APPROACH 1: TOTAL ADDRESSABLE MARKET
For instance, many people believe that bitcoin is competing with gold as a nonsovereign store of value.
APPROACH 2: THE EQUATION OF EXCHANGE (MV = PQ)
MV = PQ.
The definition of M, V, P and Q in both traditional monetary economics and cryptoasset markets.
let us assume bitcoin will process 100 billion transactions (Q) of $100 each (P) per year.
Both of these approaches have the same flaw. They see Bitcoin as a one dimensional thing they are trying to value. Bitcoin is multidimensional; Bitcoin is money so it can be used for payments which means it can not be compared with gold that is only store of value; at the same time Bitcoin as money can also be used as store of value so it can not be compared with currencies (fiat like dollar) that are useless as store of value because of their inflation.For instance, many people believe that bitcoin is competing with gold as a nonsovereign store of value.
APPROACH 2: THE EQUATION OF EXCHANGE (MV = PQ)
MV = PQ.
The definition of M, V, P and Q in both traditional monetary economics and cryptoasset markets.
let us assume bitcoin will process 100 billion transactions (Q) of $100 each (P) per year.
This means both approaches are flawed in measuring bitcoin value.
APPROACH 3: VALUING CRYPTOASSETS AS A NETWORK
~If you consider a social network, such as Facebook, Instagram, or LinkedIn, for instance, its value when it has a single user is zero.~
Using the number of active daily users participating in the network, Alabi showed that the valuation differences between certain cryptoassets (he used bitcoin, Ethereum, and Dash) can be explained with a high degree of accuracy.
That's another flawed approach that only focuses on a single aspect of the much more complex Bitcoin.~If you consider a social network, such as Facebook, Instagram, or LinkedIn, for instance, its value when it has a single user is zero.~
Using the number of active daily users participating in the network, Alabi showed that the valuation differences between certain cryptoassets (he used bitcoin, Ethereum, and Dash) can be explained with a high degree of accuracy.
Unlike social media, people don't have to use bitcoin every day for it to have a value. Remember the store of value characteristic? You can buy and hold bitcoin and that is demand even if you don't spend those coins for years.
On top of that, given the large historical volatility of cryptoassets—bitcoin, for instance, has had six bear markets of more than 70% in its history—the choice of the starting point can have a dramatic impact on the suggestion for current valuations.
That is volatility of price which has little to do with value.APPROACH 4: COST OF PRODUCTION VALUATION
As a result, the value of each bitcoin can be estimated by examining the marginal cost of mining (specifically, the electricity burned in running the computations as part of mining) versus the expected yield of new bitcoin.
The “cost of production” analysis, however, involves some significant challenges. For one, it is circular in its reasoning because the decision made by miners to enter or exit the market is driven by the cryptoasset’s price. Using two necessarily cointegrated variables to value one another has very little predictive or explanatory power. The model also fails to account for or explain the massive short-term volatility of bitcoin’s price or the fact that bitcoin’s mining difficulty is programmatically adjusted on a biweekly basis depending on the level of effort miners have focused on it.
Unlike previous approaches, this one is no longer flawed. I wouldn't call it challenge either, this is outright wrong.As a result, the value of each bitcoin can be estimated by examining the marginal cost of mining (specifically, the electricity burned in running the computations as part of mining) versus the expected yield of new bitcoin.
The “cost of production” analysis, however, involves some significant challenges. For one, it is circular in its reasoning because the decision made by miners to enter or exit the market is driven by the cryptoasset’s price. Using two necessarily cointegrated variables to value one another has very little predictive or explanatory power. The model also fails to account for or explain the massive short-term volatility of bitcoin’s price or the fact that bitcoin’s mining difficulty is programmatically adjusted on a biweekly basis depending on the level of effort miners have focused on it.
The problem is that they are still thinking in terms of something like gold and the "production cost" which is completely unaffected by gold price. For example if gold is worth $1 it still costs the same to extract it from the ground, melt it, etc. as in case it were worth a $1,000,000,000 because the process is not affected by the price (the incentive to mine gold is).
But when it comes to Bitcoin because of how mining (Proof of Work and difficulty adjustment works) things are completely different. If bitcoin price were $1, the cost of mining would also be low and close to $1 and if bitcoin price goes up to $1,000,000,000 that means the cost of mining bitcoin would also go up to be close to $1,000,000,000.
Note that I say "close to" not equal because of being decentralized and the fact that cost of mining is wildly different in different parts of the world (eg. electricity price from $0.0012 to $0.54) and other factors.
APPROACH 5: STOCK-TO-FLOW MODEL
I may be crazy but I always felt like they first created the price model then built their logic around that to explain why it works. 