A Rational Method For Pricing Bitcoin In 2023 And Beyond (BTC-USD)

We like Bitcoin (BTC-USD) at $23,000 or in the low $20,000s range and would start to accumulate from these levels despite the widespread negativity in the cryptocurrency market. We also want to buy Bitcoin on any major drop below the $20,000 level too, as we don’t really believe in timing the Bitcoin market, but we do like studying the long-term fundamentals and find the oversold nature of the coin a great spot to buy from, as opposed to making short-term trades.

We just don’t think we can bottom fish all that effectively, and while we don’t allocate a substantial sum to Bitcoin, we do allocate something to Bitcoin at all times. Perhaps adjusting weightings and making some additions or subtractions over the course of years as opposed to trading the daily charts or making short-term decisions on short-term price swings.

Right out the gate, we’re going to disclose that we’re Bitcoin permanent bulls, and believe in the underlying merits of the coin as a value storage. As is the case with our analysis, we like to dig deep, and in this particular case we’re going to do a deep dive on what could be major price drivers to Bitcoin in 2023 and our thesis on Bitcoin over the next 12 months and why we value it at $33,000 by beginning of 2024.

We think long-term investors would appreciate our presentation as we feel conviction in always maintaining a long position on Bitcoin regardless of price, but we let pricing dictate how much BTC we hold onto.

2023 a bottom in sight?

One of the indicators we like to watch when determining the strength or weakness of demand in the BTC market is Bitcoin dominance. We believe that the market is mostly formed around Bitcoin investors. Upon realizing the value of Bitcoin, traders, speculators, and entrepreneurs go off to derivative assets and tokens, and collectively experience more volatility in relation to Bitcoin in those other markets thus causing the proverbial news cycle of scandal, fraud busts, etc.

By following these trends closely we arrive at the conclusion that we’re near a Bitcoin cycle bottom, and while we’re near the bottom it’s not indicative of the exact timing for loading up on positions in order to generate returns from the intra day or weekly charts. Instead, we view the drop in Bitcoin dominance to a similar range low 40% to high 30% range indicative of 2018 where speculators got so exhausted by selling out of alternative coins that they started pulling out of the alts and started flooding back into Bitcoin. As the market started bottoming towards the beginning of 2019, Bitcoin dominance started to surge again, and went back to the 50%-70% dominance level as the market started to peak on November 21st, 2021 at a price of $65,000 or so at the peak.

Basically, we’re at the point where the oxygen is starting to get so thin in the alt coin market, we’re expecting the proverbial flood back into Bitcoin and so as a consequence the market for cryptocurrencies improves on a directional shift back into the value storage coin.

During a Bitcoin cycle bust, GPU hardware gets flooded back onto the market, and the main reason miners dump the semiconductors is because of over-production of coins, and instead they’d rather sell the hardware and buy the BTC at a discount, which is why the GPU makers are going through the per-usual secondary market flood of GPU boards causing the price of tapped out silicon to drop at this point in the cycle.

Bitcoin turned the semiconductor market into an exhaustible commodity, so when Bitcoin network demand for hardware drops, so does the computer hardware market. So, we’re starting to see signs of stress across semiconductor names, which is also indicative of cycle bottom in Bitcoin, because if the hardware starts to improve, it’s because the miners noting a sudden price reversion in Bitcoin will inevitably buy-up global semiconductor chip supply again.

Figure 1. Bitcoin at the low of the Bitcoin dominance cycle

So, Bitcoin dominance isn’t always a be all, end all indicator, but for the most part we find ourselves at a point in the cycle, where there’s demand distributed among a bunch of alt coins and Bitcoin interest among the coins is near the 2018 lows on the charts, which is indicative of one of two things: there’s a bit lower to go below the 35%-40% threshold or we have already found bottom. Eventually prices will trend back up anyways, which is why we think now isn’t the time to distribute, or reduce weightings, now is the time to add to your weightings and add to your holdings long-term.

Reasons for Bitcoin bottoming out in 2023 and rallying eventually:

1. We think market participants disperse into even more speculative coins at the bottom of a Bitcoin market cycle in order to earn returns back from the eventual bottoming. Cryptocurrency algorithms are particularly effective at trading mass sentiment, and can move Bitcoin into alternative tokens and vice versa very quickly. We think traders and algorithms are making the last set of trades before gearing up for the bottoming. The closer traders get to a BTC bottom the more likely they are to also buy cheaper or more speculative coins in an effort to make back losses from the bear market.

2. Bitcoin is the primary asset to watch if you’re expecting some recovery in crypto asset prices with Ethereum (ETH-USD) mostly mirroring the directional move of Bitcoin. If you’re hoping for a bottom in the cryptocurrency market the Bitcoin market has to bottom in order for the rest of the market to recover. Coming out of the Bitcoin market bottoming, speculators will take note of various other data points to support their thesis.

3. Macroeconomics and on-going inflation creates a bias for Bitcoin to move higher on higher interest rates. Inevitably more fiat currency in relation to Bitcoin will revert to the same trends that have dictated the price of Bitcoin trending higher. Bitcoin supply growth is much slower than fiat supply growth, and with so many sources of demand for Bitcoin, and the continued growth of the Bitcoin network, we anticipate that the underlying thesis of adoption continues.

4. Decentralized networks, decentralized autonomous organizations (also known as DAO), and the lack of a central figure opens the opportunity for other established technology players to enter the space and drive further adoption. We often forget that in the middle of a bear market there’s somebody accumulating Bitcoin in a bid to get rich off the next Bitcoin rally, and in so doing leverage whatever inherent advantages they carry into the Bitcoin ecosystem, which further supports the adoption thesis.

5. Bad news on Bitcoin has gotten a bit stale, and while nobody’s announcing from the rooftops to buy Bitcoin we propose a Bitcoin price target based on the long-term historical trend of adoption and pricing, and anticipate that some value can be derived from total network activity to arrive at a fair value comparison from prior-years. In other words, the volatility of Bitcoin certainly diminishes the appeal of the coin when prices are dropping, but when the inverse cycle starts to take effect, the news cannot stop emphasizing how many new Bitcoin millionaires there are.

Bitcoin price prediction our black box

We spent a lot of time coming to this point, or coming up with a way to value Bitcoin, and thus we have theorized a rational way or framework for valuing Bitcoin on a predictable basis.

Bitcoin Price forecast summary:

• Bitcoin price target of $24,731 for 2023.
• Bitcoin price target of $44,063 for 2025.
• Bitcoin price target of 112,164 for 2030.

Now, keep in mind that we use data that marks the end of the year, so the pricing trends generally do not capture the peaks of each year but rather the overall trend in data, so we can derive a fair value estimate. The further the price of Bitcoin gets from our fair value estimate the more undervalued we are, and the more conviction we have that we are buying Bitcoin at a steep discount. Also, the inputs to our model will change each year based on the data on users, amount of contribution value of each user, which will necessitate us to update our model with new data each year to arrive at a fair value estimate.

Figure 2. Bitcoin Pricing Model 2013-2022 Data Series

Figure 3. Bitcoin Pricing Model 2023-2025 using data from 2013-2022

So, when we value Bitcoin, we found that the number of Bitcoin wallets tends to trend higher over time based on the values we’re working with. Of course, we abbreviate some of the years, but when measuring the value of Bitcoin we work from 2013 all the way to 2022 using real data or a 10-year data set to arrive at an expected value calculation.

Meaning that our data starts to get more reliable at this point. Most people want to wait until an Index fund has 10 years of return history before buying one, and with Bitcoin having about 10 years of reliable or useful data that’s meaningful for our time series we feel confident that our forecast method will render some predictable value over time.

The value of wallets tends to increase on the blockchain ledger by an average amount of 9.345 million per year. We anticipate that over time each wallet contributes a certain amount of value to the total market value of Bitcoin and this contribution of value tends to go in cycles based on the expanded data series.

So, with these two variables fixed and set to grow over a set value over time we derive our price estimate based on the third factor that’s also expected to be predictable, which is the expected supply of bitcoin on the network. We define those three values as being constants and contributing to our model assumptions over time, and so we arrive at our 2023 Bitcoin price estimate of $24,000 and 2025 price estimate of $44,000.

But, how do we get to a $44,000 Bitcoin price target by 2025?

Figure 4. Bitcoin Price Forecast 2023 to 2025

Well, we know that there’s a defined supply of bitcoin based on the bitcoin hash rate, logarithmic function, it’s going to increase at a slower rate over time, and yet the amount of value per bitcoin wallet is set to increase over time. This is the growth function of average value per user, or average amount of value attributed to each contributing wallet to the Bitcoin blockchain at this point in time. So, this value tends to fluctuate based on the data, but we try to simplify the observation by using the end-point of the year, which provides added upside to our estimate.

However, to explain how this model works, we basically multiply the average contribution value of each wallet, and multiply this by the amount of wallets to define the total market cap of bitcoin. We then divide by the total coin in circulation to arrive at an exact value per Bitcoin. The value of the Bitcoin network seems to grow at a set function over the past 10 years and the number of wallets seems to grow at a constant rate over time (which drives our adoption thesis). We then find the expected market cap per year, and divide by the expected coin in circulation based on the expected number of coins based on the block nonce rate.

1) We know that the expected value of total coins in circulation will be 19.24 million 2023 versus 19.85 million in 2025, we know that the average contribution value per wallet is growing at an average rate of $1,331 per year, and also expected growth of new users on the Bitcoin network will be 9.345 million new users/wallets per year, so we derive a fair value estimate based on the number of variables we’re willing to measure.

2) The amount of new users there will be, the average value contribution of each additional user, and work backward to multiply the amount of users by the average value contribution to arrive at a projected market capitalization. Basically if each user contributes x value to market cap, then the total user base when multiplied by average value contribution = Bitcoin market cap. We then divide the future market capitalization by the absolute number of coins based on the block rate, or number of coins available in the given year to arrive at an exact price per Bitcoin.

3) To make the model work, you will need to adjust key inputs, like the average growth in wallets, the average value of each wallet (which fluctuates), and the amount of coins in a given year. We think these values yield a more predictable value, but the science of studying pricing trends in Bitcoin is quite limited and not as established like stocks. This method could be used to value other cryptocurrency assets aside from Bitcoin, which we hope to illustrate in the future.

Figure 5. Bitcoin Price Forecast 2020s to 2030s

The number of wallets could shrink or increase drastically at any given moment but when measured over a longer data set the value seems to be fairly consistent and growing. However, that variable alone might not affect the total value of coins, so we capture that assumption as well by averaging the amount of market cap per wallet, which is the average value contribution to market value per wallet user. By integrating these factors into our model we arrive at an estimate of $112,000 by 2030 and perhaps a high of $150,000 by 2030 assuming 30% variance, which is reasonable given BTC volatility.

Figure 6. 10-Year Bitcoin Price Model

Basically, we think we capture the main factors that drive the price of bitcoin, which is 1) the number of users, 2) the average contribution value per user, 3) the delta in added value per users, 4) the delta in the number of additional users 5) also the amount of coins that are expected to be in circulation.

We use the end-point of the year somewhere between December 28, and January 1st of each year to define the values of our model and to eliminate statistically wide ranges of numbers. It’s why our model might only capture 3/4th of the move for the particular year, implying that there could be an incremental 30% upside to our 2024 forecast, which is captured in the error bar, implying Bitcoin trades between a range of $30k to $45k if you’re optimistic, and perhaps $25k to $35k if you’re bearish.

Bitcoin is our top blue chip commodity idea for 2023

We think it’s buying season for Bitcoin investors, and we hope people leverage our assumptions and methods in their own excel models to derive their own values on Bitcoin. In the end, Bitcoin is an open source community, and Seeking Alpha is an open community of contributors who contribute to the collective knowledge and understanding of investing.

We hope that investors can find some comfort in knowing that there’s some quantifiable approach that’s somewhat approachable and at an accountant’s level of reasoning to derive a fair value estimate. We think analysts and investors can feel more confident when buying Bitcoin at this point in the cycle when investing into the Bitcoin market.

It’s why we encourage investors to continue to follow the market closely, and understand that while we may define a certain price point, it’s likely that given the historical volatility of Bitcoin, that pricing can deviate due to any number of factors, both good and bad. Meaning that if we find a statistically significant observation point, it’s likely that pricing will simply pass through our long-term trend line, and it’s unlikely that it would define a specific resistance or support level for that matter.

We think the inputs to our pricing model are quantifiable factors impacting the pricing of Bitcoin, and are direct inputs into the value of Bitcoin, and will inevitably drive the value of Bitcoin higher on the assumption that hashing rates remain constant, and the network is still operating at the future date of our projection.

We recommend Bitcoin to our readers; we don’t think it’s wise nor is it possible for investors to buy the bottom. We think investors can anticipate Bitcoin to reach $33K by beginning of next year implying 50%+ returns, which is phenomenal returns and beats the abundance of alternatives like index funds or large equity funds.