The Rise of Bitcoin: Valuation Perspectives for $100K and Beyond

As of November 22, 2024, Bitcoin is trading at near $99,000, tantalisingly close to the symbolic six-figure milestone. Its meteoric rise reflects a convergence of institutional interest, reduced supply, and macroeconomic and political developments. To understand and justify Bitcoin’s trajectory beyond $100,000, we delve into the valuation models that illuminate its current price and provide a structured framework for its future growth.

Bitcoin’s valuation defies traditional financial metrics like discounted cash flow (DCF), as it lacks cash flows, dividends, or comparable yield-based attributes. Instead, alternative frameworks that are tailored to Bitcoin’s unique characteristics - scarcity, network effects, and its transformative role as a store of value - have emerged. Let's take a look at the most widely accepted ones.

1. Production Cost Model: Establishing a Price Floor

1.1. Core Concept: Bitcoin’s value is intrinsically linked to its production cost, which provides a fundamental price floor.

The production cost of Bitcoin, determined by factors such as electricity usage, hardware depreciation, and operational expenses, has consistently acted as a critical lower boundary for its price. Historically, Bitcoin has rarely traded below its production cost for extended periods, as this scenario forces less efficient miners to exit the network, reducing supply and driving prices higher.

1.2. Current Metrics:

● As of November 2024, the average global production cost of mining one Bitcoin is approximately $85,000. This reflects a significant increase of nearly double pre-halving levels that is driven by the 2024 halving, which reduced block rewards from 6.25 BTC to 3.125 BTC. The intensified competition among miners for limited block rewards has further elevated production costs.

● After struggling to exceed production costs for much of 2024, Bitcoin prices surged past this level following Donald Trump’s election victory in November, which catalysed renewed confidence in pro-crypto policies and regulatory clarity.

1.3. Implications for $100K: The production cost model suggests a robust and rising price floor for Bitcoin. With current prices now above production costs, miners are making profits by ensuring the network’s security and stability. Coupled with sustained demand and reduced supply post-halving, the model supports Bitcoin’s trajectory to $100,000 as a justifiable and sustainable milestone.

2. Stock-to-Flow Model: Scarcity Drives Value

2.1. Core Concept: Scarcity, as measured by the stock-to-flow ratio, remains a pivotal driver of Bitcoin’s long-term value.

The stock-to-flow model calculates scarcity by comparing Bitcoin’s circulating supply (stock) to its annual production rate (flow). Historically, this model has shown a strong correlation between Bitcoin’s scarcity and its price, with higher stock-to-flow ratios indicating greater scarcity and higher valuations.

2.2. Current Scarcity:

● Following the 2024 halving, Bitcoin’s stock-to-flow ratio increased substantially to approximately 120, reflecting its most constrained supply dynamics to date. This makes Bitcoin significantly scarcer than gold, whose stock-to-flow ratio is approximately 58.

● As shown in the stock-to-flow chart, Bitcoin’s price (represented as daily end-of-day data points) has trended within ranges projected by the model, albeit with some deviations. The bright red section near 2024 signifies the immediate post-halving period, during which scarcity intensifies as new supply dwindles.

Source: BitBo

2.3. Implications for $100K:

The chart indicates that Bitcoin’s price trajectory often consolidates below the stock-to-flow projection line (yellow), especially in periods shortly following halvings. However, as demand aligns with reduced supply, prices have historically converged toward or exceeded these projections. In 2024, the stock-to-flow model supports Bitcoin’s potential to surpass $100,000 as reduced supply meets increasing institutional demand (which is particularly bolstered by the recent approval of spot Bitcoin ETFs and positive regulatory sentiment). This alignment of scarcity and demand sets the stage for sustained upward momentum.

3. Metcalfe’s Law: Exponential Growth from Network Effects

3.1. Core Concept: Bitcoin’s value grows exponentially as its user base expands, following the principles of Metcalfe’s Law. This law posits that the value of a network is proportional to the square of its number of users, making network growth a key driver of Bitcoin’s valuation.

3.2. Network Adoption and Growth Metrics:

Between 2019 and 2024, the number of active Bitcoin addresses grew significantly, rising from 362 million to over 897 million - more than a doubling of users in just five years. Over the same period, Bitcoin’s market capitalisation increased nearly 13-fold, from $67 billion on 1 January 2019 to $865 billion on 1 January 2024. This growth trajectory aligns closely with Metcalfe’s Law, which indicates that as the user base doubles, network value (and market cap) should increase roughly fourfold.

By 21 November 2024, Bitcoin’s market capitalisation had surged further to approximately $1.95 trillion, a number driven by continued adoption and amplified by institutional participation, such as the approval of spot Bitcoin ETFs earlier in the year.

NVM Ratio as a Validation of Network Value:

The Network Value to Metcalfe Ratio (NVM) offers a quantitative proxy for Metcalfe’s Law by comparing Bitcoin’s market capitalisation (log scale) to the square of its active addresses (log scale). This ratio helps assess whether Bitcoin’s price is overvalued or undervalued relative to network activity.

● The all-time high (ATH) NVM ratio of 1.34 occurred on 10 June 2024 and reflects a period of heightened speculative activity (post-halving reasons) relative to network adoption.

● As of late November 2024, while updated NVM data is unavailable, the significant increase in active addresses and market capitalisation indicates that the network remains robust. Current price levels likely reflect a more balanced relationship between market value and network utility compared to mid-2024.

3.3. Implications for $100K:

Bitcoin’s trajectory toward and beyond $100,000 is underpinned by sustained growth in its user base that is consistent with Metcalfe’s Law. From 2019 to 2024, the doubling of active addresses and exponential market cap growth illustrate how network effects have driven Bitcoin’s valuation.

While the NVM ratio’s ATH in June 2024 highlighted a potential speculative peak, the subsequent stabilisation of price and adoption reinforces Bitcoin’s capacity to sustain higher price levels. With nearly 900 million active addresses and a market capitalisation nearing $2 trillion, Bitcoin’s current valuation is strongly supported by network fundamentals. Continued growth in institutional inflows and global adoption provides a solid foundation for Bitcoin to surpass $100,000, reflecting the exponential increase in network value driven by its expanding user base.

4. Total Addressable Market (TAM) Model: Capturing Market Potential

4.1. Core Concept: Bitcoin’s value is assessed by comparing its market capitalisation to the total size of the asset classes it aims to disrupt, such as gold, fiat currencies, and the broader financial system.

4.2. Current Position in the Asset Rankings:

As of 21 November 2024, Bitcoin has a market capitalisation of $1.95 trillion, making it the 7th most valuable asset globally. It sits just behind major corporations like Alphabet (Google) and Amazon, and above Saudi Aramco and silver. Bitcoin’s price of around $99,000 per coin reflects increasing recognition of its potential as a global store of value and digital collateral. However, this market cap still represents a fraction of its total addressable market, which spans global stores of value and financial systems.

Bitcoin vs. Gold and Other Stores of Value:

Bitcoin is often compared to gold due to its fixed supply, decentralised nature, and function as a store of value. Gold currently holds the top position among global assets, with a market capitalisation of $18.08 trillion. If Bitcoin achieves parity with gold, its market cap would need to rise approximately ninefold to $18 trillion, implying a Bitcoin price of ~$500,000.

Beyond gold, Bitcoin competes with silver (market cap of $1.75 trillion), fiat currencies, and traditional financial instruments like government bonds. Bitcoin’s market cap of $1.958 trillion is still well below many of these benchmarks, hence significant room for growth.

Broader Total Addressable Market:

The total global market cap of all major assets, including equities, real estate, commodities, and financial derivatives, stands at approximately $113.213 trillion. If Bitcoin were to capture just 1.73% of this total, it would achieve a market cap of $2 trillion—aligning with its current value of $99,000 per coin.

For further perspective:

● If Bitcoin captures 3% of global assets, its market cap would rise to $3.39 trillion, implying a price of approximately $170,000 per Bitcoin.

● At 10% market penetration, Bitcoin would command a market cap of $11.32 trillion, rivaling gold and driving its price above $500,000 per coin.

4.3. Implications for $100K:

Bitcoin’s rise to $100,000 reflects only a modest penetration of its total addressable market. Currently, Bitcoin represents less than 2% of global asset value, highlighting substantial growth potential as adoption deepens and its utility as digital collateral and a store of value becomes more widely recognised.

The TAM model reinforces the view that $100,000 is not only achievable but sustainable, as Bitcoin continues to gain institutional support and competes with traditional assets like gold and fiat currencies for a larger share of the global financial system. With growing recognition of its role in both macroeconomic hedging and decentralised finance, Bitcoin is well-positioned to move beyond $100,000 and toward higher valuations in the long term.

5. MVRV: A Sentiment and Validation Model

5.1. Core Concept: The Market Value to Realised Value (MVRV) ratio compares Bitcoin’s market cap to its realised value, providing insights into whether it is overvalued or undervalued relative to on-chain activity.

● MVRV > 3: Signals overvaluation and potential market overheating.

● MVRV < 1: Indicates undervaluation and potential accumulation opportunities.

5.2. Current Observations:

● As of end of October 2024, MVRV stands near 2.0, suggesting that Bitcoin’s upward momentum reflects a sustainable balance between market cap and realised value.

● The ATH MVRV of 2.75 in March 2024 corresponded with a speculative rally after ETF approvals, which later corrected and thus demonstrated its role as an overheating indicator.

Important Notes:

MVRV is a valuation model but operates differently from the fundamental frameworks discussed earlier, such as Stock-to-Flow or Metcalfe’s Law. Its behavioural and short-term focus makes it less suitable for projecting long-term potential but highly valuable as a complementary tool for understanding market sentiment and price sustainability.

Unlike long-term models that explore Bitcoin’s macroeconomic value drivers, MVRV bridges the gap between these broader frameworks and real-time market conditions. It provides actionable insights into whether current price levels are sustainable or reflect speculative excess, serving as a checkpoint for market health.

Despite its usefulness, MVRV has limitations. Its short-term orientation and sensitivity to price fluctuations mean it cannot function as a standalone metric for evaluating long-term valuation. Instead, it works best when paired with fundamental models to provide a well-rounded analysis of Bitcoin’s market dynamics.

5.3. Implications for $100K:

At $100,000, an MVRV ratio near 1-2.5 would indicate that Bitcoin’s price is grounded in realised value rather than speculative excess. The latest ratio of 2.0 supports the notion that Bitcoin is fairly valued given its recent growth and network activity.

If the MVRV were to spike above 3, it would suggest potential overheating. Conversely, a stable or slightly rising ratio within historical norms reflects healthy growth and justifies Bitcoin’s rise to and sustainability above $100,000. While MVRV is not a long-term valuation model, it provides critical real-time validation of market conditions, making it a useful complementary tool.

Conclusion

Bitcoin’s valuation models collectively reveal the nuanced mechanisms driving its rise toward $100,000. The production cost model establishes a clear price floor that reflects the critical role of mining economics and scarcity post-halving. Meanwhile, the stock-to-flow model captures Bitcoin’s supply dynamics as a strong correlation between increasing scarcity and higher prices. Metcalfe’s Law demonstrates the power of network effects, with exponential user growth translating directly into market value, while the TAM model broadens the perspective to situate Bitcoin within the vast landscape of global asset markets. These frameworks, when complemented by behavioural tools like MVRV, offer a well-rounded lens to evaluate Bitcoin’s trajectory and the sustainability of its growth.

The convergence of these models points to a robust foundation for Bitcoin’s current price levels and its potential for further expansion. By aligning long-term valuation with short-term market sentiment, these insights highlight Bitcoin’s evolving role as a store of value, digital collateral, and financial innovation. Whether driven by scarcity, adoption, or macroeconomic shifts, the rise of Bitcoin underscores its growing significance in the global financial ecosystem, making its next milestones both compelling and credible.

Disclaimer: The opinions expressed in this article are for informational purposes only. This article does not constitute an endorsement of any of the products and services discussed or investment, financial, or trading advice. Qualified professionals should be consulted prior to making financial decisions.