Valuing Bitcoin Using Total Addressable Market For Monetary Bitcoin Demand

To value shares, investors use established models like discounted cash flow or accounting ratios such as price-to-earnings (PE). However, these models can’t be applied to bitcoin due to its unique characteristics, and an alternative standard is yet to emerge. 

CoinShares expects bitcoin to become more valuable as it gains traction as a medium of exchange because it effectively fulfils the primary functions of money- to preserve purchasing power over time and be readily exchangeable. Based on this hypothesis, CoinShares believes total addressable market (TAM) is the best way to estimate the potential price per coin. 

This article explores how bitcoin serves as a medium of exchange and estimates how much it could be worth by 2039 based on this use case. 

Total addressable market is a metric commonly used to measure the potential size of a market for a product or service. Companies employ TAM to figure out a market’s value before committing resources such as time and money to capturing a share of it. 

Investors use a range of metrics to forecast the price of bitcoin, for example its decreasing issuance (the stock-to-flow model) and the rising cost of mining (the cost of production theory). But CoinShares thinks that bitcoin’s share of the world’s total money supply (its TAM) will prove to be the most reliable indicator because its value ultimately rests on its monetary properties and network effects.  

At the end of 2022, CoinShares published research to support its use of TAM to value bitcoin. To calculate the total worth of the global supply, it broke the different forms of money into four categories: 

• Gold- Despite bitcoin’s volatility, CoinShares believes its properties (discussed below) mean it will be a more effective store of value than gold, especially as it gains further traction as a medium of exchange 

• Central bank reserves- Even though very few central banks currently have exposure to bitcoin as part of their foreign exchange reserves, CoinShares expects many to eventually use it to a degree

• Treasury assets or cash reserves- Some companies hold bitcoin on their balance sheets, perhaps most prominently Tesla. In CoinShares’s view, bitcoin could ultimately replace assets such as US Treasury bonds 

• Fiat money- Individuals already use bitcoin for savings, and CoinShares thinks it can continue to steal market share from currencies issued by governments

   

While various items have served as mediums of exchange throughout history, the most effective have certain properties, as demonstrated by the chart below comparing bitcoin with gold and fiat. 

Given Satoshi Nakamoto, the pseudonymous founder, designed bitcoin as a peer-to-peer electronic cash system, its strong showing shouldn’t come as a surprise:

• Bitcoin is scarce because its total circulation is capped at 21 million and block rewards halve every four years 

• The bitcoin network is durable, having operated for over 99% of the time since the first block was mined in January 2009 

• As a digital currency, transferring bitcoin across borders and to someone else is easy 

• The smallest denomination- known as a Satoshi- is one hundred millionth of a bitcoin 

• Decentralisation means no central authority controls the bitcoin network, making it censorship resistant    

To calculate how much market share bitcoin can potentially capture from each form of money, CoinShares came up with several scenarios, ranging from pessimistic to optimistic. For the sake of simplicity, the scenarios are based on a long-term view (30 years from bitcoin’s launch in 2009) to avoid having to allow for changes in demand caused by short-term catalysts. 

CoinShares believes that bitcoin’s biggest opportunity to secure market share is in countries where adoption is already underway, especially those where repressive economic conditions- such as high inflation and strict currency controls- make bitcoin’s properties (chiefly its censorship resistance) most attractive. This assumption suggests bitcoin will experience its strongest growth in developing and frontier economies, as opposed to developed countries.   

Adoption by corporates is limited so far- only 43 public companies hold bitcoin in their reserves. But it’s expected to be greatest in the industry sectors closest to digital currencies, such as finance, technology (bitcoin miners traditionally hold block rewards on their balance sheet) and energy, as power companies become aware of the potential revenue streams offered by mining, which may serve as a competitive advantage.

In terms of a store of value and portfolio diversification, there’s already evidence that investors are choosing bitcoin ahead of gold, suggesting it could steal a sizeable portion of gold’s market share.   

Finally, as the bitcoin network continues to grow, central banks are increasingly likely to add it to their foreign reserves, following the lead of El Salvador, which holds 2,381 bitcoin worth over $102m (as of 16th January 2024) and Iran. But this use case is more concept than reality, so CoinShares kept its estimates modest. 

CoinShares’ research suggests bitcoin remains a maturing asset, so it has only managed to secure a tiny share of global money so far. But even minor inflows could have a large impact considering the bitcoin market is still relatively small. 

The baseline scenario indicates that bitcoin’s overall share may reach 3.5% by 2039. This might seem low, but it would value each coin at around $62,000. These estimates are sensitive to growth in demand. For instance, a 7% increase in bitcoin’s share of the fiat money market would push the price per coin above $100,000.    

Alternatively, this table shows the impact on bitcoin if it secures market share from fiat money and gold. According to these calculations, capturing 2% from fiat money and 20% from gold would result in a valuation of $261,000 per coin.

Investors should take certain caveats into account when viewing these estimates. Firstly, little data is available on bitcoin ownership by entity and geographical region, which limits CoinShares’ ability to assess adoption over time. Also, the 30 year timeline is based on the adoption rate of other technologies such as the internet and mobile phones. While bitcoin will benefit from some of the infrastructure already in place, it may not follow the same trajectory, so the pace of demand might be over or underestimated. 

In less than 15 years, bitcoin has established itself as a nascent medium of exchange, having grown its market capitalisation to $843 million (as of 16th January 2024). 

Bitcoin’s fixed properties are unique and advantageous, which should promote its use as a medium of exchange over time. Its relational properties offer benefits too, but present some barriers to adoption, particularly volatility. However, they’ll improve as the network effects grow. Changes to the global economic environment may also favour bitcoin.  

Given this optimistic outlook, CoinShares believes that bitcoin will continue to take market share from the other main forms of money, which will support its price. 

• CoinShares thinks that bitcoin’s adoption will drive its value, so total addressable market is the best way to forecast its price 

• Bitcoin’s monetary properties suggest it can serve as an effective medium of exchange, which should help it secure market share 

• Bitcoin is already capturing market share: people use it to save, companies hold it on their balance sheets and some investors consider it a better store of value than gold 

• A 3.5% share of the total money supply would value bitcoin at $62,000

• There are caveats though- ownership data is hard to source, and bitcoin may experience a slower rate of adoption than other technologies