Bitcoin Waves: A linear combination for price modeling
Introduction
Bitcoin has received much attention in recent years due to its properties, which offer instant payments to anyone, anywhere in the world [1]. Probably, this technology is the biggest invention of our generation. However, what is the real value of bitcoin?
A genius man known as Plan B modeled the price of bitcoin based on the scarcity of bitcoin [2]. He inspired me to find a model of bitcoin price. Thank you very much.
This report presents a new method for modeling bitcoin prices. On the basis of halving waves, it then describes the movement of the market using the linear combination.
Bitcoin Waves data treatment
Up to date, there were three bitcoin waves. The first wave started on the famous “pizza day” and ended on the first halving (2010 > 2012). The second wave occurred between the first and second halvings (2012 > 2016) and the third wave between the second and third halvings (2016 > 2020), as can be observed in Figure 1.
Data prices were recruited from Coinmetrics [3], 2010 to 2021. Considering just the 1st and 2nd waves, because 3rd is an outlier in terms of max price date after halving, max price day occurred 378 ± 18 days after the halving, 95% confidence level. 4th wave was used to test the Bitcoin Waves model.
Data import, pre-processing, and multivariate procedures were conducted out using R software [4] with Signal Processing (signal), Dynamic Time Warping (dtw) [5], and Latent Semantic Analysis (lsa)[6] packages. All data processing was performed using the free R software from the R Foundation for Statistical Computing.
Bitcoin Waves model
The goal of the Bitcoin Waves model is to predict the next waves by approximating the future waves as linear combinations of prior waves, similar way to Molecular Orbital Theory or Quantum Mechanics. Using 1st wave to predict 2nd wave, the cosine similarity was 83.98%. In this way, 1st and 2nd waves were combined and compared to 3rd waves, cosine similarity 96.18% (Figure 2).
Figure 3 shows 1st, 2nd, and 3rd waves processed and projected in the present scenario (2021). Despite the fact that each wave in the basis contains your history, it is possible to notice that they present a similar behavior and, in this way, opening the opportunity to model this behavior. Obviously, the actual big facts affect the price and probably will create new signals in the future.
Finally, the linear combination of 2nd and 3rd waves produced the model presented in Figure 4.
The representative graphic in Figure 4 gave a cosine similarity of 94.72%. The predicted max price for bitcoin after May 2020 halving will be from $99,700 to $232,800 someday between 2021–05–09 and 2021–06–08. As the incredible CZ would say, this is not financial advice, it is a simple model and an opportunity to test this hypothesis. It is important to note that, according to the model, close to 2024 will be a buy zone, because Figure 5 shows what this noise is in the future.
Conclusion
Niels Bohr, Nobel Prize for Physics in 1922, is quoted as saying, “Prediction is very difficult, especially if it’s about the future!”. This points to the fact of the importance of testing and stressing models before presenting results. On other hand, there are only three waves to use for creating new models and nobody can wait a lot of waves to intent the target.
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Acknowledgments
The author is grateful to Satoshi Nakamoto, Hal Finney, Nick Szabo, Changpeng Zhao, Plan B, Sabrina Moraes, Fernando Ulrich, André Fauth, Criptomaníacos, and Vela Trader.
References
1. https://bitcoin.org/bitcoin.pdf
2. Modeling Bitcoin Value with Scarcity | Medium
5. https://www.rdocumentation.org/packages/signal/versions/0.7-6
