole SoV market (gold, silver, collectibles, real estate etc.), we focus

solely on physical gold as a proxy. We believe that focusing on just one comparable SoV asset represents a more

realistic basis to value Bitcoin as “digital gold”.

Even though Bitcoin’s use for online payments is currently not widespread, we see significant potential here as well

due to technological advancements in Bitcoin’s technology. For instance, deployment of Bitcoin’s Lightning Network,

a "second layer" payment protocol on top of Bitcoin, can significantly increase speed and scalability while reducing

transaction costs dramatically. We expect Bitcoin to also facilitate the other four use cases, where Bitcoin’s role as a

gateway to other cryptoassets stands out. However, we expect the gateway case to deteriorate over time, once more

and more cryptoassets can be acquired directly via fiat currency.

Figure 3: Calculate base addressable Market Size

For each application the model attempts to forecast the demand for Bitcoin. We first calculate the market size of

each use case given official market research for this sector. As an example, Figure 3 highlights how the current market

size for the SoV use case was calculated.

Demand Use Case 1: Store of Value

Bitcoin [BTC] Economy Inputs

Metric Assumption

Price per ounce of Gold (end of 2017) [P] 1,302.60$

Price per ounce of Gold (end of Q2 2018) 1,252.00$

Annual Price growth - Gold 5.98%

Total number of above ground Gold (2017, in tonnes) 190,040

CAGR for Gold supply increase (5y avg.) 1.5%

% of total market addressable 42%

Total supply of gold (in ounces) - [Q] 6,703,463,729

GDP of Store of Value Economy (Gold) - [P*Q] 8,731,931,853,263$

Total addressable SoV Economy (2017) 3,667,411,378,370$

Figure 4: Modeling Market Share Development

Bitcoin (BTC)


The market size is then forecasted for the next 10 years based on researched growth rates. Next, we model the

estimated market share gained by Bitcoin for each of the use cases (see Figure 4). The market share development

follows an S-curve, since most new technologies typically exhibit an S-shaped adoption pattern. For example, we

assume that Bitcoin’s demand as a store of value asset will reach an equivalent of 50% of gold’s SoV market by 2040.

As a next step, the model calculates the yearly market size supported by Bitcoin (the “GDP” of the network) for each

use case, given the estimated market share of Bitcoin. For example, we forecast that in 2020 Bitcoin captures a market

size equivalent to 5% of the gold SoV market, which results in a market capacity of $213 billion supported by Bitcoin

(equivalent to P*Q in the framework).

Velocity [V]: According to our valuation framework we next have to find the velocity, i.e. how many times one Bitcoin

changes hands per year. Calculating velocity is based on many assumptions and one can’t expect to get a very

accurate number. Nevertheless, a good approximation can be calculated by dividing the annual BTC transaction value

in USD by the average USD market cap of that year.

Our calculations yield a velocity of Bitcoin of around 5.5 for last year (July 2017 – July 2018). Since velocity varies by

use case, we assign every use case an approximate velocity level that is then weighted by the “GDP” of each use case.

Hence, all weighted velocity use cases together yield an overall velocity of 5.5 again. For example, the SoV use case

only has a velocity of 1.5, since most Bitcoin bought for this purpose are held for a longer time period. In contrast,

online payments have a higher velocity of around 5.

Required Monetary Base of Bitcoin [M]: Finally, as stated in the equation of exchange “PQ” can be divided by “V” to

get “M”. We are then able to calculate the required monetary base in Bitcoin for each use case (i.e. how much does

Bitcoin’s total supply need to be worth to facilitate the use case economies). To illustrate this, let’s look at the SoV

case again. At the end of 2018 we expect around $62 billion worth of value to be stored in Bitcoin. Hence, knowing

the current supply level of Bitcoin, we are able to calculate how much one BTC needs to be worth (its utility value) to

enable the aforementioned level of SoV. We repeat this for every use case to get the fundamental utility value of

each Bitcoin in circulation. The calculated utility values of BTC for each year can be observed in Figure 2 (last row

above the discount rate).

Discount rate: The model employs a high discount rate of 30% to account for the uncertainty regarding the modeled

outcomes ten years out. Depending on the cryptoasset maturity, an even higher discount rate could be chosen. For

comparison, venture capital normally uses discount rates in the range of 30% to 60% depending on the stage of the

investment. Since Bitcoin is the most established cryptoasset with a long track-record of network usage, it can be

viewed as the “blue chip” of cryptoassets. Therefore, we argue that the aforementioned discount rate is appropriate.

It can also be argued that cryptoassets are a riskier investment than stocks by an assumed multiple. Given the long-

term average annual return of 7% by the S&P 500, we can calculate a discount rate of ~30% (assuming Bitcoin is

around 4x more risky).

Bitcoin (BTC)


Bitcoin Valuation Outcome Result: We calculate Bitcoin’s current (end of July 2018) present value (PV) at slightly above $8,000 by discounting

the utility value of BTC in 2028 until today. Taking into account the current market outlook and Bitcoin’s future

potential, especially as a store of value / digital gold, BlockNovum is of the opinion that the calculated present value

of $8,053 is justified.

Compared to its current price level of around $7,100, BTC is currently priced below what we consider its fair value.

Our PV result also corresponds with the resistance level at $8,000 that has been observed several times over the last

few months.

Opinion: The present value can also be decomposed into its two components – utility value today and discounted

expected future utility value (speculation). This shows that a big part (34%) of Bitcoin’s value still relies on speculation

of future utility value.

Figure 5: Composition of Value

One annotation to expected future value: newspaper articles and other blockchain experts often predict Bitcoin to

hit $100,000 at some point. We are of the opinion that this outcome is a possibility, but fundamentals only predict

such a price in a timeframe of eight to ten years, as shown in our valuation model. Nevertheless, this result is highly

uncertain and is dependent on Bitcoin establishing the utility for the various discussed use cases at scale.

Figure 6: Utility Value Forecast

Metric Value Percentage of Value

Current Utility Value (end of 2018) 5,341$ 66%

Discounted Expected Utility Value 2,713$ 34%

Bitcoin (BTC)


It also has to be noted that the outcome of the valuation is highly dependent on a few key variables, such as the

chosen velocity and discount rate. Therefore, even though the obtained result is not exact science, we argue that the

obtained result still provides a fundamental realistic price range and is useful for investors to assess the current

market price levels.

To illustrate the varying outcomes depending on the chosen discount rate and velocity, a range of present values for

BTC can be observed in below sensitivity analysis. Note that here all use cases assume the same velocity, which

changes the result as well (e.g. SoV has the same velocity as online payments). Hence, the below present values

cannot directly be compared to the previously obtained result, but nevertheless give an overview about the range of

potential valuation results.

Figure 7: Sensitivity Analysis (BTC PV of Utility Value in 2028)

Consequently, depending on investors risk appetite reflected in the discount rate, Bitcoin’s present value is

substantially higher or lower. BlockNovum is of the opinion that $8,000 is a justified current fair value of Bitcoin

(standing end of July 2018).

As a next step, the result of our valuation model is verified with alternative valuation approaches. As a final step, we

also consider various qualitative factors to assess Bitcoin as an investment.

$3,155 20.0% 25.0% 30.0% 35.0% 40.0%

2.0 20,085 13,126 8,723 5,887 4,030

2.5 16,068 10,501 6,978 4,709 3,224

3.0 13,390 8,751 5,815 3,924 2,687

4.0 10,043 6,563 4,361 2,943 2,015

5.5 7,304 4,773 3,172 2,141 1,465

6.5 6,180 4,039 2,684 1,811 1,240

8.0 5,021 3,282 2,181 1,472 1,007

Velocity

Discount Rate

Bitcoin (BTC)


Alternative Valuation Approaches

In this section, we evaluate four additional valuation approaches to verify our fundamental valuation result.

Cost-based Valuation Methodology: An alternative valuation approach to “mineable” tokens is to look at their cost of acquisition. Instead

of buying the desired token on an exchange, an investor could also acquire a miner and run it to mine the token. In

the mining example one has a series of cashflows, which includes the initial miner acquisition cost, the annual

electricity expenditure, and the payout in token value. In theory, there should be a point where a rational actor is

indifferent between buying Bitcoin or mining it. The calculated mining value represents the total costs required to

acquire one Bitcoin and discounts the net present value of these cashflows at our chosen discount rate. At this NPV,

one would be indifferent between buying Bitcoin or mining it. This value can also be seen as a lower bound of the

current token value.

Figure 8: Cost-based Valuation of one Bitcoin

Data: For the cost-based valuation we chose to use an Antminer S9, one of the best and most available Bitcoin miners.

With 13 TH/s and power usage of 1323 W, it comes at a price point of $2,000. Electricity cost is assumed at $0.12 per

kWh, which corresponds to the average electricity price in the US or Russia. While China and India can offer costs as

little as $0.08 per kWh, many other western mining locations charge in the range of $0.15 / kWh or higher. Therefore,

we find the chosen 12 cents to be a suitable average. For continuity, we use the same 30% discount rate as in our

fundamental valuation.

The estimated mining duration until one Bitcoin is mined varies by source. While online data forecasts a mining

duration of around 4.3 years, our own calculations show that it can take up to 8 years for one BTC to be mined. This

takes into account growth of the network hash rate.

Result: Figure 8 shows that depending on the assumed mining duration, the cost-based valuation results in a Bitcoin

price between $7,440 and $8,670. This calculation, performed independently of the fundamental valuation, shows a

similar price range for one token of BTC. Our calculated PV of Bitcoin at $8,000 actually lies in the middle of the cost-

based valuation boundaries.

Net Discount Cost

Hardware Opportunity Cost 3,380$

Year 1 Electricity (NPV) 1,391$

Year 2 Electricity (NPV) 1,070$

Year 3 Electricity (NPV) 823$






Indifference Point - 8y 8,668$

Indifference Point - 4.3y 7,443$

Bitcoin (BTC)


Alternative cost-based valuation: As an alternative, instead of calculating the cost of mining 1 BTC with one miner,

we can calculate the total electricity cost spent by the network to mine one Bitcoin instantly. Given the total network

hash rate of around 47 million TH/s towards the end of July 2018, on average one would need to control around 3.8

million TH/s to mine 1 BTC in the next block. To illustrate, this corresponds to over 288,000 Antminer S9’s. The total

electricity cost to run this network of miners for 10 minutes (the Bitcoin block time) is calculated at around $7,600.

Again, this result comes pretty close to our previously obtained valuations of Bitcoin.

Opinion: To sum up, our cost-based calculations confirm that today’s fundamental value of one Bitcoin at around

$8,000 is realistic and justifiable by the costs incurred to mine one BTC.

Next, we analyze some of the most common ratio’s that are used to evaluate cryptoassets.

Figure 9: NVT Ratio vs. BTC - Time Series

Bitcoin (BTC)


Network Value to Transactions Ratio (NVT) Ratio analysis serves as a fast method to evaluate cryptoasset, while still being a good proxy of fair value. One of the

most popular ratio to analyze cryptoassets is the Network Value to Transactions ratio (NVT).3 In this context it is often

also compared to the P/E-ratio (Price-to-Earnings) used in equity analysis.

Methodology: Similar to the P/E-ratio, where the earnings metric in the denominator serves as a proxy for the created

underlying utility of the firm for shareholders, one can use transaction value as a similar metric for cryptoassets. The

reason for this is that the total value of all transactions in a cryptoasset network correspond to the level of utility

users derive from the specific blockchain. We only take into account on-chain transactions and use adjusted

transaction values that exclude certain volumes mainly driven by speculation, e.g. trading activity on exchanges. The

network value corresponds to the market capitalization of the respective cryptoasset.

Data: Our data source is from Coinmetrics and Coinmarketcap.

Result: The NVT ratio is mainly used to detect (Bitcoin) price bubbles, meaning periods where price valuations are

not supported by fundamentals (the value of transaction volume serving as a proxy). Furthermore, it can be used to

compare the valuations of different cryptoassets with each other. We follow an adjusted NVT formula pioneered by

Dmitry Kalichkin, who showed empirically that the Kalichkin NVT predicts price bubbles the best.

The Kalichkin NVT is calculated by dividing the daily network value by the 90 day-average daily transaction volume.

Figure 10: NVT Results – No signs of overvaluation, however trend towards a bubble is a possibility

Our calculations yield an adj. NVT ratio of around 48 for Bitcoin (25 for original transaction volume numbers). Looking

at the long-term time-series in Figure 9, one can observe that whenever the NVT ratio entered the yellow or red chart

area a bigger price correction followed.

Opinion: Looking at the chart, we conclude that Bitcoin’s price is currently supported by the fundamentals. However,

investors need to be cautious since we observe a trend towards the yellow chart area. Prices high above $10,000, as

observed towards the end of 2017, were definitely driven by pure speculation. A move towards this direction, without

an underlying improvement in fundamentals, might increase the chances for a price correction again.

3 Methodology and content based on the research by Chris Burniske, Willy Woo, Dmitry Kalichkin, and Coinmetrics.

NVT Ratios - Valuation Result

Current Kalichkin NVT Ratio 25.11

Current Kalichkin NVT Ratio (adj. Transaction volume) 48.14

Outcome:

Ratio currently below yellow or red zone indicating that

prices are supported by fundamental activity (no bubble).

However, the trend shows that movement towards another

bubble is a possibility if fundamentals don't grow

accordingly.

Bitcoin (BTC)


Price to Metcalfe Ratio (P/M) Metcalfe’s law is used to describe the network effects of communication technologies and networks such as the

Internet, social networks, and other digital technologies. It is recently also being used to value the network of

cryptoassets.

Methodology: Similar to the NVT ratio, the current price of a cryptoasset network (expressed by market cap) is

compared to the underlying theoretical network value (expressed through Metcalfe’s law). By dividing the network

value (price) by the Metcalfe network value, we obtain a ratio that is compared to the Price-to-book ratio (P/B) for

equity analysis by some exponents.

The Metcalfe network value is calculated by squaring the number of active network addresses. To smooth out daily

fluctuations, we take the 30 day moving average of the Metcalfe network value.

Data: Daily number of active Bitcoin users and market cap from Coinmetrics.

Result: We obtain a Price-to-Metcalfe ratio of 0.31 for Bitcoin for end of July 2018. The ratio is mainly used as a

comparative indicator regarding cryptoassets network valuation. Therefore, Bitcoin’s ratio will be compared with

other cryptoassets, such as Ether or Litecoin, in future research.

Opinion: Generally, the higher the P/M-ratio, the more overvalued a certain cryptoasset is compared to its underlying

network value. We currently can’t draw a conclusion yet from the obtained P/M ratio.

Network Value to Metcalfe Ratio (NVM) Finally, the Network Value to Metcalfe Ratio (NVM) is an indicator proposed by Dmitry Kalichkin4 to estimate if the

price of a cryptoasset is supported by the network’s activity. As a combination of the NVT and P/M ratio, a time series

of the NVM ratio can indicate if a cryptoasset is over- or undervalued.

Methodology: As in the two previous indicators, the actual network value corresponds to the cryptoasset’s market

cap. The NVM is calculated by using two definitions for Metcalfe’s law. First, we use the original Metcalfe’s law which

states that Network Value (NV) = n2. Second, a variation of Metcalfe’s law called Odlyzko’s law, states that NV = n *

ln (n). Again, n corresponds to the network’s daily active addresses.

Research has shown that the original law probably overestimates a cryptoasset’s network value, while Odlyzko’s law

underestimates its network value. Therefore, we can use them respectively as an upper- respectively and lower-

bound for the indicator. It has been shown that Bitcoin’s price is best predicted by Metcalfe’s law, when a natural log

is applied and a 30-day moving average is used. Two constants (a and b) are included to build the narrowest corridor

possible (of upper- and lower- bound) that still describes all the movements of network value.

4 Methodology and certain data (constants) are based on Kalichkin’s research.

https://medium.com/cryptolab/network-value-to-metcalfe-nvm-ratio-fd59ca3add76

Bitcoin (BTC)


The fundamental network value can then be calculated with the following formula:

Figure 11: Fundamental Network Value 5

Next, since we calculated the fundamental network value by the above logic, we can now deduct the NVM-ratio.

Figure 12: Network value to Metcalfe Ratio (NVM) 5

Finally, the NVM is normalized so that it stays between -1 and +1. The NVM then describes a cryptoasset’s network

value position relative to the upper and lower bounds given by Metcalfe’s law, and thereby quantifies any

overvaluation or undervaluation.

Data: Daily active addresses and market cap from Coinmetrics, estimated constants (a and b) from Kalichkin’s data.

Result: Applying the NVM methodology to Bitcoin, we obtain a current NVM of 0.64 (normalized 0.29). When we

look at the NVM over a longer time-series, the ratio indicates if Bitcoin is over (red)- or undervalued (green).

5 Source: Kalichkin - Rethinking Metcalfe’s Law applications to cryptoasset valuation.

https://medium.com/cryptolab/network-value-to-metcalfe-nvm-ratio-fd59ca3add76

Bitcoin (BTC)


Figure 13: Network Value vs. NVM Ratio

Figure 13 highlights that Bitcoin might still be overvalued. Even though most of the high NVM ratio can be explained

by an unusually low number of daily active addresses, there are indications that today’s Bitcoin price could be too

high given the current level of fundamentals.

Opinion: Figure 13 provides us with more insights regarding Bitcoin’s market cap compared to the fundamental value

expressed through NVM (theoretical network value through Metcalfe’s law). The NVM is historically still quite high,

which are signs for an overvaluation. However, since the daily active addresses have been lower than usual for the

past few months (probably due to the current bear market), we are not too concerned about a bubble. This is also

based on the additional analysis performed for the other indicators, which have not shown a clear overvaluation.

Bitcoin (BTC)


Qualitative Assessment

In addition to the previous quantitative analysis and valuation, BlockNovum also applies a qualitative assessment

framework to evaluate cryptoassets as a potential investment for our clients. The assessment framework consists of

several elements to provide a holistic view on any cryptoasset’s investment potential and suitability.

Assessment Framework: Figure 14 lists the eight key factors that BlockNovum views as relevant to qualitatively assess

any cryptoasset or blockchain startup for its investment potential. For each factor, we qualify how well the

cryptoasset performs and form an opinion on the investment eligibility. We also provide an indicative rating in the

range of “High”, “Medium”, “Low” to classify the cryptoasset’s positioning within the respective factor. Note that the

White Paper analysis is mainly reserved for early stage projects (ICOs) that don’t have a functioning product yet.

Furthermore, BlockNovum does not currently perform any technical due diligence and viability checks of

technological claims made in a project’s whitepaper.

Figure 14: BlockNovum's Qualitative Assessment Framework 6

6 Factors in the framework were partly inspired by Chris Burniske’s writing in his book “Cryptoassets”.

Bitcoin (BTC)


We are now applying the framework to Bitcoin to assess its investment potential and to also qualify the provided

valuation of $8,000. Note that future reports that cover early stage projects, will place a bigger emphasis on the

qualitative assessment than this report for Bitcoin, which is already a well-established cryptoasset.

Decentralization Edge Description: This factor assesses whether the specific cryptoasset gains any advantages from using a blockchain.

Some questions we ask ourselves: Is there an actual problem that needs to be solved in a decentralized way? Is there

a realistic use case for leveraging a blockchain, or does the project merely want to profit from the blockchain trend?

Opinion: Bitcoin was the first application that introduced and successfully implemented the blockchain technology.

The main motivation of Bitcoin was to become a global consensus network and digital currency that offers a

decentralized payment system without a central authority. For these reasons and due to its pioneering role, Bitcoin

had and still has one of the best justifications for using a blockchain. We see the use case of a fully digital decentralized

and autonomous currency that is free from any government control, still as one of the most convincing cases for

blockchain usage.

Rating: High

Product-Market Fit Description: The term Product-Market Fit (PMF) was coined by world-famous venture capitalist Marc Andreessen as

“being in a good market with a product that can satisfy that market.” Tren Griffin elaborates that the term Product-

Market Fit describes “the moment when a startup finally finds a widespread set of customers that the product

resonates with.” It is rather difficult to quantify PMF, therefore we stick to a qualitative assessment of the offered

product/service in the context of customer demand and expectations. Referencing Alexander Osterwalder's Business

Model Canvas paradigm, PMF can be interpreted as having a clear value proposition, customer segment, relationship,

and channel.

Opinion: Given Bitcoin’s market capitalization of over $121 billion and track record of almost ten years of existence,

it is evident that it provides value and that it fulfills a demand of a certain customer segment. Its original purpose of

becoming a fully digital currency and decentralized payment system has a clear use case with a huge potential market

size. As laid out in more detail in the valuation section, Bitcoin actually supports various use cases. Bitcoin’s

advantages of fast transactions, low fees, full control, security, and transparency all address problems inherent to

some of the markets it targets. The current payment system is slow and plagued by high fees, especially for cross-

border transactions. These characteristics make it especially attractive for online payments and remittances, with the

latter suffering from notorious high fees for middlemen. In addition, we particularly see the demand for a digital store

of value asset with appreciation characteristics (similar to gold), as the key use case where Bitcoin has Product-Market

Fit.

As our valuation showed, Bitcoin is still far away from capturing substantial market share and reaching mass adoption

in some of these target markets. It also has yet to be seen, if all, only a few, or none of the mentioned use cases

actually will have widespread adoption of Bitcoin. Nevertheless, BlockNovum is convinced that Bitcoin offers multiple

use cases for which a clear market demand exists. Due to the uncertainty regarding PMF for some target markets,

we rate this category as “Medium/High”.

Rating: Medium/High

Bitcoin (BTC)


Issuance Model Description: The issuance model of a cryptoasset entails the method of how tokens are issued to users. The rate of

supply is a crucial factor to consider for a cryptoasset economy, since a high rate of supply can erode an asset’s value

if the underlying utility doesn’t grow at the same pace. The total number of units ultimately also has an effect on

asset value in the future.

One has to differentiate between issuance through mining or issuance through other channels, such as an ICO,

airdrops, or tokens released from a developer foundation.

In the mining case, we consider if the distribution is fair. Practices such as “premine”, where tokens are mined by the

creators before the network is publicly launched, create an unfair advantage and are a controversial practice to profit

through the early accumulation of network assets and power.

Identically for ICOs and other issuance models, we examine if the assigned pots and percentages of raised capital to

developers, foundation etc. are justified and follow market best practice. One way for unethical founders to profit is

by immediately paying out a large sum of the ICO capital to themselves, without having a long-term issuance plan in

place. As a result, the long-term success of a project can be endangered through wrong incentives set at the issuance

model level.

To sum up, we analyze if the issuance model chosen by the cryptoasset fits the use case and sets the project up for

long-term success.

Opinion: Bitcoin pioneered the space of cryptoassets and therefore through mining uses the most traditional method

of issuing cryptoassets. The maximum supply of Bitcoin is capped at 21 million, which gives Bitcoin value based on

the principal of digital scarcity. While the initial supply rate was at 50 Bitcoin per block in 2009, it is cut in half roughly

every 4 years, which leads to a current block reward of 12.5 BTC. Hence, we are currently at an annual inflation rate

of tokens at 3.9%. This percentage is constantly decreasing though and going towards zero. We expect the issuance

rate to be at 0.4% in 2028.

In contrast, in 2018 the USD currently is expected to have an annual inflation rate of around 2.5%-2.9%. Other safe

fiat currencies, such as the CHF or EUR, are showing inflation rates of around 1%, respectively 2%. In this context,

Bitcoin’s inflation rate is currently only slightly above some of the most trusted fiat currencies, while in the long-term

the currencies’ supply rate will gradually decrease. This sets the preconditions for a stable / rising prices in the future,

without the danger of a future erosion of asset value.

We have to point out that Satoshi Nakamoto, the mysterious creator of Bitcoin, is estimated to have mined an amount

of 980,000 BTC during the beginnings of the network. Normally, this would be a concern for any cryptoasset since

such a large stash of tokens can heavily influence the network and prices. However, the tokens mined by Satoshi

were actually never moved out of the wallet and haven’t been touched since creation. Therefore, it is widely expected

that these tokens will are staying out of circulation for the long-term or are “lost” forever.

Bitcoin (BTC)


For the above reasons, we rate Bitcoin’s issuance model as appropriate for the supported use cases and don’t see

serious warning signals that could impact the long-term success of the project or stability of the price. Due to some

uncertainties around founder holdings and “lost” assets, one could argue for a deduction in the rating. Nevertheless,

due to Bitcoin’s long-running and transparent issuance model, we issue a “High” rating for Bitcoin in this category.

Rating: High

Figure 15: BTC Supply

Community and Developers Description: This factor evaluates the cryptoassets community and developer team. In particular, teams of early stage

startups that conduct an ICO need to be vetted. The background, education, work experience, and commitment of

the founding and developer team have to be assessed. Especially in the ICO space, one needs to do a thorough check

to differentiate serious founders from free-riders or fraudulent actors.

In addition, we also analyze the community engagement of the cryptoasset to get a feel for the asset’s popularity.

For this we turn to social networks, such as Reddit, Twitter, and Facebook, and evaluate the community involvement

there.

Opinion: The Bitcoin Core project has a large open source developer community with many casual contributors to

the codebase. Since there is no fixed “team” or static group of people, the developer community is in constant

fluctuation. As Bitcoin is a well-established cryptoasset, a deep dive into developer and founder backgrounds is not

necessary. Furthermore, there are various independent teams that build applications on top of the Bitcoin blockchain.

Overall, Bitcoin has one of the most experienced and biggest developer community in the cryptoasset space.

Developer Activity: The Bitcoin development activity can also be measured by “code repository points”, a metric

compiled by CryptoCompare. The metric assesses a cryptoasset’s code repository and awards points according to the

number of stars, forks, and subscribers. Figure 16 highlights that Bitcoin is by far the most active cryptocurrency when

it comes to developer activity.

Bitcoin (BTC)


Figure 16: Code Repository Points Comparison (July 2018) 7

Community Involvement: A similar metric also exists to assess a project’s community involvement. CryptoCompare

calculates the metric as the sum of following indicators: CryptoCompare Points, Facebook Points, Reddit Points,

Twitter Points, Code Repository Points, Total Page Views / 10,000. The points for the respective social network are

awarded for subscribers, comments, and active users. The CryptoCompare metric is one of the easiest ways to

visualize and compare community involvement for cryptoassets.

Figure 17 illustrates that Bitcoin again has a significant lead when it comes to community involvement. For instance,

Bitcoin has over 900,000 subscribers on Reddit with several thousand comments per day.

To sum up, Bitcoin is the unchallenged leader in the cryptoasset space regarding developer activity and community

involvement. This is probably due to it being the oldest and most established cryptoasset. Network effects and a loyal

community did play their part as well. As a result, Bitcoin has had the most time to establish itself as a market leader,

which is why we issue a “High” rating in this category.

7 Source: CryptoCompare

Bitcoin (BTC)


Figure 17: Community Involvement Comparison (July 2018) 8

Rating: High

Network Security of Cryptoasset Description: A further indicator is the security of the cryptoasset’s network. For Proof-of-Work based systems,

security can be described by the number of miners and the combined network hashing (compute) power. One of the

only ways to attack a blockchain network is through a so called 51% attack, in which a malicious network participant

controls more than half of the network computing power. This allows the actor to process invalid transactions and

double spend money. As a result, we analyze the network security by looking at the network’s total computing power

and by calculating the cost to launch a 51% attack.

Opinion: Bitcoin’s network hash rate has grown from around 1.4 million TH/s at the end of July 2016 to almost 50

million TH/s at the end of July 2017. This astonishing increase shows that Bitcoin’s network computing power

continues growing with no signs of a slowdown. In return, the network gets more and more secure.

In contrast, Ethereum’s network hash rate sums up to around 290 thousand TH/s, whereas Litecoin is at only around

250 TH/s. These huge differences can mostly be explained by the availability of high performing ASIC miners for

specific cryptoassets. Nevertheless, in this comparison Bitcoin stands out as the most secure cryptoasset network in

terms of hash rate.

The cost to attempt an attack on Bitcoin’s network would sum up to more than $7.2bn at the time of writing at end

of July 2018. This number is obtained by calculating the number of Bitcoin miners that are needed to replicate the

current network computing power, in an attempt to reach control by owning more than 50%. One would need over

3.6 million Antminer S9 miners to achieve a hash rate equivalent to the current 50 million TH/s of Bitcoin. Given the

8 Source: CryptoCompare

Bitcoin (BTC)


cost of $2,000 per miner, we calculated the above value. The feasibility of acquiring or building such a huge number

of miners would pose another major challenge.

Finally, the benefit of attacking the Bitcoin network would most likely be far smaller than the incurred cost. Therefore,

we conclude that Bitcoin’s network is amongst the most secure in the blockchain space and that it is very unlikely

that it is going to be successfully attacked.

Rating: High

Figure 18: Bitcoin Network Security 9

Support and Partnerships Description: This final indicator assesses various factors that describe market support for the cryptoasset. Depending

on the type of cryptoasset, these factors can include the number of merchants that accept the cryptoasset, the

number of exchanges that list the asset, the size of related venture capital investments, and user growth. They all

provide us with some information regarding the consumer / market’s view of the cryptoasset.

Opinion: Bitcoin is the most widespread cryptoasset due to its use case as a digital currency. According to

SpendBitcoins.com, there are over 100,000 merchants worldwide that accept Bitcoin. Coinmap.org also lists over

13,000 venues and shops that accept Bitcoin. As previously mentioned, Bitcoin is the main gateway asset to other

cryptoassets. Hence, it is also the most accepted token on cryptoasset exchanges. It is listed on hundreds of

cryptoasset exchanges and also the main currency on the most regulated exchanges, such as Coinbase, Gemini,

Kraken, or Bitstamp.

We also observe a constant growth in users, which is reflected in the increasing number of Bitcoin wallets.

Blockchain.info, one of the leading Bitcoin wallet providers, shows a growing number of wallet users. By the end of

July 2018 the number grew to almost 27 million wallet users, which corresponds to a growth rate of around 25% for

the first 7 months of 2018. It should be noted that this is only the data from one wallet provider. Hence, given the

9 Source: Blockchain.info

Bitcoin (BTC)


fact that there is a wide range of wallet provider, the true number of users is a multiple of the Blockchain.info data.

The increasing number of wallets support our view that Bitcoin has a constantly growing user base.

Next to the store of value use case, the increasing number of real-world applications (represented by the number of

merchants and stores that accept Bitcoin) provides evidence for the plausibility of the digital payment use case.

In addition, there is a whole ecosystem of developers, startups, and corporations that build applications on the Bitcoin

blockchain or offer services related to Bitcoin. For instance, on August 3rd, Starbucks, NYSE parent Intercontinental

Exchange, Microsoft, and others, announced that they are working to launch a new company called Bakkt, which

creates a regulated, digital asset ecosystem to buy, sell, store and spend digital currencies. One mentioned use case

is the possibility to spend Bitcoin at Starbucks.

Venture capital funding for blockchain startups is also on its way to another consecutive record, with over $1.3 billion

investment volume globally in only the first 6 months of 2018. From the 200+ deals conducted in H1 2018, several

startups offer products connected to Bitcoin.

To sum up, we see Bitcoin currently as the most established cryptoassets when it comes to exchange listings, market

acceptance and number of users. It also has a thriving ecosystem of companies and technologies that build upon and

interact with Bitcoin.

Rating: High

Figure 19: Bitcoin Wallet Users 10

10 Source: Blockchain.info

Bitcoin (BTC)


Recommendation

Based on the extensive fundamental valuation, BlockNovum establishes an initial price target of $8,000 per Bitcoin

(BTC). We see this fair value justified by the underlying use cases enabled by Bitcoin. The store of value (digital gold)

use case, along with the usage as a gateway to other cryptoassets, promises a substantial addressable market size

for Bitcoin. Other relevant use cases for Bitcoin include digital payments, remittances, and banking for the unbanked.

To account for the high uncertainty regarding Bitcoin’s future role in powering these use cases, we applied a high

discount rate of 30%.

The qualitative assessment confirms Bitcoin’s leading role as a cryptoasset. We are of the opinion that Bitcoin is

addressing challenges and offering solutions for the aforementioned use cases, e.g. lower fees for digital payments,

reduction of middlemen in remittances, need for secure store of value that is fully controlled by the owner, or

reduced risk through removal of central entity. Various indicators show continuing growth in network security, active

users, and use case support by the markets. Bitcoin also exhibits the highest amount of developer and community

activity among comparable cryptoassets. As a result, the qualitative assessment confirms Bitcoin’s strong and

continuously growing fundamentals which support our price target. Its leading role also make it an ideal candidate

for a first investment in the cryptoasset asset class.

The cost-based valuation predicts a price range of $7,440 and $8,670 per BTC and serves as a validation of our

fundamental valuation model.

Our ratio-analysis uses Bitcoin’s current network value (market cap) and compares it to various data points that serve

as a proxy for Bitcoins fundamental value. NVT shows that Bitcoin’s price is currently supported by fundamentals. In

contrast, NVM gives some indication that Bitcoin might be overvalued in the short-term. Consequently, a correction

in the upcoming months could be a possibility in case some fundamentals don’t pick up growth as expected. Despite

NVM’s potential warning signs, we don’t view Bitcoin’s current price as overvalued in the medium to long-term.

Conclusion: BlockNovum issues a Buy rating for Bitcoin, as long as the BTC price stays below our target price of

$8,000. Therefore, investors should aim to buy Bitcoin below the target price and account for their preferred margin

of safety. Bitcoin serves several promising use cases, which gives it fundamental value. In particular, the store of value

use case, where Bitcoin serves as digital gold, offers enormous market potential with an estimated market size of

$2.6 trillion served by BTC in 2028. Our qualitative assessment framework and ratio analysis confirms Bitcoin’s strong

and continuously growing fundamentals and further supports our price target. However, another short-term price

correction is a possibility if fundamental on-chain activity does not develop as expected.

Further arguments for an investment in Bitcoin are that it has a low or even negative correlation to traditional

equities. A study by Grayscale showed that Bitcoin achieved an average correlation of 0.01 for a whole basket of

popular equity benchmarks and fiat currencies. Bitcoin is also beneficial to portfolio performance. It is shown that a

global 60% equity / 40% bonds portfolio benefited significantly from allocating just 1% of the portfolio to Bitcoin. The

simulated cumulative return increased by 293 bps, without materially increasing volatility since the Sharpe Ratio

improved by 18%. 11

11 Source: Grayscale – A New Frontier, Observation period: 31. December 2016 – 31. May 2018

https://grayscale.co/a-new-frontier-research-paper/

Bitcoin (BTC)


In conclusion, an inclusion of Bitcoin in an investor’s portfolio at current price levels provides investors with price

appreciation potential, but is also likely to improve the whole portfolio performance through better diversification

and risk-reward characteristics.

Risks

Investing in Bitcoin and any cryptoassets will expose investors to a number of risks that are listed below. Cryptoassets

are a new asset class but shows similar characteristics to other alternative investment categories, such as venture

capital. Therefore, we expect investors to understand the high risk nature of investing in cryptoassets and that you

or the organization your represent possesses the appropriate income, net worth, and professional experience to

invest.

Investing in cryptoassets may include the following risks:

• Cryptoassets are subject to volatile price movements and in the short-term prices are often moved by market

sentiment.

• Changes in global Bitcoin demand through changing levels of acceptance by merchants, consumers, and

corporations may adversely affect Bitcoin’s long-term market potential and prices.

• Theft of Bitcoins and other cryptoasset tokens from a Bitcoin online wallet or hacking of exchanges can lead

to loss of BTC. However, this risk can be mitigated with the right precautions around storage and custody.

• Regulators are still catching-up to this emerging asset class. Therefore, changes in regulations may lead to

legal liabilities or even bans of certain cryptoassets and the related organizations. News announcements

around regulations might also affect cryptoasset prices. Bitcoin was classified by the SEC as a commodity,

however most other initial coin offering (ICO) tokens are classified as securities.

• Depending on the jurisdiction, investing in cryptoassets leads to tax liabilities. Often, there is no final

framework in place yet regarding how to tax cryptoassets, which leads to some uncertainty and requires you

to keep detailed records of all transactions.

• Bitcoin itself does not generate any cash flow. Most cryptoassets should be thoroughly assessed regarding

the associated token rights.

• Competition from other payment technologies, services, or other cryptocurrencies could lead to a lower

expected market share and negatively affect prices.

• Potential reputational damages due to relation with Bitcoin and/or other cryptoassets. Even though Bitcoin’s

reputation has gotten a lot better over the last few years, it still suffers from negative perception issues (even

though they might be misinformed or politically motivated views by incumbents that are threatened by this

new technology). This slows down consumer adoption and can deter institutional investors from entering the

space.

• The open-source software protocol of the Bitcoin network has to be maintained and further developed,

which is dependent on the community and a few core contributors.

• New technologies, such as quantum computing, might pose additional challenges to certain cryptoassets and

make them less secure.

Bitcoin (BTC)


Disclosures and Further Information

At the time of publication, BlockNovum does not hold any amounts of BTC. However, the author has invested a small

amount in Bitcoin and related cryptoassets.

The information herein is based on sources that BlockNovum considers reliable, but its accuracy is not guaranteed.

All statements made in this report are strictly beliefs and points of view held by BlockNovum after conducting careful

research. Certain of the statements contained herein may be statements of future expectations and other forward-

looking statements that are based on BlockNovum’s current views and assumptions and involve known and unknown

risks and uncertainties that could cause actual results, performance or events to differ materially from those

expressed or implied in such statements. Neither BlockNovum, nor any of its employees shall have any liability,

howsoever arising, for any error or incompleteness of fact or opinion in it or lack of care in its preparation or

publication.

The information contained in this report are not a representation by this corporation / cryptoasset, nor is any

recommendation made here based on any privileged information. This information is not intended to be nor should

it be relied upon as a complete record or analysis; neither is it an offer nor a solicitation of an offer to sell or buy any

security or cryptoasset mentioned herein. Nothing contained herein constitutes investment, legal, tax or other advice

and is not to be relied on in making an investment or other decision. Investors should determine for themselves

whether a particular service or product is suitable for their investment needs or should seek such professional advice

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About BlockNovum:

BlockNovum is a Swiss Blockchain and Cryptoasset investment research & consulting firm. We provide professional

assessments, fundamental valuations, and research reports for the emerging asset class of cryptoassets & blockchain

startups. BlockNovum positions its cryptoasset research reports and services analog to established equity sell-side

research providers. Therefore, our target clients include mainly institutional investors with an interest in allocating

capital to cryptoassets, or that plan to invest directly in blockchain startups. Additionally, we also offer our reports

and consulting services to accredited investors, such as angel investors.

Mission: Founded in 2018, we are a young startup that wants to advance the quality of fundamental cryptoasset

research to a professional level to provide institutional investors with high quality due diligence and valuations.

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