Bitcoin
Using Power Laws to Predict When Bitcoin Price Will Reach $1 Million
The following is a guest post by Rajagopal Menon, Vice President at WazirX.
Come the bull market, come the models to predict the price of Bitcoin. In the last bull market of 2021, the Stock-to-Flow (S2F) model was the rage of the season. This model, created by Plan B, assessed the scarcity of assets by comparing stock with annual production. Applied to Bitcoin, the S2F model emphasized its “digital gold” potential and provided scarcity-based long-term price predictions. However, the S2F model disappeared in the crypto winter of 2022.
But fear not, in the current bull run, there is a new model in town – the Power Law Model, which claims to predict the price of Bitcoin with remarkable accuracy.
Understanding Power Laws
In a world seemingly full of chaos and randomness, scientists have discovered hidden patterns and relationships known as laws of power. These laws provide a framework for understanding how different phenomena interact, revealing consistent mathematical patterns that govern various aspects of our universe.
Laws of Power in Everyday Life
Power laws are fascinating mathematical relationships that appear in various phenomena, offering insights into the underlying simplicity of complex systems. They describe how two quantities relate to each other, with a change in one quantity leading to a proportional change in the other. This relationship spans different scales, from the microcosmic to the cosmic, influencing biology, society, technology and natural phenomena.
Animal size limits
Galileo’s square cube law is a classic example of a power law in nature, explaining how an animal’s size affects its strength. As animals grow, their bulk and weight increase much faster than their strength. This law establishes natural limits, explaining why larger animals have thicker bones and why larger animals are found in aquatic environments where buoyancy compensates for weight.
Metabolic rates
Max Kleber’s research on metabolic rates further demonstrates the applicability of power laws. It reveals that an organism’s metabolic rate increases to ¾ the power of its mass, indicating that larger animals are more energy efficient. This principle has a significant impact on understanding the life cycles, growth rates and sustainability of species.
Natural Phenomena and Human Activities
Power laws govern diverse phenomena, from the distribution of earthquake magnitudes to the frequency of words in a language. They explain why we observe a small number of significant events alongside numerous smaller cases. For example, Zipf’s law describes the frequency of words in languages, highlighting the disproportionate occurrence of common words compared to less frequent ones.
Beyond natural phenomena
Power laws extend to human activities such as economics, finance and technology. They elucidate the distribution of wealth, where some individuals own a significant portion of the wealth. In technology, power laws describe how content interacts on the Internet, with some highly popular and many less popular nodes forming a long-tail distribution.
Bitcoin Power Law
Astrophysicist Giovanni Santasi discovered this connection. He says 15 years of data shows that Bitcoin also follows a power law principle. Santostasi first shared the power law model on the r/Bitcoin subreddit in 2018. However, it witnessed a resurgence in January after financial YouTuber Andrei Jeikh mentioned it to his 2.3 million subscribers in a video.
Giovanni’s theory says that the price of Bitcoin is not as random as it seems. There is randomness in this, but in the long run, the price of Bitcoin follows a specific mathematical model. It’s not just a mathematical formula that some guy drew a line at; instead, it follows a power law like those observed throughout the universe.
The yellow line represents the current price and the red line represents the support line, Bitcoin’s level usually never drops below. The green line is the linear regression line, which is like the fair value price where Bitcoin will eventually return, and the purple line is the resistance line where Bitcoin typically tops out.
Predicting the future of Bitcoin
Santostasi’s Power Law Model charts Bitcoin’s price trajectory with remarkable accuracy. It features a chart showing the current price of Bitcoin, a support line indicating the level that Bitcoin typically does not fall below, a linear regression line representing a fair value price, and a resistance line marking the level that Bitcoin typically does not fall below. reaches before a recession.
This model highlights Bitcoin’s remarkably linear growth, particularly evident when outliers are removed. Despite occasional fluctuations, Bitcoin’s overall trajectory follows a discernible pattern reminiscent of other phenomena governed by power laws.
Implications for investors
The Power Law Model offers intriguing insights into Bitcoin’s potential future spikes. Santostasi’s analysis suggests that Bitcoin could peak at $210,000 in January 2026, followed by a subsequent decline to around $60,000. He goes on to predict that Bitcoin will be worth $1 million by July 2033. While mathematical models provide valuable information, they are not immune to errors and may not take into account unforeseen events that could significantly impact prices.
“All models are broken, but some are useful” means that although models may not be perfect, they can still provide valuable information. Models such as the power law model or the stock-to-flow model for predicting the price of Bitcoin have their flaws and limitations. For example, Crypto Quant’s Julio Marino pointed out problems with the power law model, such as underestimating errors and giving a misleading impression of accuracy.
Interestingly, both the power law and stock-to-flow models have faced similar criticism. Despite their flaws, they have historically made almost the same predictions for the price of Bitcoin. However, over time, they may differ in their predictions.
The question arises: if these models are correct, why bother with traditional investment strategies like the 60/40 portfolio? Some argue that new models that explain Bitcoin’s behavior could offer better returns.
While some may think these models are useless, others, like the speaker, believe they still have value. Scarcity, driven by Bitcoin’s fixed supply, plays a role in its price appreciation. Furthermore, factors such as M2 growth also influence the price of Bitcoin.
Although models can provide useful information, they cannot predict the future. Even if the models are flawed, Bitcoin’s trajectory appears upward. Therefore, although it is essential to consider these models, it is also essential to recognize their limitations.