Investors can use financial multiples to arrive at a stock’s intrinsic value, which includes a price-to-earnings ratio (P/E), price-to-book ratio (P/B), and/or enterprise value to EBITDA (EV/EBITDA) multiple. Because of the uniqueness of a business and/or an industry, a “one-size-fits-all” approach does not exist for valuing stocks. Moreover, as industries have evolved, so have valuation methodologies. Throughout the information age, market participants have been at odds with valuing technology businesses because of their disruption potential, massive cash burn rates, exuberant growth, unexplored/unquantifiable markets, and priceless intangible assets. Such complexities have caused even the most talented and experienced market participants to miss the boat.
“I made the wrong decisions on Google and Amazon.” – Warren Buffett
Consider that if we were to value Facebook’s stock by using a price-to-book ratio (P/B), we’d fail to account for Facebook’s most valuable intangible asset – its network of 1.8B daily active users that is available to anyone with an internet connection and an email address. Source: s21.q4cdn.com
With this in mind, consider bitcoin’s intangible assets when ascertaining its intrinsic value, such as the following:
Nasdaq-listed and Wuhan-based Kingold Jewelry used gilded copper bars to pass off as real gold bars to secure $2.8B in loans from more than a dozen Chinese financial institutions. The scheme came to light in February 2020 when Dongguan Trust Co. Ltd. went to liquidate Kingold’s collateral to cover defaulted debt, only to discover gilded copper alloy. On May 22nd, one of Kingold’s largest creditors, China Minsheng Trust Co. Ltd., obtained a court order to test a sample of the collateral and discovered copper alloy. As of September 23rd, shares in Kingold have fallen -88% since the news broke in February. Source: caixinglobal.com
Bitcoin was developed with incentives in place to ensure that network validators have a vested interest in verifying past and present transactions, bitcoin’s immutability is arguably priceless. The immutability of a bitcoin and a corresponding transaction, which cannot be counterfeited or faked, makes bitcoin a highly differentiated, reliable, secure, and valuable asset.
The same could be said about bitcoin. The case could be made that bitcoin will “succeed” not purely because of its underlying technology and value proposition, but because people believe it will succeed. Participants believe adoption, or the purchase/use of bitcoin, will continue to accelerate and for this reason, they adopt themselves. This rationale ignites a wave of adoption that drives others to the same conclusion and the same action. As a social phenomenon that continues to attract new users despite weathering several boom and bust cycles, bitcoin possesses the potential to rise to prominence due to its reflexive nature. Sources: nfx.com investopedia.com
For more information, download a free copy of “The Great Debate: Bitcoin & Intrinsic Value”, Kraken Intelligence, September, 2020.