By
Temitope Olatunji
April 18th, 2024
A formula that takes into account the growth of the real world economy alongside the digital one makes some surprising claims, reveals Daniel M. Harrison.
Consider for a moment the following equation:
(BTC/GOLD) = X
X / 100 = Y
Y / 30-Year Risk Free Rate = Z
Z* 100 = A
A / 30 Years = B
B = Multiple of digital asset growth vs. real asset growth
B * Current Earnings Growth in Equity Markets = Annual Digital Asset Growth Rate (ADAGR)
(ADAGR * n. Years) * (Digital Asset Price) x (% of Digital Asset Market Share) = G
G*(1 Year Digital Asset Growth/1 Year BTC Growth)
= Digital Asset Price in n. Years
In these 8 lines of equation we have a very simple and effective formula for predicting the prices of all digital assets; coins, tokens, sidechains and whatever else. Let’s review the logic.
First Line: Divide BTC by Gold to get a value
Second Line: Take the value and divide by 100
Third Line: Divide the New Value by the 30 year Risk Free Rate
Fourth Line: Multiply The Former Value by 100
Fifth Line: Divide The Latest Value By 30 Years
These five lines give us an indication of how much faster the digital economy is growing than the real economy. Specifically, the higher the value of BTC, the lower the value of gold, the lower the 30-year risk free rate = the higher the growth of the digital vs. the real economy. Any variation in that combination and the lower the growth in digital assets vs. real assets is likely to be. So far, it appears as if some sense here then that the growth of digital assets is inverse to the growth of real assets.
Sixth Line: Take the value and multiply it by the current earnings growth in equity markets to give an Annual Digital Asset Growth Rate (ADAGR)
The world of digital assets is not negatively correlated with the world of real assets; asset price inflation is somewhat part of one package, and underlying that package are real earnings. Therefore, in this part of the equation we include this earnings growth to give us a likely representation of the true multiple of digital asset growth.
Seventh Line: Take the ADAGR and multiply it by the number of years being calculated, multiply the result by the current price of the digital asset being valued, and then multiply this number again by the percentage market share of the digital asset. This will give a Gross Value (G).
Eighth Line: Take the Gross Value of the asset and divide it by the following equation: the annual growth rate of the digital asset being valued divided by the annual growth rate of BTC. This result will give you the price of the digital asset in n. years.
Testing The Top 4 Digital Assets
Let’s take the equation for a quick tour-de-Blockchain now. First, there’s Bitcoin. Since BTC is our reference variable digital asset, it’s a little less work than the others:
($2716/$1245) = 2.18
2.18 / 100 = 2.18%
2.18% / 2.74% = 0.79%
0.796 * 100 = 79.56
79.56 / 30 Years = 2.65
2.65 = Multiple of digital asset growth vs. real asset growth
It appears then from the equation that digital asset growth is a little over two-and-a-half times the growth of the real economy. That’s probably about right. Earnings in the US financial sector are growing around 12% conservatively, so that gives us a basis for the next part of the equation:
2.65 * 12% = 31.8%
(1.318 * 3 Years) * ($2716) x (39.93%) = $4288
($4288*1)
= $4288/BTC in 3 years
Now for Ethereum:
(1.318 * 3 Years) * ($342) x (28.23%) = $381.74
(2642%/297.4%)
= $3402/ETH in 3 years
What is so interesting is, because of the relative growth rate of Ethereum in the past year, the premium is significantly higher for the more complex Blockchain technology.
In the case of Litecoin, a prospective decline in the price of about 75% is on the cards:
(1.318 * 3 Years) * ($45.37) x (2.07%) = $3.71
(818%/297.4%)*3.71
= $10.22 in 3 years
For Ripple, currently the third largest digital asset on the leaderboard, the prospects are somewhat rosier:
(1.318 * 3 Years) * ($0.311) x (10.5%) = $0.129
(4669%/297.4%)*$0.129
= $2.02/XRP in 3 years
With a price of around a couple bucks, that puts Ripple in for another 1500% or so of growth over the coming 3 years.
Naturally, this model favours huge growth trajectories, especially for those assets that are towards the bottom of the leaderboard, to such am extent it might be unfeasible to apply it to any other asset than the Top 10.
Even so, it raises interesting questions and discussion points to think about when buying digital assets to hold over the long term. What is especially interesting is that there is some cohesive logic in the formula: after all, the simpler, more rote Blockchain assets seem to be yielding somewhat to the more complex, dynamic ones, putting ETH and XRP well in front of BTC and LTC.
Perhaps there is a message there worth considering. This is after all an economic formula.