bitcoin‘s Price Prediction: The Impact of Scarcity Models

The Rise of bitcoin and Its Volatility

In March 2019, during a challenging bear market when bitcoin was valued at approximately $4,000, a Twitter user known as PlanB released a blog post titled “Modeling bitcoin Value with Scarcity.” This post utilized a decade’s worth of data regarding bitcoin‘s supply and market value to forecast that the cryptocurrency could reach around $55,000 by 2020 or 2021—a prediction that faced significant skepticism at the time.

Many financial experts were predicting bitcoin‘s downfall. Notable figures like Warren Buffett labeled it a “gambler’s device,” while economist Steve Hanke dismissed it as a “fool’s game.” Jamie Dimon from JPMorgan referred to it as a “fraud,” and journalist John Crudele asserted that bitcoin would soon be worthless. However, in February 2021, bitcoin reached the $55,000 mark, validating PlanB’s forecast.

Understanding bitcoin‘s Unique Value Proposition

bitcoin is often recognized for its extreme volatility. Created by the anonymous Satoshi Nakamoto in 2009, it has undergone a remarkable transformation over the past 15 years. The cryptocurrency has experienced dramatic price fluctuations, soaring to unprecedented heights before enduring significant declines.

From being virtually worthless a decade ago, bitcoin‘s value has now surpassed $100,000. This raises the question: how can one accurately assess an asset that lacks traditional valuation benchmarks?

PlanB, the author who successfully predicted bitcoin‘s previous bull run, proposed that bitcoin‘s value could be modeled using a scarcity framework known as the “stock-to-flow” model. In his blog post, he explained why bitcoin holds intrinsic value and how it can be evaluated through this scarcity lens.

“bitcoin is the first scarce digital object the world has ever seen. It is scarce like silver and gold, and can be transmitted via the internet, radio, or satellite.” – PlanB

The Scarcity Model Explained

Similar to precious metals, bitcoin possesses an inherent scarcity. New bitcoins are mined daily, but this production rate is halved approximately every four years—a process known as the bitcoin halving. Additionally, the total supply of bitcoin is capped at 21 million coins.

The cost of producing new bitcoins is defined, primarily involving energy and hardware expenses. According to PlanB, this characteristic aligns with what Nick Szabo, a prominent computer scientist and cryptographer, refers to as “unforgeable costliness.” Szabo noted that items like antiques and gold are valuable due to their creation costs or the improbability of their history, making them difficult to replicate.

“Precious metals and collectibles have an unforgeable scarcity due to the costliness of their creation.”

Using this framework, PlanB argued that bitcoin‘s value could be assessed through its stock-to-flow (SF) ratio, calculated by dividing the total existing stock by the annual production rate. A higher SF ratio indicates greater scarcity and a higher likelihood of value appreciation.

To support his argument, PlanB cited economist Saifedean Ammous, who suggested that gold’s historically low supply growth is a fundamental reason for its enduring monetary role.

Predicting bitcoin‘s Future Price Movements

This framework formed the basis for PlanB’s accurate prediction in 2019. Currently, the model suggests that bitcoin could exceed $300,000 within this year. However, various external factors can influence bitcoin‘s price beyond mere scarcity metrics.

As bitcoin gains mainstream acceptance, there is a valid concern that it may experience diminishing returns as potential buyers become saturated. Furthermore, as institutional adoption increases, bitcoin‘s price may stabilize, potentially diminishing the dramatic bull runs predicted by the stock-to-flow model.

Interestingly, this marks the first instance in bitcoin‘s history where its price has consistently lagged behind the projections made by the stock-to-flow model. For the model to remain relevant, bitcoin‘s price must appreciate rapidly.

Currently, we find ourselves in a phase of the bitcoin halving cycle where the stock-to-flow model anticipates significant price increases. Whether this will lead to bitcoin reaching $300,000 by year-end remains a pivotal question.

Conventional wisdom suggests that such a surge is unlikely, but history has shown that traditional expectations can often be misguided.

Disclaimer: This article is provided for informational purposes only and does not constitute financial advice. Readers are encouraged to conduct their own research before making any investment decisions.