TL;DR: In this piece, we will present our thoughts on an emerging pricing model that has had high predictive power in the past and that forecasts Bitcoin surpassing $60,000 in May of next year. After the original study was published, we set out to confirm the findings of the backtest and Bitcoin pricing model, and added several enhancements. We also looked past halving cycles for clues to how Bitcoin’s price could track if history repeats itself and the model proves to be valid in an out of sample test.
A few months ago, a pseudonymous individual known by the handle PlanB (@100trillionUSD) on Twitter and Medium published a report titled “Modeling Bitcoin’s Value with Scarcity.” The analysis detailed the connection between Bitcoin’s price and its Stock to Flow (SF) ratio (the inverse of its inflation rate). The report was notable for two things in our opinion: an attempt to put a future price on Bitcoin and the strength of the historical relationship between the price of bitcoin (market cap) and the SF ratio.
It’s not every day we see backtest of a crypto strategy (or valuation) with an R-Square of 95% and a P-Value of <looks closer> 2.3E-17, so we decided to replicate the study, but on a more granular level and with some slight adjustments. Our findings are broadly supportive of the original analysis: the SF ratio has had explanatory powers (R Square of 91%) and is of sufficient statistical significance (t Stat of 181.3). The model predicts a bitcoin price of $60,592 in May 2020 followed by $732,256 in the 2024 halving.
Enhancements to the Study
PlanB’s original study looked at monthly price and supply data and removed the first 1,018,750 tokens created from the SF ratio. The idea was that these coins were created in the first months of Bitcoin’s existence and likely belonged to Satoshi or were associated with private keys that have been lost. We did something similar and excluded 1,148,800 tokens based on this analysis. However, we also excluded those same token balances from the market cap calculation, not just the SF ratio, to come up with an adjusted market cap calculation. We think that removing these balances from both the SF ratio and the market cap maintains consistency in the treatment of Satoshi’s holdings. The regression of the adjusted market cap with adjusted SF ratio results in…