Digital Currency Trading

Digital Currency Trading – Bitcoin & Valuation Metrics – Crypto Currency

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Bitcoin is the digital currency gold standard as of right now. It is the most valuable crypto currency, and many experts are predicting what many believe to be outrageous price increases over a very short timeline. While we are in uncharted territory with regards to digital currency, there is some support for these claims. In this article I’m going to break down some of the metrics that could be used for these predictions. It’s easy to find people touting large numbers, but it’s not quite as easy finding out why those numbers are being thrown around. I’m equating bitcoin to the US Dollar for my numbers. This is done as these large numbers being thrown around must be predicated on Bitcoin becoming the gold standard of crypto currency. The closest metric for that with traditional currencies is the US Dollar.

Countries have currency, but they also have control over the supply of currency.  The US took the dollar off the gold standard a long time ago, so the only thing backing up the US dollar is faith in the United States.  The same goes for Bitcoin.  The only thing backing up bitcoin is faith in the blockchain.  The difference is the blockchain is public, and there are a limited number of bitcoins that will ever be produced.  That is not true of the US dollar.

Just to give you an example.  Money in the US is measured in a few different ways.  M1 is a measure of essentially all the cash in circulation for a basic explanation.  Right now there is about $3.5 trillion in circulation.  In 1959 there was $138 billion in circulation.  All that extra money was essentially created by the government.  This cannot happen with Bitcoin.

M2 is a measure of all cash in circulation (essentially M1) plus all short term deposits and assets that can be converted to cash within 24 hours.  That number is much larger.  Today there is about $13.6 trillion in circulation using the M2 measure.  In 1981 that number was $1.8 trillion.  Again, the increase is money created by the US government.

Now compare that to bitcoin, which has about 16.5 million coins in circulation now, with a hard cap of around 21.5 million coins.  There will never be more than 21.5 million coins.  In fact there will be less as coins that are digitally lost are not typically recoverable.  Should bitcoin be accepted as the gold standard of digital currency – which right now that is where it stands – it is a known quantity.  Everyone knows how much there is, and there is no way for an outside party (like a country) to control or increase that quantity.

For my valuation, I’m counting on bitcoin being the digital standard, much like the US dollar is the standard world currency – for now.  Using my numbers above, and using the M1 numbers for US dollars in circulation, valuing bitcoin straight across to US dollars would indicate a value of about $162k per bitcoin.  That is ONLY valuing bitcoin equal to the actual cash in circulation right now in US dollars – the M1 number.

If we use the M2 number of $13.6 trillion, my valuation of bitcoin goes up substantially.  Valuing bitcoin straight across compared to all dollars in circulation plus all short term deposits that can be converted to dollars in 24 hours gives me a value of over $632k per bitcoin.

This does not even touch on longer term deposits and longer term money market funds.  That’s M3 money, and the US Bank does not even publish this number any longer.  That number is even higher than M2 money.

Now back to my reasoning for digital currency becoming the world standard.  It cannot be manipulated by governments.  So right now, the US has $3.5 trillion in cash and equivalents.   It has $13.6 trillion in cash, equivalents and short term deposits.  It has a national debt of just under $20 trillion.  So the US debt is larger than all the US cash in circulation, plus all the deposits that can be turned into cash quickly.  The US debt comes out to about $165k per taxpayer.

So the US keeps borrowing money, keeps printing money and keeps increasing it’s debt.  Read the newspapers, they are going to have to increase the debt limit again shortly so they can borrow more.  The US is not the only country playing this game with money.  With a global economy and digital currency that cannot be manipulated, it is only a matter of time before one of these digital currencies becomes the gold standard for investors to flock to for security.  Bitcoin is a good candidate as it is the market leader, and there is a hard cap on how many coins are out there.

A reasonable target in my opinion for Bitcoin is $78k, just under 50% of the US M1 supply.  I think that is a conservative number should it really gain traction. Think about that for a minute. I’m throwing out $78k as a value per Bitcoin as a conservative number….  I don’t think Bitcoin will be the long term digital currency that is used daily due to processing times (which are being worked on and may change), but I do think that there will be a digital currency to fill that niche.  One contender right now is Ripple.  It’s worth about .22 right now.  I like it as it has a much higher cap for the number of coins out.  It caps at 100 billion coins.  It also is used by large companies right now, and one of the validators in it’s user base is MIT.  It’s starting to gain some traction in the banking communities and processes very fast.  It is the 4th largest digital coin in terms of total value.  With 100 billion coins potentially in circulation, one upside I like is that the value won’t get so high as to deter people from buying it.

There are lots of other coins out there as well.  Eutherium is a large one.  I like it because a lot of these other coins are built on it’s blockchain.  It’s being used, so it is in demand and will continue to be in demand.  There are about 93 million euthereum coins out right now, and it is the second largest digital coin behind Bitcoin in terms of value.  Litecoin, Dash, NEO, ZCash, Monero – there’s a lot of coins out there with billion dollar market caps (13 to be exact with OmiseGo real close to being the 14th).

Lastly, the biggest thing I like, is that even though these coins have been around for a while, the volume has crazy potential to go much higher.  Most I think will end up being essentially bubbles that pop, but a few winners will be long term players on a global scale.  We don’t nessicarily have to find the winner, though, as I think we are in the beginning stages of a bubble period.  Think about this:  You look at financial markets and what not more than the average person.  How many people do you know that own any digital currency besides me?

The market share is super small right now, and with even small percentage growth the volume will increase in a huge manner.  Also, there has been multiple tries to get an ETF approved for bitcoin.  At some point it will be approved.  When there is an exchange traded fund investing in bitcoin, the volume and price increase will be crazy.  Countries are starting to adopt digital currencies.  Japan not long ago gave approvals for merchants to accept bitcoin.  Australia is looking at adopting a digital currency.  So is Russia.  What is the largest digital currency that people  know of right now?  Bitcoin.  Ask the average person about digital currency and if they know anything about it at all, they will know Bitcoin.  You will have a hard time finding someone who knows anything about any other digital currency, even a name.

With a fixed number of coins in circulation, and with that fixed number being low (I use 21 million rather than the current float), it does not take that much volume to make big moves.  And I don’t think big money has really come into it yet.  Once it does, crazy moves and ridiculous wealth making opportunities are there.

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