The concept of Sia is simple, create a decentralized market where users can buy, and providers sell storage space. If Bitcoin is the new dollar, Sia is the new Akamai or Amazon S3.
?The promise of Sia is a decentralized network of datacenters that, taken together, comprise the world?s fastest, cheapest, and most secure cloud storage platform.? According to Sia?s Roadmap their ambitious goal is by 2020 to become a true competitor to Amazon S3 and that companies start to switch to Sia as a decentralized, cheaper alternative.
Nowadays, every crypto is highly correlated with Bitcoin. Therefore, big Bitcoin price changes affect the rest of the Altcoin prices. Eventually, these correlations will decrease, and we will see how different cryptos are traded as if they were different asset classes. For example, we would differentiate currencies between PoW, PoS, Hybrid, Interbank Settlement, Smart Contracts, Media Content, Cloud Storage and many more.
I?m looking for a long-horizon Siacoin price forecast. One that?s built on fundamentals. So, when trying to determine its value, I wondered what would eventually determine Siacoin price. Ultimately the price is tied to the Sia network success. Therefore, Siacoin?s value will eventually depend on people?s expectation on the growth of the business and the ecosystem on Sia network. However, we will see huge fluctuations, in Siacoin price fueled by speculators.
Siacoin has the same problem as many other crypto currencies: it doesn?t have any intrinsic value as it only serves the purpose of making possible the payments between hosts and renters. Siacoin was never meant to be a currency that stored value. Hence, it cannot be valued as a percentage of the gold?s market cap. Siacoin price comes exclusively from perceived value.
Why inflation rate matters?
Many state that Siacoin has unlimited supply and a huge inflation rate. Well, that is not actually true. First, Siacoin has a decreasing inflation rate because of the decreasing block reward mechanism (300,000-Block Height). With a larger token base and a decreasing token supply the inflation rate decreases every day. Second, Proof of Burn mechanisms for hosts, yet to be implemented in a future update, will help to decrease the total supply of tokens. Burnt tokens should offset the inflation rate, so eventually there will be a constant supply a token or even we could see deflation in the amount of tokens available.
This can be seen in the following graph:
Proof of Burn mechanics for hosts is not considered
However, we will have to wait a few years until we see a stable supply of tokens outstanding. The inflation rate for the next few years is going to be huge. From June 2017 to June 2018 the inflation rate will be 38%, that is 12.7 billion new tokens. For the next one year period (June 2018 to June 2019), it will be 17.5% or 6 billion new tokens. And for the following one (June 2019 to June 2020) 3.3 billion new tokens will be mined.
A simple analogy that explains why a growing token supply causes dilution of the value of the outstanding tokens is the following:
Let?s imagine an economy that produces 1,000 units of output and suppose that the money supply (number of notes and coins) equals $10,000. This means that the average price of the output produced will be $10 (10,000/1,000).
Suppose that the government issues an extra $5,000 of notes and coins so the total money supply will be $15,000; but the output of the economy stays at 1,000 units. Then the price of each good will be $15 (15,000/1,000). This means that each monetary unit buys fewer units of production than before.
Sia?s current (March 2018) market cap is 0.4 billion USD and with the current supply of 33 billion tokens outstanding that gives us a price per token of 1.21 USD cents (0.4/33 billion). Under the not strong assumption that the current market cap represents Sia?s network perceived value and that this value shouldn?t change unless Sia developers make significant improvements to the platform; each new token that is released will contribute to lower the value of every other token outstanding.
One year from now there will be 40 billion tokens in circulation, and with the current market cap, that would mean that each token will be priced at 1 USD cents (0.4/40 billion) which is 17% less than the current price.
As mentioned above, Siacoin?s value eventually will depend on people?s expectation on the growth of the business and the ecosystem on Sia network. According to Metcalfe the value of a network is proportional to the square of the number of connected users of the system.
The number of daily transactions can be used as input in the formula. On average, Sia has 10,000 daily transactions, so the value of Siacoin would be 0.1 billion. If in the next two years, this number grows 10 times to 100,000 daily transactions, then the total value of Siacoin jumps to 10 billion. Even with a $10 billion market cap in the next two years the price of each token would be 22 USD cents (10 billion / 45 billion tokens).
Another valuation technique that?s popular among cryptocurrency investors is the relationship between market cap and daily transaction volume.
The historical average over the past 6 months has shown a relationship between daily transaction volume and the market cap of Siacoin. On average, the market cap of Siacoin = 53.5 x daily transaction volume.
In the past 6 months, the average volume transacted by the market has been about $2.5 million, which means a market cap of $0.13 billion.
$1 doesn?t seem much. But it is.
Let’s assume that Siacoin reaches the $1 speculator goal by 2020. What would you be able to afford if you owned all the Siacoin outstanding? You would be able to buy 5 times Dropbox at current valuation of 8 billion and still have some cash left.
Dropbox hosts over 500PB of data, has over 11 million paying users and over 300,000 businesses paying for their services. Whereas, Sia?s network has 4.5 PB of storage available of which 160 TB are being used. It would be irrational to state that Siacoin would be over 5x more valuable than a business over 100x bigger in storage terms.
To put this into perspective, you could afford the cost of construction of Trump?s Wall bordering Mexico estimated at 25 billion dollars or you could afford half of Warren Buffet net worth.
One thing to consider is that the network is not ready for production. Current network stats are not representative of a useful platform. At the moment, Sia is more or less a testnet since most Sia users are experimenting with it.
I would expect usage rates and storage capacity to increase drastically. If there is real usage of the platform I would say that we would see the storage capacity of Sia increase 100x or even 1000x.
We?re now during the birth period and wild speculation. Eventually, Sia?s technology is going to be business ready. Then, we will definitely see extremely fast adoption rates.
In the next crypto bull market run, we will definitely see new highs in most cryptos and Siacoin will not be the exception. But, the question that you should be asking as an investor is if those prices are fueled by speculation or have actual intrinsic value?
If you?re able to exit the market before the next correction, then buy every coin out there. But, for the average investor, entering the crypto world comes with a lot of risks and uncertainty.
From an intrinsic valuation perspective Sia?s token will not reach a 40+ billion market cap anytime soon. However, crypto markets have demonstrated exuberance and irrational investing. This bull market has shot crypto prices to unimaginable levels.
Many thanks to Eddie Wang and Gonzalo Ferrs for the comments and suggestions, much appreciated.
This document is intended for informational purposes only. The views expressed in this document are not, and should not be construed as, investment advice or recommendations. Recipients of this document should do their own due diligence. This document is not an offer, nor the solicitation of an offer, to buy or sell any of the assets mentioned herein.