What method are analysts trying to use to determine the price of cryptocurrency in the coming years? Its "inviolable cost", the comparison with gold and the role of halving. Scenarios that want a price increase.
"I see that Bitcoin has value and a rarity that cannot be disputed," said the CNBC presenter, putting the Stock to Flow ratio diagram on the screen for millions of viewers to see. We will analyze this diagram today and what it meant.
Bitcoin is the first rare digital object the world has ever seen. Surely this rarity has value . But how much is that? First of all, let's clarify what rare means. Rarely is it defined as "a situation in which something is not easy to find." Nick Szabo has a more useful definition of scarcity: "inviolable costliness . "
Indeed, Bitcoin has inviolable cost. The cost of electricity and mechanical equipment required for the production of Bitcoin is significant. At the same time, the amount produced is strictly predetermined. Even if its price triples, which means that the incentive to produce Bitcoin is multiplied, it is forbidden to extract extra quantity.
Rareness can now be quantified. It is the ratio of existing reserves to the rate of mining per year (SF). In gold, based on the current rate of mining per year, it will take 62 years to get the same amount as the existing stock. Silver comes second, as it will take 22 years. In all other minerals, from oil to palladium or copper, the existing stock is usually equal to or lower than the annual production.
In gold, if its price triples, it makes sense for mines to step up their efforts or start digging deeper, at a depth that until yesterday was unprofitable to dig. But even so, owning one is still beyond the reach of the average person. The impact of the price will be negligible .
Gold, therefore, enjoys more trust than conventional currency. No matter how much governments or central banks want, they cannot double or tenfold the amount that exists. Unlike their currencies, where it is only a matter of political decision .
The difference between Bitcoin and other currencies is not that they are digital. 98.5% of the circulating euros are also digital. If their innovation were just digital, they wouldn't be worth it. Such already exist. Bitcoin is unique because it ca n't be made when you try it.
The steadily low annual gold production rate is the main reason why it has maintained its monetary role throughout human history. The high ratio of reserves to the flow of quantity produced. In contrast to oil, for example, any increase in its price will immediately cause a flood. Today many facilities are down or abandoned, because its price is lower than it used to be. However, any increasing quantity will result in a reduction in its price, because the demand is inelastic, ie relatively stable.
Let's now turn to Bitcoin, which to date has produced 17.5 million. The annual production is 700,000 Bitcoin . This means a reserve ratio of up to 25. In other words, existing Bitcoin stocks in 2017 were about 25 times larger than the new Bitcoin produced in the same period. It has about the same SF as silver.
With one difference. How the rate of mining will change. In a few years, the ratio of reserves to production (SF) of Bitcoin will exceed the ratio of gold. This is because the allowable amount produced will fall by half . How is this going to be done; Because new Bitcoin is created on average every 10 minutes, as long as a block needs to be created. The reward for those who produce them started with 50 Bitcoin per block, and is halved every 210,000 blocks (about 4 years). This is called halving . The actual number of blocks differs from the theoretical number because the blocks are not produced exactly every 10 minutes (eg, in the first year of 2009 there were significantly fewer blocks).
A Twitter user nicknamed Plan B * (who claims to be a high-ranking executive on a Wall Street hedge fund who wants to remain anonymous), calculated the monthly price of the SF ratio and the price of Bitcoin from December 2009 to February 2019. He adapted his statistical model to take into account the lost Bitcoin, to approach the issue even more realistically.
The graph and the conclusion that emerges from the calculations confirms what common sense dictates. That market prices tend to be higher when the SF ratio is higher. At the same time, the existence of an undeniable SF ratio and market value is revealed. Of course, there are other factors that affect the price, such as news or investment psychology. That's why not all dots are on the straight black line. However, the most important factor is rarity.
Based on this methodology, this means that at some point near halving, around May 2020, by the end of the month, the price of a Bitcoin will be between $ 50,000 and $ 100,000 . Too much; Where to listen to the next one. In the next halving, which will take place in about 5 years, the SF index will become 50. A value very close to 62 of gold.
Therefore, if we assume that the rationale for rarity is correct, it is possible that the total value of Bitcoin will approach the capitalization of gold. If we consider that today all gold is worth 8 trillion, then each Bitcoin will be worth $ 400,000. Very likely above, if the price of gold rises until then. Coincidentally or not, the mathematical model of Plan B. agrees. According to the model, the price of Bitcoin will then be between 400,000 and 1,000,000.
It is worth noting that the reasoning behind the analysis made in recent days by a German bank, Bayern LB, is similar . And they use the Stock to Flow ratio, with the difference that they are talking about $ 90,000 in May 2020! Details can be found in the accompanying material.
* https://medium.com/@100trillionUSD/modeling-bitcoins-value-with-scarcity-91fa0fc03e25
