Bitcoin predicted to have 1.1% return over the next 100 years

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Bitcoin predicted to have 1.1% return over the next 100 years

Bitcoin is predicted to have an annualized return of 1.1% over the next 100 years.

It's the prediction of a fair value model that's based on Metcalfe's Law. The value of the network is proportional to the square of the number of users.

A former commodities portfolio manager at TCW Group, Claude Erb, applies Metcalfe's law to bitcoin BTCUSD by assuming that each mined coin represents one user in the network. Since the total number of bitcoins that can be mined is known, and when that volume will eventually be reached, Erb's Metcalfe's Law model is able to calculate the cryptocurrency's long-term expected return. The projections are based on the expected annualized return of 1.1%.

It's easy to poke holes in the model, as Erb himself points out. Some 'users' in the Bitcoin network own less than one coin, while others own more than one. Many bitcoins have been lost. The number of bitcoins that have been mined doesn't exactly equal the number of users.

Erb said in an email that he offers his Metcalfe's Law-based model in the same spirit as those who observe that 'all models are wrong, but some are useful. His model is a way to anchor a conversation about the cryptocurrency valuation that is sufficiently 'intriguing' to warrant our serious consideration, he said.

The model has done an admirable job, as you can see from the chart above. It has issued warning signs when Bitcoin reached unsustainably high levels and provided assistance when its price fell too low. I first devoted a column to the model in late 2020, just as bitcoin was about to triple from around $20,000 to over $60,000. The model argued that such a price surge was unjustified, and bitcoin was subsequently recouped below $20,000. At that point, I reported that bitcoin had become undervalued - and it subsequently rallied more than 50%.

I last wrote about Erb's model in early June, predicting that bitcoin's fair value was about 10% above its then-current price. It has gained 4.2% since then. The model calculated that bitcoin's fair value is about $31,400, or about 14% above where it's trading.

Even if the model continues to provide accurate forecasting of bitcoin's price, you should still expect bitcoin to fluctuate between extremes well-above and below fair value. That's something all assets do, and bitcoin is no exception.

The stock market is conditioned on its long-term average price/earnings ratio. The S&P 500 SPX has traded for as much as seven times its fair value and as little as a third over the past 150 years. Bitcoin's range has been similar in recent times.

In a statement, he can be reached at mark@hulbertratings.com.

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