BNY Mellon Weighs Controversial Bitcoin Valuation Model

By Jeff Benson

BNY Mellon has taken on the difficult task of evaluating different methods of valuing Bitcoin in a March investment report, And in doing so, it's spotlighted a controversial model that—if correct—would see Bitcoin’s price hit $100,000 to $288,000 this year.

BNY Mellon’s thoughts on the matter are important because it’s the largest custodian bank in the world, with over $25 trillion in assets. Its custodial role is soon to be expanding to Bitcoin and other cryptocurrencies, as a Wall Street Journal report revealed in February.

The research report, “Blending Art & Science: Bitcoin Valuations,” analyzes several possible models for determining how much BTC is worth without anointing any particular one. After taking readers through some valuation methods for gold, another asset that has been used as both a store of value and a medium of exchange, it delves into valuation models for Bitcoin, taking seriously some models that have been panned by other analysts.

One method is the stock-to-flow ratio, which it says “is worth understanding despite its flaws.” The stock-to-flow (S2F) ratio looks at the total current supply (stock) of an asset and divides that by the amount of the asset that can currently be mined in a year (flow). It’s a model that can work with gold and other precious metals, but it's gained traction in recent years among Bitcoiners.

Quantitative analyst and investor PlanB, who created the Bitcoin S2F model posited in his March 2019 article, “Modeling Bitcoin’s Value with Scarcity,” that S2F could be used to measure Bitcoin’s scarcity and, therefore, its future value. Since the amount of Bitcoin produced declines over time, the S2F will go up. PlanB projected that the May 2020 Bitcoin halving—when BTC mining rewards were last cut in half—would cause the price of Bitcoin to rise to around $55,000 (not far from its current price of $57,000), tracking the prices of gold and silver when they had similar S2F ratios.

It’s one of the most bullish models for Bitcoin price projections around. And not without its detractors. For example, Nico Cordeiro, CIO of investment fund Strix Leviathan, wrote in June 2020, “We believe that the model’s accuracy will likely be about as successful at forecasting Bitcoin’s future price as the astrological models of the past were at predicting financial outcomes.”

BNY Mellon’s research team agrees with S2F critics that “supply doesn’t define price.” When applied to gold, critics offer, most of the commodity’s price movement are better “explained by purchasing power of the US dollar, and buying/selling of gold is based on inflation or currency debasement expectations.”

But the mere act of mentioning it lends it some added clout. And each of the other valuation methods noted has flaws as well. The net cost model, which ties Bitcoin’s value to the price of mining, may fail to account for massive future improvements in renewable energy that make production cheaper. The network value-to-transaction model is based on transaction utility, but prices have been going up even as people are holding BTC for longer. And the stock-to-flow cross asset model, which compares Bitcoin to other assets based on developmental milestones, is extremely imprecise.

As evidenced by the paper’s hedging title, the researchers aren’t ready to crown one model the winner given that there are still multiple models for valuation of fiat currencies, which have been around far longer. “Ultimately, Bitcoin valuation will likely be a combination of several models and be constantly evolving, especially as it gains mainstream acceptance,” the researchers wrote.

Mainstream acceptance is something that the Bitcoin S2F model doesn’t yet have. But the fact that BNY Mellon is taking it seriously could earn it some more adherents. 

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