[tpeng]

The way I value bitcoin is to take the fully diluted market cap (21 million * $850 ~= $18 billion) and apply a money velocity which I assumed to be similar to US M2 velocity of 1.6 ($18 billion * 1.6 ~= $28.5 billion). Since global ecommerce transactions are about $1 trillion / yr this implies that bitcoin should penetrate 2.85% of ecommerce. Big assumption here is that bitcoin does not work for real-world transactions as the confirmation time is > 15 min. This may be oversimplified because a lot of real-world transactions don't need to be real time. I'm also excluding time value effects which you can insert back in if you like.

From the data I have seen, the bitcoin real economy could be orders of magnitude smaller than that implied by the current price, although there is no way to know precisely how large it is. This is including "illegal" transactions (I'm not sure why sam is discounting drug transactions, unless he means to imply that these will be shutdown. It does make sense to exclude gambling transactions as they are extremely high velocity).

Note that sam's point about merchants immediately converting BTC back to USD serves to increase the money velocity (perhaps by >10x). This would mean that BTC is pricing in a real economy even larger than $28.5 billion. Based on current BTC-denominated real transactions, fair value of BTC is at most only a few dollars.

[im3w1l]

I think much of BTC's valuation come from expectations that money velocity and market penetration will increase.

EDIT: Sorry I meant to say the velocity will decrease.

[tpeng]

A higher money velocity => lower BTC/USD, but yes, the current price implies a huge future growth of the bitcoin economy. This is what sam is saying and I agree. I happen to think that we will not see that growth/adoption, but that is a different question.

[im3w1l]

Oops, yeah, I meant the other way around.

[tpeng]

There's no obvious reason why BTC velocity should go lower than USD velocity. If anything, its electronic nature and potential for fast settlement times should indicate a much higher velocity than USD M2.

[im3w1l]

>Note that sam's point about merchants immediately converting BTC back to USD serves to increase the money velocity (perhaps by >10x).

If this changed, it could at least get closer to the velocity of usd.

[foobarqux]

I don't understand what you are calculating but it's circular in any case: You can't use the current price of bitcoin to derive a value.

[tpeng]

Price-implied expectations

http://www.amazon.com/Expectations-Investing-Reading-Prices-...

[foobarqux]

I understand what you are saying now but I'm not convinced by the argument: It does not seem plausible that transaction volume will be affected by value of the medium of exchange. Can you show your reasoning applies to other conventional currencies? Specifically that the transaction volume changes in direct proportion to some numeraire, say USD?

(That book is about DCF and bitcoin and other currencies don't give off cash flows).

[tpeng]

We could debate what the velocity of bitcoin is/will be, but the relationship between velocity, money supply, and transaction volume is definitional.

http://en.wikipedia.org/wiki/Velocity_of_money

[foobarqux]

The definition of velocity is not at issue, the relationship between "price" and transaction volume is. If tomorrow the US gov decreed that every $1 of USD will immediately be exchanged for $2 of USDX you wouldn't expect, in theory, for the USDX transaction volume, denominated in USD, to change.

Put another way, I fail to see how the BTC/USD exchange rate is related to BTC transaction volume except for tangential reasons like sentiment.

[tpeng]

BTC value is directly related to its velocity and the value of the goods and services that are transacted in BTC. I held the purchasing power of USD constant, simply to derive a value of BTC in 2013 dollars. If USD experiences a large shift in PP (unlikely), that would affect BTC/USD. But either way that's not an inherent source of value to BTC.

This is my last comment, as I cannot possibly respond to an endless string of unfounded criticisms.