Revalin has proposed a formula for the fundemental USD price of a bitcoin:
I've been talking fundamentals for a while, and here's my formula:
Fundamental price = A * B / (C - D)
A = USD-value of goods and services purchased per day in BTC
B = Number of days buyers and sellers hold the coins before and after a transaction
C = Number of coins in circulation
D = Number of coins hoarded by (speculators/early adopters/whatever)
While this equation makes sense, the variable D is unsatisfying to me. Therefore I would like to propose a slightly modified equation:
P(USD/BTC) = V * T / (A - S + I - L)
Where P(USD/BTC) = Price of a bitcoin in USD/BTC
V = Value of goods and services purchased for BTC, in USD
T = Time buyers and sellers hold bitcoin, in days
A = Total bitcoins
S = average bitcoin savings of each person
I = bitcoin investments
L = lost bitcoins
I would like this discussion to address the validity of the equation, and how it can be estimated.
If I understand correctly, any bitcoin investment will have a corresponding bitcoin savings. For example, if Ben gives Joe one bitcoin, then Joe holds one bitcoin of I and Ben holds one bitcoin of S. So investing with bitcoins does not affect the money supply, since an increase in S and I cancel each other.
So to increase the value of P (the USD price of bitcoins), we should focus on increasing V, the value of goods and services traded in bitcoins.