How to value bitcoin: Valuation frameworks for investors

Bitcoin stands apart from some other assets in that it lacks a universally accepted valuation model. Still, investors have developed a range of frameworks to assess its worth, from network activity to production cost.

How do you value an asset?

One way investors value assets is by projecting their future cashflows and then discounting them back to the present. On the other hand, some commodities like gold or oil which do not generate cashflows are valued based on supply, demand, and scarcity. Each asset follows its own logic—but bitcoin (BTC) breaks the mold, which makes valuing it a unique challenge.

Institutional investors often hesitate to invest in BTC because there’s no widely accepted model for determining its value. But there are various frameworks for assessing BTC’s worth, many of which may look familiar. So, it’s not beyond investors’ capabilities to analyze BTC's worth, it’s just there’s no “one true” valuation method.

How to value bitcoin: Five valuation frameworks

A growing number of investors are exploring valuation frameworks that reflect frameworks of traditional assets, technology, and macroeconomics—some might look familiar. Together, they may offer a multi-dimensional picture of how to value BTC in the short and long term.

1) Valuing BTC as a commodity

BTC is often referred to as “digital gold”—a label that stems from its structural similarities with physical commodities. The steady and finite issuance of new coins, embedded in its code, deliberately mirrors the real-world mining process of precious metals.

Some investors see BTC as having potentially commodity-like scarcity, and hence, an inflation-resistant profile. However, it also differs from commodities in notable ways. As outlined in the original BTC white paper by Satoshi Nakamoto, BTC’s supply expansion requires the expenditure of computational energy, like the physical labor and energy costs incurred by gold miners.¹

Although BTC doesn’t exactly fit the description of a commodity, there are some frameworks to value it compared to other commodities.

A common framework for valuing commodities is the stock-to-flow (S2F) ratio: Circulating supply (stock) divided by annual production (flow)

This ratio quantifies how scarce an asset is—how many years of new supply it would take to match current levels.

• Gold’s S2F ratio has long hovered between 55 to 65, signaling extreme scarcity.⁴ With a current S2F ratio well over 100,⁵ BTC’s predictable declining supply boosts its appeal as a long-term store of value
• BTC’s issuance keeps shrinking—especially after halving events—which pushes its S2F ratio higher and increases its scarcity value. This predictability of supply, absent in fiat currencies and precious metals, may bolster BTC’s appeal as a long-term store of value once its volatility normalizes

2) Halving and cost of production: A supply-side framework for BTC valuation

There are some key features of BTC that investors can use to take a supply-side valuation approach, through a scarcity and cost of production approach.

• Programmable scarcity through halvings

A core feature of BTC’s design is its preprogrammed scarcity. To enforce this scarcity, BTC undergoes a halving event approximately every four years, reducing the number of new coins entering circulation.

Every 210,000 blocks—approximately once every four years—the BTC network undergoes a halving event that cuts the block reward in half and reduces the number of new coins entering circulation. This reward is the incentive given to miners who validate transactions and secure the network. When BTC launched in 2009, the reward was 50 BTC per block. It has since been reduced in successive halvings: to 25 BTC in 2012, 12.5 in 2016, 6.25 in 2020, and most recently, 3.125 BTC in 2024.⁶

As supply growth slows and assuming demand remains stable or increases, BTC’s price tends to rise in response to reduced availability. Although there are various lags and degrees based on broader market conditions, historically, each halving has been bullish for BTC.

The halving process introduces a unique type of monetary policy discipline into BTC’s economic model. Where central banks use interest rates and asset purchases to control inflation, BTC relies on programmatic scarcity, immune to political pressures or economic cycles.

This makes BTC particularly attractive if you are concerned with fiat currency debasement, inflation, or loss of purchasing power over time. As fewer new coins are created, existing BTC becomes scarcer, reinforcing its narrative as a digital store of value.

• Cost of production

The cost of production model suggests that the floor value of BTC is tied to the cost miners incur to mine it, primarily driven by electricity costs and computational intensity.

The New Liberty Standard, one of the first BTC pricing models, framed it simply: BTC price = Annual electricity cost divided by BTC mined over the same period.

When market prices fall below the cost of production, miners operate at a loss, and less efficient participants exit the network. This self-regulating mechanism reduces hash rate, lowers mining difficulty, and eventually balances supply pressure.

These inputs serve as a dynamic lower bound for price. At BTC’s inception, the price was negligible. $1 could buy over 1,300 BTC, a reflection of low energy costs and minimal competition. However, as more miners entered the network and the difficulty adjustment algorithm increased mining complexity, production costs surged. This self-regulating mechanism reduces hash rate, lowers mining difficulty, and eventually balances supply pressure.

Anecdotally, miners are getting smarter about how they manage energy. As block rewards shrink with each halving, the cost to produce each BTC goes up unless prices rise or miners become more efficient. This built-in scarcity motivates miners to support long-term price growth which supports BTC’s resilience through cyclical bear markets.

3) Network effects: Belief, value, and the self-reinforcing dynamics of adoption

One of BTC’s most powerful and misunderstood value drivers is its network effect. BTC’s value is significantly shaped by the size and strength of its user base, as opposed to cash flows or physical utility like many other assets.

In decentralized systems, value grows exponentially with adoption: the network becomes more useful and valuable to each individual user as more participants use the network.

This dynamic, often modelled by Metcalfe’s Law,⁸ states that the value of a network is roughly proportional to the square of the number of its users. For BTC, this means that every new participant increases the usefulness and credibility of the asset for all others—whether a holder, transactor, miner, or developer.

This also makes BTC reflexive: rising prices attract more attention and users, which further validates the network and pushes prices higher. Conversely, during downturns, declining sentiment can reduce activity and trust in the network. Therefore, sentiment and fundamentals are tightly intertwined in BTC’s valuation.

There are caveats. With the rise of liquid exchange traded BTC products, fewer investors are using BTC wallets directly. That may weaken the network effect—measured by active wallets, which is used as a proxy for nodes on the BTC networks—and reduce how much activity on the network influences price.

4) Total addressable market (TAM) approach

The TAM approach is a method used to estimate the potential market size for a product or asset by comparing it to existing markets that it could potentially disrupt or complement. For BTC, the TAM approach estimates its potential value by looking at how much of existing stores of value or money systems it could take over.

Basically, this means asking: If BTC grabs a certain percentage of big markets like gold, equities, or bonds, what would each coin be worth once you divide that captured value by the supply of bitcoin that will ever exist? It comes from this formula: Implied value of BTC = (Level(s) of market penetration × Value(s) of target market(s)) / Fully diluted supply. For BTC, the fully diluted supply is 21 million units.

For example, one common comparison is between BTC and gold. Gold has long been considered a store of value, and its total market capitalization is estimated to be around $30 trillion.⁹ If BTC were to capture even a fraction of this market, its valuation could increase significantly above current levels.

BTC could lose market share, but it also has the potential to disrupt or complement other markets. These outcomes aren’t mutually exclusive—it’s possible for both to happen at the same time.

Focusing on a 0.5% penetration level into some of the most cited markets, here’s how BTC's value could increase:

• US M2 money supply. With a value of $22.32 trillion,¹⁰ a 0.5% increase in penetration would imply an increase in BTC value of $5,315
• Gold. The total stock of gold held above ground amounts to approximately $30 trillion.¹¹ At a 0.5% increase in penetration, the increase in BTC's implied value would be $7,143
• Official central bank FX reserves.¹² Valued at $13 trillion, a 0.5% increase in penetration would suggest an increase in BTC value of $3,095
• Global remittances. With a market size of $905 billion,¹³ a 0.5% increase in penetration would yield an increase in BTC value of $215.5

This method gives a rough estimate by comparing BTC to traditional markets, but it assumes that BTC can take on roles within traditional markets, like being a store of value or a medium of exchange. Still, TAM may provide a strategic lens for long-term positioning. Institutions often use TAM analysis to justify small allocations today, anticipating potential future adoption curves similar to other disruptive technologies.

5) Sentiment: The psychological component of BTC pricing

Investor sentiment has always been a key force behind BTC’s volatility and price swings. Much of BTC’s price action reflects not just reactions to new information, but anticipation of others' beliefs and future behavior. Over the past several years, BTC and other major crypto assets have shown strong co-movements with the Fear and Greed Index—a sentiment gauge that captures market emotions through volatility, trading volume, social media trends, and other indicators.

This responsiveness to sentiment suggests that BTC doesn’t just act as a store of value, but it’s also as a reflection of collective belief and market psychology. It also introduces further reflexivity into BTC’s valuation: bullish sentiment can drive prices higher, reinforcing optimism, while negative sentiment can quickly unwind gains.

The future of bitcoin valuation

Valuing bitcoin remains a complex and evolving challenge, but investors aren’t without frameworks. By drawing on models from commodities, technology, and macroeconomics, and by considering factors such as scarcity, cost of production, network effects, and sentiment, investors can build a more nuanced understanding of BTC’s value.