Modeling Bitcoin Value: Three Methods
Price-Time, Price-Difficulty, Price-Stock2Flow
Bitcoin’s Double Feedback Loop
The beauty of Bitcoin is that its security and scarcity work together in a self-reinforcing pair of cooperating feedback loops as shown in the figure below.
Between Halvings, Bitcoin becomes scarcer since each block’s reward is a decreasing fraction of the outstanding stock (currently around 18 million bitcoins).
But it is even scarcer due to its regularly scheduled Halvings, which occur each 210,000 blocks, almost four years apart. These cut the block reward in half and have the long term outcome of driving the inflation rate in Bitcoin to zero.
In the upper loop in the diagram, we indicate both the effect of the Halvings, and the continual effect of each new bitcoin being a smaller and smaller fraction of the outstanding supply. This increased scarcity drives prices higher.
In the lower loop, we are indicating that higher prices encourage more mining power, more hashing power, and that increases security. Increased security drives prices higher.
