Bitcoin will fundamentally change the way that investors value companies.
Upgrading monetary technologies is a radical paradigm shift that will leave many financial “experts” confused. Our current monetary system, the U.S. dollar, is based entirely on an ever-growing mountain of debt. In contrast, the Bitcoin monetary system is equity-based, with no counterparty risk and no dilution risk.
Once the world has completely embraced bitcoin as the superior monetary good, we will be living in a post-hyperbitcoinization world. Let’s experiment and see how a company will be valued using bitcoin as our unit of account or measuring stick of value.
Wyoming Red Ribeyes
The fictional company we will use for this example is Wyoming Red Ribeyes. It is a small cap, consumer staples, wholesale beef supplier that raises cattle and then sells premium beef to grocery stores in the U.S.
We will analyze this company with a discounted cash flow (DCF) analysis. Put simply, we attempt to predict the future cash flows the business will generate, and discount those cash flows to today’s value.
Two DCF models are created. One model is analyzing the company in a world where prices are driven by USD-denominated investors (today), and the other model is analyzing the company in a world where prices are driven by BTC-denominated investors (post-hyperbitcoinization).
USD-Denominated Model (Pre-Hyperbitcoinization)
Before we create the full model, we need to lay out our assumptions.
First, let’s assume the current variable cost per ribeye produced is $5, and the price that Wyoming Red Ribeyes sell 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, historically equal about 25 percent of annual revenue.
Additionally, we expect its unit costs to rise 2 percent per year (consumer price index inflation), and it will pass that on to its customers by raising our prices 2 percent per year. It also expects to increase the number of ribeyes sold by 2 percent per year, as U.S. beef consumption is steadily growing.
Last, Wyoming Red Ribeyes expects to sell the business in 10 years at a price-to-earnings (P/E) ratio multiple of 25 (the S&P 500 Consumer Staples average), and it will discount its projected future cash flows back to today’s value using the company’s weighted average cost of capital (WACC) as its discount rate. This company is financed with 50 percent debt and 50 percent equity, with a cost of debt equaling 100 basis points (bps) above the risk-free rate (based on a 10-year treasury note) and an equity risk premium of 5 percent.
Above is the USD DCF model (hiding years four to nine for display purposes). Three things are very notable: One, we can see that revenue starts at $100 million and continues to grow over time. Two, earnings start at $25 million and also continue to grow over time. And three, the implied market cap is just below $1…