Valuations of Stocks in Bitcoin – Brain Melt

Consider a company/stock with the following attributes:

a)    It’s shares are bought and sold with bitcoins

b)   It’s valuation is in bitcoins

c)    It’s profits are in bitcoins

Now imagine those profits are hefty.

If we take common company valuation methodologies, specifically the PE Ratio of a company, and apply that within the new, small and constrained (in volume of total currency) world of bitcoin, we can potentially find ourselves in an interesting situation.

The valuation of said company, can in theory exceed the total number of bitcoins. brain melt

In 1999, the Average PE ratio of the S&P 500 was a staggering 44.20 (and has been above 65 since). By this account the bitcoin gambling site Satoshi Dice, who’s shares are traded in and valuation is in bitcoin, is worth a staggering 3.3million BTC. Or near enough ¼ of the total bitcoins currently in circulation.

Now imagine 100 companies (quite a small number of companies in the scheme of things) all traded and valued in bitcoin. Imagine each of those companies makes a measly 20,000 BTC profit per year (the same amount Satoshi Dice earned in January 2013 alone) for a total combined profit of 2million BTC. At a modest PE of 12 (at the date of writing the S&P500 PE was 17.37), those 100 companies would be worth twice the entire current pool of available bitcoins, and more than the total number of bitcoins that will ever be produced.

Economically it isn’t a problem because those share prices will only remain high whilst those companies continue to perform well. Some people might wonder what would happen if there was an attempt to sell all the shares at the same time, but simply put this would require the share price to go down massively (since otherwise sell orders would be met with buy orders) until demand becomes nil because nobody has any bitcoins to spend, and the share price drops while the exchange rate between USD and bitcoin goes MENTAL.

In other words, while the total valuation of bitcoin companies might be more than the total value of bitcoins, equilibrium will persist and a situation cannot occur in which this will become a problem. If company profits are recycled into the bitcoin economy, the phenomenon of companies total valuation being higher than the total volume of bitcoins is exacerbated (in a very positive way).

The brilliant side note to this phenomenon is that huge bitcoin profits and valuable bitcoin stocks are great for the fiat price per BTC.

2 thoughts on “Valuations of Stocks in Bitcoin – Brain Melt

  1. Spekulatius on

    I dont have numbers right now to back it up but I guess all the publicly traded companies in the world combined have a value greater then the whole monetary base in the world anyway. This phenomenon becomes more observable when applied to the miniature world of the Bitcoin economy of course. Nice thought experiment!

    +bitcointip 0.01 BTC verify ;)

    Some follow up questions:
    - Is the current valuation of Satoshi Dice and comrades actually justified?
    - Are we at the beginning of a Bitcoin stocks bubble?
    - Will Bitcoin companies pose a more profitable investment then hoarding Bitcoin itself?

  2. The wilshire total market index puts the market cap of all US-listed equities at about $15Trillion – about 150% of M3 (www.shadowstats.com/charts/monetary-base-money-supply). Its just how fonance works because market cap is based on stock price which accounts not just for present but also future value.

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