Bitcoin will fundamentally change the way investors value companies.
Upgrading monetary technologies is a radical paradigm shift that will confuse many financial ‘experts’. Our current monetary system, the US dollar, is based entirely on an ever-increasing debt mountain. Bitcoin’s monetary system, on the other hand, is based on stocks, with no counterparty risk and no dilution risk.
Once the world has fully embraced bitcoin as the superior monetary commodity, we will be living in a post-hyperbitcoinization world. Let’s experiment and see how a company is valued with bitcoin as our unit of account or measure.
Wyoming Red Ribeyes
The fictional company we’ll be using for this example is Wyoming Red Ribeyes. It is a small-scale, consumer goods supplier of beef that raises livestock and then sells premium beef to supermarkets in the US.
We will analyze this company with a Discounted Cash Flow (DCF) analysis. Simply put, we try to predict the future cash flows the company will generate, and we discount those cash flows to their present value.
Two DCF models are made. One model analyzes the company in a world where prices are set by USD-denominated investors (today), and the other model analyzes the company in a world where prices are driven by BTC-denominated investors (post-hyperbitcoinization).
Model in USD (pre-hyperbitcoinization)
Before we create the full model, we need to outline our assumptions.
First, let’s assume that the current variable cost per ribeye produced is $ 5 and the price Wyoming Red Ribeyes is selling it for is $ 10. Based on previous years sales, we expect 10 million ribeyes to be sold this year. Other expenses, including selling, general and administrative expenses, have historically equated about 25 percent of annual sales.
In addition, we expect unit costs to increase by 2 percent per year (consumer price index inflation), and it will pass that on to its customers by increasing our prices by 2 percent per year. It also expects the number of ribeyes sold to grow by 2 percent per year as beef consumption in the US increases steadily.
Finally, Wyoming Red Ribeyes expects to sell the business within 10 years at a price-earnings (P / E) ratio of 25 (the average of the S&P 500 Consumer Staples), and it will discount expected future cash flows to today’s . value using the company’s weighted average cost of capital (WACC) as the discount rate. This company is funded with 50 percent debt and 50 percent equity, with a debt cost of 100 basis points (bps) above the risk-free rate (based on a 10-year Treasury) and a equity risk premium of 5 percent.
Above is the USD DCF model (hide years four to nine for display purposes). Three things are quite remarkable: First, we can see that revenues start at $ 100 million and continue to grow over time. Two: Revenues start at $ 25 million and also continue to grow over time. And three, the implied market cap is just under $ 1 billion.
BTC-denominated model (post-hyperbitcoinization)
Before creating the full model, let’s outline our updated assumptions as all prices are now expressed in bitcoin.
First, we updated the unit cost to 50 sats and the price at which Wyoming Red Ribeyes sells a unit to 100 sats. This equates to about $ 5 and $ 10, respectively, against $ 10 million per BTC. Based on previous years sales, Wyoming Red Ribeyes is still expecting 10 million ribeyes this year. Other expenses, including selling, general and administrative expenses, have historically equated about 25 percent of annual sales. It’s possible that this percentage will decrease over time, but for simplicity’s sake, we’ve kept it quiet.
Contrary to our USD-denominated analysis, Wyoming Red Ribeyes can anticipate that both costs and prices will fall 5 percent annually. This is due to bitcoin’s natural deflationary nature, which allocates productivity gains to bitcoin savers. These productivity gains can come from an infinite number of sources, including: automated energy production; self-driving vans; automated packaging and distribution; automated feeding, breeding and slaughtering processes; or new software that drives other unforeseen improvements.
Finally, Wyoming Red Ribeyes expects to sell the company at a P / E multiple of seven within 10 years, and we will return our projected future cash flows to today’s value using the expected equity risk premium below a Bitcoin standard, 10 percent. The P / E ratio is expected to be around seven and the discount rate is expected to be around 10 percent to better offset the risk the investor is taking against the new opportunity cost of simply HODLing bitcoin. The discount rate could potentially be higher and the P / E could potentially be lower.
Above you can see the BTC DCF model (hide years four to nine for display purposes). Four things are quite remarkable: first, we can see that earnings start at 10 BTC and continue to decline over time. Two, earnings start at 2.5 BTC and also continue to decline over time. Three, the implied market cap is just above 20 BTC. And four, and in particular, the real market capitalization in USD is less than a quarter of the world valuation in USD.
Bitcoin swallows ‘store of value’
As you might have expected, this massive drop in (real) valuation simply takes the “store of value” aspect out of the stock, as that value is completely stored in bitcoin. It may be better to think that stocks will not fall in (fair) value, but instead the amount of actual savings in the economy should increase by several orders of magnitude. That is to say, the value per bitcoin has to go very high.
Ultimately, bitcoin HODLers will be the ones who value stocks in a bitcoin world, and they will be the ones who determine what risk premiums they are willing to part with their bitcoin at. The types of businesses and projects funded in a bitcoin world are high-value, low-time-biased endeavors because that’s the only way to get positive free cash flow.
The high risk premium on shares does not necessarily mean that fewer projects will be funded. It’s likely that bitcoin’s value will soar that big HODLers will have so much wealth to fund all kinds of interesting ventures, while still keeping a significant portion of their BTC as savings.
Bitcoin will usher in a new era of price discovery for markets by eliminating government and central bank intervention, erasing the idea of debt, and allocating all risk-free ‘store of value’ to bitcoin. It is likely that the amount of wealth that people will be willing to store in a risk-free “store of value” asset with no counterparty risk and no dilution risk is incomprehensible.
This is a guest post from Mimesis Capital. The views expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine