Blockchain’s purpose is to store and transfer information. Blockchain makes data transactions available publicly, easily accessable and immutable. Blockchain can solve tons of issues of modern industries, which hugely depend on continuous exchange of information (i.e. IT, finance, logistics, etc.).
Nowadays we are in the very early stage of development of blockchain technology. It can be compared to internet in early 2000s. Nobody could predict back then how far the industry would grow. With time internet became one of the most important parts of our life, and now we can safely assess almost all the world’s major internet companies. Just look at the market cap of Amazon, Facebook, Google, etc., and you’ll get the answer.
But how can you estimate the value of all blockchain platforms? The most simple and obvious answer is via total cryptocurrency market capitalization. Needless to say how extremely volatile is cryptocurrency market at its early stage, making it hard to provide insightful info of the real worth of the technology.
The purpose of this article is to look into the future and speculate on the potential value of cryptocurrency market once it matures, in other words, make a prediction of how big the demand for blockchain technology will be in, say, 5-10 years.
Value of cryptocurrencies from store of value point of view and utility point of view
In modern financial theory a company’s value is calculated as projected financial benefits, or income, which it can generate over the course of its future business activities. Another method is to evaluate assets, like buildings, factories, ships, vehicles, which belong to the company. The value of all public companies, which have shares traded on stock exchanges, is called stock market capitalization.
Cryptocurrency market capitalization can’t be described in similar way. Cryptocurrencies don’t provide income from operating activities. Nor are they a tangible asset. In fact, they intend to solve two tasks.
Firstly, cryptocurrencies are currencies and can be paid in exchange for data transactions on blockchains. Cryptocurrencies are literally the blood of blockchain platforms. Payments in cryptocurrency motivate operators of blockchain nodes to process data transactions over the blockchain. The most demanded blockchain platforms have the highest utility value, reflected in the capitalization of their cryptocurrencies.
Secondly, cryptocurrencies can act as a store of value. The most protected and decentralized blockchains, like bitcoin, are most suitable as a store of value (substitute for gold or fiat money). The most tech advanced blockchains, like dash, besides the store of value, are suitable for transfer of value. But I think that the transfer of value is more related to utility value of cryptocurrency, because it is a substitute to companies like Visa, MasterCard, Western Union, etc.
Calculating utility value of cryptocurrency
Now let’s consider that the value of all companies represents the utility value of services and goods, provided by those companies to society. I believe that it is approximately equal to the total stock market capitalization, derived from conventional economic calculation methods (discounted cash flows, assets valuation, etc.).
Also we can say that total capitalization of cryptocurrency matkets represents the utility value of all benefits which all blockchain platforms provide to society.
So now we need to understand which part of utility value, provided by companies, can be substituted by utility value, provided by blockchain platforms.
According to World Federation of Exchanges, the total market capitalization of all stock markets reached $67 trillion by the end of 2016. No data for 2017 was available at the time of writing this article.
At the end of 2017 MSCI calculated that the world market capitalization equals $46 trillion, based on its MSCI ACWI Index. MSCI ACWI Index takes into account large and mid cap companies across major global developed and emerging markets. The index covers approximately 85% of the free float-adjusted market capitalization.
The large difference in figures can be explained by that fact, that World Federation of Exchanges takes into account 100% of the total market cap, but MSCI includes only 85% of free float-adjusted market cap. The difference between these two methods is that free-float approach considers only available shares on the market , but the total market cap methodology includes all shares outstanding. The latter methodology reflects the total value.
So, the figure we are looking for is $67,2 trillion at the end of 2016. To estimate a 2017 figure, let’s take into account that in 2017 world stock markets provided a return of approximately 24%, according to MSCI. It means that the total market cap at the end of 2017 should be around $67,2 trillion * (100% + 24%) = $83 trillion.
Summary: the total market capitalization of all public companies in the world equals approximately $83 trillion.
MSCI estimates that companies of IT and financial sectors capture 18% and 19% of total market cap, adding up to 37%. It means that the value of all public companies in the world, which provide services that can be partially replaced by blockchain technologies, is approximately $31 trillion.
Lets make a very conservative assumption, that only 10% of IT and financial services will be improved with the help of blockchain technology and will depend on blockchain in the future. That gives us $3.1 trillion in utility value, which blockchain technology can provide. Once again, this is a very conservative estimate.
Calculating value of cryptocurrency as storage of value
There is a convention among cryptocurrency adopters that some cryptocurrencies can act as a store of value. And there are solid reasons behind the belief. Let’s take bitcoin. It’s emission is limited to 21 million coins (transparent information about supply, not like inflationary fiat currencies; gold substitute as well). Anyone can easily buy and sell it with the help of accessible software (simple and fast transactions without the need of third parties, like banks or money transfer services). Anyone can store it safely (without the need of third parties, like banks). Bitcoin ecosystem is self-sustainable, because node operators are motivated to process transactions and receive a fee in return.
Unlike bitcoin, fiat money is printed in an unlimited fashion. Fiat money is backed by sole promises of governments. Governments can have a strong or weak economy, strong or weak political system, powerful or frail military, all of these factors can drastically reflect on the value of currencies. Besides, no one can restrict the government from publishing more banknotes or coins. So fiat can’t be a true store of value.
Business Insider refers to the Bank for International Settlements, estimating the amount of notes and coins in circulation all over the world to be equal $5 trillion. This is the narrowest measure of money.
The broad measure of money supply additionally includes everything except physical money: checking accounts, savings accounts and money-market accounts. According to CIA World Factbook, the amount of this encompassing money measure is estimated to be $80 trillion.
Gold is a nice example of store of value, but it is not limited either. According to World Gold Council, the best estimates currently available suggest that around 187,200 tonnes of gold have been mined up to date, of which around two-thirds came after 1950. So, the supply of gold is not fixed. However, it’s less inflationary than fiat supply.
Nowadays 1 kg of gold costs $40,000, which means that all mined gold in the world costs $7,5 billion.
In order to estimate which portion of gold and fiat money can be substituted by cryptocurrencies, I will use the most conservative estimate – only 10% (yearly volatility of stock markets or commodities is much higher!). Yes, I would dare to stay that only 10% of all fiat money and gold can be replaced with cryptocurrencies. Furthermore, to keep to the conservative base, I will consider not broad money supply ($80 trillion), but only coins and notes in circulation ($5 trillion).
Now, lets calculate the potential value of cryptocurrencies as a storage of value:
a). ($7,5 trillion + $5 trillion) * 10% = $1,3 trillion, if narrow money supply is considered;
b). ($80 trillion + $5 trillion) * 10% = $8,5 trillion (!!!), if broad money supply is considered.
The potential value of all cryptocurrencies is $4,4 trillion
To find out how much the cryptocurrency market capitalization can reach, we need to simply add up two figures:
a) potential value of cryptocurrencies from store of value point of view ($1,3 trillion) + potential value of cryptocurrencies from utility point of view ($3,1 trillion) = $4,4 trillion, if we consider only narrow money supply (the most conservative case).
b) $8,5 trillion + $3,1 trillion = $11,6 trillion, if we consider broad money supply (just conservative case).
Our readers should take into account that these figures are derived from quick and most obvious educated guesses and estimates. I didn’t consider the world’s economy growth during the time the blockchain market becomes mature, which may take up to 5-10 years. I didn’t take into account private companies, when estimating the value of financial and IT sectors. You can dig deeper and perhaps provide more insights into how to estimate the total potential value of cryptocurrencies.
And one more figure at the end. According to Credit Siusse, there are approximately 33 million US dollar millionaires in the world, but the bitcoin cap is only 21 million.
Disclaimer: this article is not a financial advice, but only a personal opinion of the author.