Almost one hundred years ago, Henry Ford, the man behind the Ford Motor Company, imagined an "energy currency", suggesting that instead of gold, nations could base their currencies on energy resources. While this idea never materialised - probably due to its potential to undermine government control over wealth- Ford's concept is partly reflected in bitcoin.

This cryptocurrency, often referred to as digital gold, operates on a decentralised network and is created via a "mining" process that requires a significant amount of energy. Indeed, some argue that the value of bitcoin is intrinsically linked to the energy expended in its creation.

As a reminder, bitcoin is not controlled by a central authority such as a bank or government. Instead, a global network of computers, known as miners, verify and record every bitcoin transaction on a decentralised network powered by the blockchain. These miners compete to solve complex mathematical puzzles to confirm and add transactions to the blockchain. Miners invest in high-performance computing devices and consume large amounts of electricity to solve these puzzles and earn rewards in the form of bitcoins. This process is known as "Proof-of-Work" (PoW) and is the reason why bitcoin is so secure and immutable.

When it was launched in 2009, the bitcoin protocol included a set of predefined rules, one of which stipulates that a new block containing a set of transactions must be verified and recorded on the blockchain every 10 minutes or so. It also sets a limited supply, capped at 21 million bitcoins by the year 2140. Currently, around 19.6 million bitcoins are in circulation, with the production of new bitcoins halving every four years, a phenomenon known as halving.

Unlike traditional assets such as stocks or bonds, bitcoin lacks tangible metrics like earnings, dividends, or net assets that investors typically rely on to gauge value. Consequently, determining a fair value for bitcoin remains elusive, as conventional valuation methods are not directly applicable. The price of one bitcoin will thus tend to align with factors such as supply and demand dynamics, geopolitical events, investor sentiment and its production cost through the mining process.

In 2019, Capriole Investments developed an interesting model known as the Energy Value Equivalence, focusing on the energy expended in bitcoin's production. At its core, this model seeks to assess the intrinsic value of bitcoin by quantifying the energy expended in its production and compare it to the energy required to produce other assets or commodities.

The model highlights several key insights: firstly, that energy, measured in raw Joules, is a fundamental determinant of bitcoin's fair value. Secondly, increased energy input corresponds to a higher fair value for bitcoin. Moreover, the Energy Value model suggests that bitcoin's price tends to revert to its mean Energy Value over time.

The assumption underlining the model suggests that bitcoin’s intrinsic value is a function of the amount of energy expended in its production, the rate at which its supply grows, and a conversion factor to fiat currency for energy expenditure.

Also in 2019, Plan B, a mysterious Dutch institutional investor, presented the Stock-to-Flow (S2F) model assessing the value of bitcoin with surprising accuracy. This quantitative model attempts to predict the theoretical value of bitcoin over time based on asset scarcity. Initially greeted with scepticism, in 1999 the model predicted a rapid rise in bitcoin to $55,000 after the May 2020 "halving". A prediction that proved accurate, as bitcoin reached this level in 2021, reinforcing its credibility through its ability to predict prices.

In simple terms, the "Stock-to-Flow" model is an indicator of the scarcity (or abundance) of a commodity. It is the total amount of a resource's reserves (the "stock") divided by its annual production (the "flow"). The Stock/Flow ratio therefore measures the annual marginal supply, or additional supply, in relation to existing reserves. The higher this ratio, the less supply is renewed, and therefore the more the asset in question can be considered "scarce".

This model is generally applied to precious metals, such as gold. Current gold reserves (the "Stock") are estimated at around 192,000 tonnes. The "Flow" corresponds to the quantity of gold extracted each year, i.e., 3,200 tonnes. Dividing the total supply by the "Flow" gives a ratio of ~60. This means that, at current production rates, it would take around 60 years to extract 192,000 tonnes of gold.

Given bitcoin's unique properties (e.g., time-limited supply), the stock-flow model seems to apply to bitcoin in the same way as it does to precious metals. Bitcoin currently has a "stock" of around 19.6 million and a "flow" of 0.353 million per year, giving a SF of 55.5. Before the May 2020 "halving", the SF was 25 (the SF was even lower a few years earlier). In the future, bitcoin's SF should continue to rise, influenced by its limited supply and the halvings every 4 years. The SF is predicted to be 110 after the April 2024 halving.

While the Stock-to-Flow and Energy Value models offer valuable insights into Bitcoin's value, it's essential to recognize their limitations. These models, emphasising scarcity and energy consumption, may overlook critical factors such as regulatory risks and market volatility. Bitcoin's relatively short history may raise questions about the long-term validity of these models.