• Giancarlo Farfan

Projection of ultimate monetary mass by Crypto Asset class

Updated: Apr 27, 2020

The forecast of the ultimate monetary mass of a crypto asset consists in projecting, in an established financial environment, post mainstream adoption, the possible or likely size of the market capitalization of the large crypto asset classes, in today’s euros – regardless of which coin will be predominant, or if many co-exist.

Getting into the detail of this exercise is probably equivalent to a number of Ph.D. theses, so we will limit ourselves to some estimations of a few orders of magnitude, and call for a deeper study.

We are going to separately address two very different classes of crypto assets: Bitcoin-likes (non-execution infrastructure token) and Etherium-likes (execution infrastructure token).

Bitcoin and its peers (non-execution infrastructures)

Bitcoin and other non-anonymous, pure cryptocurrencies, including Litecoin, have an outreach that is purely monetary. A number of approaches can be used to estimate the ultimate monetary mass that will be covered by these crypto-assets:

  • Our first projection is based on technical analysis of the price trend (for this we’ll consider just BTC). If we project logarithmically and in the same order of magnitude the gains that occurred between January 2015 and January 2017, and considering that the next price increase is the final adoption phase, then we have an order of magnitude of x100. If we moderate this figure based on quantitative easing by central banks, which has somewhat devalued money, and if we reckon that for each new growth cycle, the Bitcoin price “jump” is reduced, then with a factor of x30, we derive a projected BTC market capitalization of 3,000 billion euros.

  • Another projection consists of comparing this crypto asset class with the value of today’s standard financial assets. There are currently 35 trillion euros of “narrow money”, which covers coins, banknotes and checking deposits at commercial banks, and 100 trillion euros of “broad money” if you add savings accounts. Depending on whether we decide to consider the narrow or broad money supply, and considering that countries would take drastic measures if the value of IĀĒ reached 15% of that, we obtain between 5 and 15 trillion euros.

  • The total gold supply today is worth close to 10 trillion euros, which is another magnitude to note, because of the tendency (valid, to some extent) to see BTC as digital gold.

We see that the orders of magnitude indicate that a market cap in the range of 5 to 10 trillion euros is feasible, but beyond which, is unlikely. To translate this into BTC price, supposing that BTC ultimately accounts for 50% of this monetary mass, we obtain a BTC price of between 120k and 240k euros.

Ethereum and its peers (execution infrastructures)

Even today, the market price of native distributed execution platform tokens (Ether, Cardano, Neo, Stellar, etc.) cannot be explained by the utility of these tokens. With reasoning based on the valuation of the market for cloud computing, extrapolated to DLTs, the rate of the tokens paying for the execution, the monetary mass needed in the ecosystem is limited.

However, other segments of usage have to be accounted for, since on-platform basic value transfers, stable coin backing, and other fundamental factors will immobilize some monetary mass (think of the ICOs raising Ethers and not USDT). So, fundamentally we are tempted to infer the on-chain monetary mass from the size of the economy that is likely to be supported by it, and take a fraction of that as the fundamental native token volume of money needed in this situation.

So, let’s see just that! We will start with some blind guess hypotheses:

  • Why not assume that 10% of the global economy ultimately transfers to public DLT platforms (as opposed to the rest being handled on permissioned blockchains).

  • Then we have to estimate the value of all assets circulating in the global economy. This is touchy. The stock market is worth about 100 trillion euros, add to that 100 trillion of broad money; then the global debt is around 200 trillion, as is real estate debt. But then we also have the derivative markets, which are financial bets that are very difficult to evaluate. These are estimated to be at least 500 trillion. So, let’s say we have assets valued at 1,000 trillion euros in the global economy.

  • Let us consider that 5% of this monetary mass is directed to native token usage.

Using these assumptions, the monetary mass of IEĀ tokens will be approximately 5 trillion euros. Again, to give some perspective, if Ethereum was a platform that handled half of this traffic, this would mean an Ether price of almost 50,000 euros.

About the author:

Alexandre is Head of Research at BQ Intel, blockchain research and analytics company. He works as an adviser to multiple ICOs and fin-tech startups in the blockchain industry.

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