New York Mellon Bank's latest research report "Blending Art and Science" seeks the most suitable valuation model for Bitcoin.

The Bank of New York Mellon (BNY Mellon) holds over $25 trillion in assets, making it one of the largest custodian banks in the world. In March of this year, the bank released a research report titled "The Art and Science of Bitcoin Valuation," which aims to explore which valuation models are suitable for Bitcoin.

The Controversial Stock-to-Flow (S2F) Model

The most widely discussed Bitcoin valuation model to date is the Stock-to-Flow (S2F) model proposed by quantitative analyst PlanB in March 2019. This model aims to measure Bitcoin's future value based on its scarcity (the current total supply of the asset (stock) divided by the amount that can be mined in the upcoming year (flow)), and can also be used as a valuation model alongside gold and other precious metals.

As the production of Bitcoin decreases over time, under the Stock-to-Flow model, the value of Bitcoin is expected to rise. PlanB had predicted during the last Bitcoin halving that by May 2020, the price of Bitcoin would reach around $55,000, which is not far from the current $57,000. However, many critics still find this model unrealistic. For example, Eric Wall, the Chief Investment Officer of the cryptocurrency hedge fund Arcane Assets, stated at the end of last year:

"I bet a million dollars that S2FX will be completely off within five years starting now. This is not a joke, I'm willing to escrow the bet with a trusted third party we both trust, and you'll have to do the same. By 'off,' I mean Bitcoin not even reaching 50% of what the S2FX predicts."

Analysts at Mellon Bank agreed with the critics of the S2F model in a report, stating that "supply does not determine asset prices" and that "the purchasing power of the dollar" and "expectations of inflation or currency devaluation" can more reasonably explain the price movements of gold and most commodities.

Other Models Have Flaws as Well

Apart from the Stock-to-Flow model, analysts at Mellon Bank also listed other valuation models in their report, such as the Cost-of-Production model, Network-Value-to-Transaction model, Stock-to-Flow cross-asset model (S2FX), all of which have their own flaws.

The Cost-of-Production model, which values Bitcoin based on mining costs, will become inaccurate as production costs decrease with the use of renewable energy in the future. The Network-Value-to-Transaction model is based on on-chain transaction volume, but even if most people hold their Bitcoin in wallets without moving them, the price of Bitcoin continues to rise. Additionally, the Stock-to-Flow cross-asset model, which compares Bitcoin to other assets, is also controversial. Researchers concluded in the report that there is currently no single model that can accurately predict Bitcoin valuation. However, they stated:

"Ultimately, the valuation of Bitcoin is likely to involve a combination of multiple models and will continue to evolve and update as it gains mainstream adoption."