Here are three reasons why PlanB's prediction was incorrect and why we cannot expect the Bitcoin price to increase 10x after each halving.
Three reasons why PlanB's stock-flow model isn't reliable
In the last few years, the stock-flow model proposed by PlanB has become very popular. A quantitative study published on planbtc.com shows a pattern and predicts that Bitcoin (BTC) could hit a $100 trillion market cap. Apparently, the crypto industry, myself included, is fascinated by the logic of the model and even more so by the idea that it could hit and exceed $100,000 by early 2021.
In fact, the stock-to-flow model assumes that there is a relationship between the amount of precious metals mined each year (flow) and the amount previously mined (reserves).
For example, gold is mined each year at just under 2% of the gold in circulation (held by central banks and individuals). It took more than 50 years - at today's rates of mining - to double the amount of reserves in circulation, effectively making gold a scarce commodity.
PlanB hypothesizes that Bitcoin, widely regarded as digital gold, can follow this relationship between quantity in circulation and quantity mined during the year and proposes a Cartesian plane (with logarithmic axis at both X and Y axes) where the growth of Bitcoin over time follows a growth that can be described by a regression line (with the power law formula).
The returns found every four years or so are due to halving or halving the expected remuneration for each block mined. Bitcoin's protocol stipulates that for every 210,000 blocks, half of the Bitcoins will be assigned to each block to the miner who wins the cryptographic test.
Related: Bitcoin Price Forecasting Using Quantitative Models, Part 2
Presumably, Satoshi Nakamoto, thinking about the halving phenomenon, did so to assume the price doubles every four years. Meanwhile, PlanB has shown that for the first 10 years of its history, Bitcoin has moved around an exponential function, meaning that for each halving, the price will increase 10 times instead of doubling.
Reason #1
The first reason is: Can we really assume that Bitcoin will hit $1 billion in value around 2039?
A billion per Bitcoin would mean a capitalization of about $20,000 trillion, “just” 130 times the current value of the stock market. Not to mention the following years, the value under this model will increase 10 times.
Obviously, this is inconceivable, even and especially the next two points.
2nd reason
The second reason is that this model does not consider demand but only scarcity, and Bitcoin is no longer the only crypto asset in circulation. Its dominance is waning as more emerging projects are sure to draw attention (and investment) away from digital gold.
In fact, it is the failure to consider the resulting impact from demand that makes the incomplete stock-flow model a scarce asset valuable if people want to buy it. A painting by an unknown artist, however beautiful and even part of a collection of several paintings, is of no value without the interest of someone who wants to own it.
I discussed this in my post a few months ago when I proposed a Bitcoin prediction model based on demand rather than scarcity. According to this model, for Bitcoin to be worth a billion, about four trillion wallets would need to be in circulation – which is a rather difficult scenario to imagine.
Related: Bitcoin Price Forecasting Using Quantitative Models, Part 3
3rd reason
The third reason comes from stock-to-circulation itself.
If instead of doing the regression from start to today, we assumed we did it at the end of each period prior to the halving, the regression would always be different.
If we calculate the amount of shares in circulation at the end of the first halving, projections to reach the worldwide cap of diamonds as early as September 2016. However, at the end of the halving. the second halving in August 2016, the regression line indicates that the capitalization of Bitcoin will reach the level of gold in 2021 while we are still a tenth of the way there.
Related: Bitcoin Price Forecasting Using Quantitative Models, Part 4
So, Bitcoin's path in the Cartesian plane with a double logarithmic axis, proposed by PlanB, most likely cannot be considered as a straight line but as a curve (with an unstudied mathematical description) with flat trends over time, effectively invalidating it. over-optimistic prediction of the stock-flow model proposed by PlanB.
Daniele Bernardi is a serial entrepreneur constantly looking for innovation. He is the founder of Diaman, a team dedicated to developing profitable investment strategies, which recently successfully launched PHI Token, a digital currency with the goal of merging traditional finance with crypto assets. death. Bernardi's work is directed towards the development of mathematical models that simplify the decision-making process of investors and family offices to reduce risk. Bernardi is also the president of the Italian investor magazines SRL and Diaman Tech SRL and the CEO of the asset management company Diaman Companions. In addition, he is the manager of a crypto hedge fund. He is the author of The Birth of Crypto Assets, a book on crypto assets. He is recognized by the European Patent Office as an “inventor” for his European and Russian patents related to the field of mobile payments.