The way I value bitcoin is to take the fully diluted market cap (21 million * $850 ~= $18 billion) and apply a money velocity which I assumed to be similar to US M2 velocity of 1.6 ($18 billion * 1.6 ~= $28.5 billion). Since global ecommerce transactions are about $1 trillion / yr this implies that bitcoin should penetrate 2.85% of ecommerce. Big assumption here is that bitcoin does not work for real-world transactions as the confirmation time is > 15 min. This may be oversimplified because a lot of real-world transactions don't need to be real time. I'm also excluding time value effects which you can insert back in if you like.

From the data I have seen, the bitcoin real economy could be orders of magnitude smaller than that implied by the current price, although there is no way to know precisely how large it is. This is including "illegal" transactions (I'm not sure why sam is discounting drug transactions, unless he means to imply that these will be shutdown. It does make sense to exclude gambling transactions as they are extremely high velocity).

Note that sam's point about merchants immediately converting BTC back to USD serves to increase the money velocity (perhaps by >10x). This would mean that BTC is pricing in a real economy even larger than $28.5 billion. Based on current BTC-denominated real transactions, fair value of BTC is at most only a few dollars.