How to Value Bitcoin

I’ve done a lot of reading up on crypto currencies and blockchain the past month—not because I want to invest in it, but because I find it fascinating and potentially life-changing. Just last week I was traveling internationally and I can’t tell you how many times I thought to myself “this would be so much easier if everyone was using a Bitcoin app on their phones.” I have no idea if Bitcoin is the MySpace or the Facebook of the cryptocurrency future, but it’s fun to learn about either way. One thing I haven’t seen much of is people attempting to value Bitcoin.

I’ve read plenty of logical sounding arguments for why Bitcoin will be $20,000 or $50,000 in 10 years, but those people rarely mention the discount rate that needs to be slapped on those estimates. Even if you’re a Bitcoin bull, you have to admit it’s an incredibly risky asset and there’s a chance it’s worth $0 at some point in the future. Given that, a high discount rate is required. When I value profitable, growing public companies that have little debt on their balance sheet I use an 11% discount rate. Thus, I’d say any discount rate on a Bitcoin valuation needs to be significantly higher than that—maybe 30-40%—though I wouldn’t fault anyone for going even higher.
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