Valuing Bitcoin

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Bitcoin has sparked one of the most compelling financial debates of the 21st century: how do we determine its true value? Unlike traditional assets such as stocks, bonds, or fiat currencies, Bitcoin doesn’t generate cash flow, pay dividends, or rely on central authority. This makes valuation inherently complex. Yet, investors, analysts, and economists have developed several models to estimate Bitcoin’s intrinsic worth—each rooted in different economic principles and market behaviors.

In this deep dive, we’ll explore six key valuation methods: Mining Cost, Fundamental Valuation (MV=PQ), Puell Multiple, National Currency Comparison, Stock-to-Flow (STF), and Store of Value (SOV). By analyzing these models and synthesizing their results, we aim to provide a clearer picture of where Bitcoin stands today—and where it might be headed.

Mining Cost: The Floor of Value

One of the most tangible ways to assess Bitcoin’s value is through its mining cost—the real-world expenses required to produce a single BTC. This method assumes that miners will not operate at a sustained loss, meaning the market price should eventually reflect production costs plus a modest profit margin.

Bitcoin mining has evolved from a hobbyist activity into an industrial-scale operation. Early adopters used CPUs; today, miners rely on specialized ASICs (Application-Specific Integrated Circuits) capable of processing up to 100 terahashes per second (TH/s). The latest ASICs cost around $3,900 each, and profitability depends heavily on electricity prices, internet connectivity, cooling systems, and economies of scale.

As of 2020, the largest mining pool, F2Pool, controlled over 24% of the global hashrate with 23.02 exahashes per second (EH/s). To replicate this infrastructure would require an investment of approximately $87 billion—a staggering figure that underscores the capital intensity of modern mining.

TradeBlock estimated the post-halving mining cost at **$12,525 per BTC**, assuming an electricity rate of $0.06/kWh. While some large-scale operations secure cheaper power (~$0.02/kWh), the overall cost structure suggests a strong floor for Bitcoin’s price. A subsequent drop in hashrate after the halving reduced mining difficulty temporarily, but the long-term trend points upward due to increasing competition and energy demands.

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This implies that if Bitcoin trades below this cost level for too long, unprofitable miners will shut down—reducing supply pressure and creating conditions for price recovery. Therefore, mining cost acts as a natural support level, especially during bear markets.

Fundamental Valuation: MV = PQ

Another approach evaluates Bitcoin as a transactional currency using the equation of exchange:
MV = PQ, where:

Assuming:

We calculate a theoretical market cap of $100 billion**, translating to **$10,000 per BTC.

While this aligns closely with Bitcoin’s price in mid-2020 ($9,451), it hinges on assumptions about adoption. Notably, nearly half of all bitcoins haven’t moved in two years, suggesting many are held long-term rather than spent. This "hodling" behavior reduces velocity and increases scarcity—potentially pushing prices higher even without proportional growth in transaction volume.

Thus, while MV=PQ offers a framework for economic utility, it may underestimate value in a world where Bitcoin functions more as digital gold than daily spending money.

The Puell Multiple: Gauging Miner Revenue Stress

The Puell Multiple measures miner profitability by comparing daily coin issuance value (in USD) to its 365-day moving average. It helps identify market cycles:

In March 2020, amid the pandemic crash, the Puell Multiple hit 0.38, signaling extreme undervaluation. After the May halving—which cut block rewards in half—the metric briefly dipped again before stabilizing near 0.46.

Historically, readings below 0.5 have marked turning points:

This pattern suggests that when miners sell pressure eases due to capitulation or consolidation, upward momentum often follows. Some analysts apply nonlinear regression models to the Puell Multiple, predicting a fair value near $11,667 post-halving—further supporting undervaluation.

National Currency Comparison: Bitcoin vs. M2 Supply

Could Bitcoin ever function like a national currency? By comparing its market cap to global M2 money supplies, we gain perspective.

As of 2020:

That puts Bitcoin’s value roughly on par with the Czech Republic’s money supply ($190 billion). But economic activity tells another story.

Only about 700,000 wallets hold over $10,000 in BTC—far fewer users than in even small economies. Daily trading volume (~$40 billion) hints at speculative use rather than real-world commerce.

If we assume:

This is just 1.33% of Czech GDP, implying Bitcoin is vastly overvalued unless adoption surges.

But here’s the counterargument: investors aren’t pricing current utility—they’re betting on future adoption.

Suppose by 2030:

Matching Taiwan’s M2 supply ($1.37 trillion) would imply a BTC price of **$68,500, or $34,250** if halved conservatively. Discounted back at 7%, that gives a present value of **$17,410**—still bullish.

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Stock-to-Flow (STF): Scarcity as Value Driver

Developed by analyst PlanB, the Stock-to-Flow model treats Bitcoin like a scarce commodity. STF measures existing stockpiles against annual new supply:

With only 900 new BTC mined daily, and supply halving every four years, Bitcoin becomes increasingly scarce over time. The model correlates rising STF with exponential price growth.

As of May 26, 2020, the STF model predicted a price of $9,413**, closely matching actual levels. Long-term forecasts suggest prices exceeding **$100,000 by 2022, contingent on continued faith in scarcity dynamics.

While critics argue the model ignores demand-side factors, its historical accuracy post-halving events lends credibility.

Store of Value: Bitcoin as Digital Gold

Finally, consider Bitcoin purely as a store of value (SOV)—like gold.

Global wealth stands at ~$360 trillion. Gold holds about **$9 trillion, or 2.5%** of total wealth.

If Bitcoin captures:

Even modest adoption could justify five-figure prices. Assuming Bitcoin reaches $25,000 by 2030**, discounted at 7%, today’s fair value is **$12,700—again suggesting undervaluation.

Frequently Asked Questions

What is the most reliable Bitcoin valuation model?

There is no single “best” model. Each reflects different aspects: mining cost sets a floor, STF emphasizes scarcity, MV=PQ measures utility, and SOV focuses on investor sentiment. Averaging them provides a more balanced view.

Is Bitcoin overvalued or undervalued?

Based on a synthesis of six models, Bitcoin appeared undervalued in mid-2020 with an average fair price of $12,285**, compared to the market price of **$9,451—a gap of nearly 30%.

Why doesn’t Bitcoin have intrinsic value like stocks?

Unlike companies, Bitcoin doesn’t generate earnings. Its value comes from network security, decentralization, scarcity (fixed supply), and growing acceptance as a hedge against inflation—a role increasingly relevant amid rising global debt and monetary expansion.

Can government regulation kill Bitcoin?

Regulation can restrict access or usage but cannot eliminate Bitcoin unless all nodes are shut down globally—a near-impossible task due to its decentralized nature. However, regulatory clarity could boost institutional adoption.

How does halving affect Bitcoin’s price?

Halvings reduce new supply by 50%, increasing scarcity. Historically, major price rallies occur 12–18 months after halving events, once reduced inflation is priced into the market.

Will other cryptocurrencies replace Bitcoin?

While altcoins offer innovation (e.g., smart contracts), Bitcoin remains dominant in security, liquidity, and brand recognition. Its first-mover advantage and network effects make displacement unlikely in the near term.

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Final Thoughts

Combining all six models—mining cost ($12,525), fundamental valuation ($10,000), Puell Multiple ($11,667), national currency analogy ($17,410), STF ($9,413), and SOV ($12,700)—we arrive at an average estimated value of $12,285 as of May 28, 2020.

Given the actual price of $9,451, this implies a significant undervaluation—assuming efficient markets haven’t yet fully priced in future potential.

Three key risks remain:

  1. Profit-taking pressure from traders
  2. Competition from central bank digital currencies (CBDCs) like China’s DCEP
  3. Regulatory uncertainty

Yet despite these headwinds, Bitcoin’s structural advantages—fixed supply, censorship resistance, portability, and growing institutional interest—suggest strong long-term upside.

For informed investors, monitoring these valuation frameworks offers critical insight—not just into price movements today, but into the evolving role of digital scarcity in tomorrow’s financial world.