TheCryptoverseGuide Post #1 A discussion of Bitcoin targets based on different models
Bitcoin's next top is always a hot topic of discussion, especially once we see a green bar after a prolonged -60-70% decline. As a person with economics background, I simply cannot stand not to join the discussion and also express my views about this topic. I always suspected the theory of diminishing returns would also apply to Bitcoin, however, I had no idea what this ratio could look like until I stumbled onto a model today. So I want to discuss the model's idea and discuss my own idea of why this model may and may not work in predicting the next Bitcoin top.
What is the theory of diminishing returns and implications for next Bitcoin top?
In this context it would simply suggest that as the value of Bitcoin grows in terms of dollars, each subsequent rally should be a smaller percentage relative to the previous one (as its easier to grow by 50,000% when small - in millions and impossible to grow from $500 billion-1 trillion by 50,000% as this would mean the world's GDP is entirely in Bitcoin). While there are still those that believe Bitcoin does not have diminishing returns, the following graph illustrates that perfectly.
This would definitely not be a popular opinion. However, the math is based on the idea that each subsequent rally is a 5.3x smaller % relative to the previous one. I will not bore you with all calculations, but in short, the graph above shows that this model predicted the tops of the second, and third rally based on the formula 1) rally of previous market divided by / 2) 5.3, since the first rally's percentages.
Adding demand and supply into the equation
While some speculate that Bitcoin supply is for the first time increasing at a pace, which is lower than it's demand and that's its price should parabolically explode to $300,000 or $1,000,000, this model suggests that this is unlikely. It suggests that the new high that BTC will experience will be a relatively minor one relative to the previous one.
My own view on adjusting this model
If I had one critique to this model it would be that 400% / 5.3 would mean only an 80% gain for the next bull market and so on (i.e. in the future, it would suggest all rallies would be corrective). Therefore, maybe the factor by which each rally diminishes, might itself start diminishing, making this model obsolete (or in need of adjusting).
In other words, if we assume that BTC mining activity will increase due to prices increasing and that rewards will decrease by half the Bitcoin Halving, and if we include the logic of the Stock-to-flow by PlanB, this would suggest that the factor of 5.3 may itself may have to be diminished by 2, to adjust for the 2x increase in obtaining bitcoin (due to Bitcoin halving). If we do that and "diminish" the power of the "diminishing factor" by half, this would suggest that the likely Bitcoin top at $154,000 (double of 77k).
This model vs stock-to-flow vs my adjusted model on diminishing returns model
It seems somehow weird that Plan B's model suggests that Bitcoin should be at least 1 million by 2025, while this model suggests Bitcoin may top as early as $77,000. While both models in a way, were accurate in predicting parts of the future, every model has one main problem - it is simply a model of the world (or Bitcoin) and a model can never take in all the factors of the world, i.e. a model of the world is not the world.
While some would say this basically suggests both models are kind of useless, to me they are useful in understanding what others expect. Therefore, my own expectation is that the truth is somewhere in-between the range of these models. This is a more abstract way of thinking and based on the idea that markets usually top and bottom at levels that relatively few people expect (as opposed to the levels everyone expects).
If I had to venture my own target, it'd not be 1 target but at least 3 (3 because to assume I know the 1 magical number at which Bitcoin will top would be madness, and the logic of guessing the 1 number does not make sense to me. Those 3 levels at which I'd sell 3/4 of my entire position would be $104,000-$125,000-$150,000 (1/4 each, or 3/4 of my entire position). The $104,000 is the $77,000 from the model, but adjusted by me for inflation. The $154,000 is derived from my own view that the model of diminishing returns is correct, but it also omits the idea that the amount by which each rally diminishes (i.e. that bitcoin grows less % each subsequent rally) may itself diminish (i.e. the slowdown may not be a constant 5.3, but drop by 2 each time, there is a Bitcoin halving). This would be inconsistent with previous times because until now, there were a few Bitcoin halving events, but keeping the factor a constant 5.3, actually worked out.
My idea is therefore that, this might have been correct until now because Bitcoin supply was increasing at the fastest rate during its first few years and has become 2x more difficult to mine every time there was a Bitcoin halving event. However, I think of 2024, as the first year as of which Bitcoin's supply may actually start growing slower than its demand, which is why I am willing to believe that we can achieve a price of Bitcoin that is double the one of this model.
Another reason to actually consider the possibility why the growth of Bitcoin is likely to be more than 400% is that only to adjust its previous high for inflation it would need to reach about $100,000-$125,000 (as PPI is about 50%, this suggests to adjust to real inflation Bitcoin would need to at least reach $102,000, but if PPI grows, this number can extent to $125,000). This number still does not include "the new growth" of about 400%, so this can suggest that at best Bitcoin reaches $300,000-$400,000. In other words, this takes a price prediction based on adjusting $68,000 to $100,000 as inflation adjusted previous high and multiplying it by 2 and 4 as the possible price range $200,000-400,000. To me this seems as a mathematically defendable justification regarding my predicted future topping price of Bitcoin.
So the minimum inflation-adjusted top should come at about $100,000 and the maximum at about $400,000. The more reasonable expectation is about $150,000-180,000. Also, these targets differ because one is based on simply growing to an inflation adjusted $68,000 which becomes $100,000. The real number on growth + inflation adjustment should be above $180,000.
Wrapping it up
As an economist major, I would factor in that the reason to halve the diminishing factor now, is not random, but based on the idea that Bitcoin demand may indeed be for the first time greater than Bitcoin supply. However, I doubt that the implication of growth is to "infinity" or to 1 million. I suspect the reasonable target would be somewhere between $100,000- $400,000 because that'd be levels, few people would be willing to sell at.
To me personally the specific target is irrelevant. The logic of this piece is to show that usually models work until they don't. However, they offer some usefulness in establishing boundaries. The boundary between $68,000 - the lowest end of possible tops and $1,000,000 - the highest of possible tops is quite large (but thus it should leave little room for error, i.e. the price is more likely to be inside of the range, than outside of the range).
Once we have established a range, the only next step we can take is to establish a range within the range and a strategy of execution. My range based on the range of $77,000-$1,000,000, would be $100-$300k. Therefore, I am personally in favour of selling 1/4 north of $100,000, 1/4 at $125,000 and 1/4 at $150,000. This would be a strategy where I risk taking profit too early on 3/4 on my position if Bitcoin were to go to 1 million. However, if Bitcoin were to go to only 200/300k, I'd already be out 3/4 of this. In other words, there is flexibility and return is locked at the likely points from which risk will become greater than potential return (i.e. from $15,000 to 150,000 is 10x (1000%), but from $150,000 to $300,000 is only 100%, likewise from $100,000 to $300,000 is 200%). This means the risk of selling too early is locking in a 8-10x gain where there could have been a 12-15x gain. However, the risk of not selling and trying to get the maximum gain is that if no sales are made, this gain will fully be erased when the market drops by 50-60%. In other words, even if the top is at $300,000-400,000, I am more than likely to be able to rebuy at $100,000-150,000, even if I have sold out too early (at least the same amount). However, if Bitcoin were to drop to $55,000-$70,000 I'd be able to buy at least 2-3x more. And I am in favour of this approach for my own execution.
On the negative side, if Bitcoin does top at $77,000 this means I would not have sold any Bitcoins and may have to wait much longer to achieve my targets. It may turn out in other words, that the original model is true (and that inflation and bitcoin halving don't matter), not a likely outcome but still a possibility. This is to show that I'd take more risk relative to the model which suggests a top at $77k, but less risk relative to the model which suggests $1 million per Bitcoin by 2025. This would be based on my range of ranges and maybe entirely inaccurate. There have been many logical things that never worked out.
This is simply a discussion of Bitcoin targets based on models of Bitcoin targets, which as mentioned are only models of reality. My purpose here was to show that and explain how I'd use these models in planning my own sales targets. It was also to show that models of reality do not equal reality, as usually they omit a key variable (or assume 1 variable will have a higher impact than it does). However, these are extremely useful in seeing what others think will happen, which allows me to frame a "range of ranges" - i.e. using model extreme ranges to create my own range within those.
Testable Hypotheses:
Hypothesis is an assumption or an idea proposed for the sake of argument so that it can be tested. It is a precise, testable statement of what the researcher predicts will be outcome of the study. It is an integral part of the scientific method that forms the basis of scientific experiments.
Unlike those in an experiment, these are called - directional hypotheses
They specify the expected direction to be followed to determine the relationship between variables and are derived from theory. Furthermore, they imply the researcher’s intellectual commitment to a particular outcome.
Below I have outlined my 2 directional hypotheses based on this piece. I like hypotheses as a tool to outline statements which can be turned into a testable prediction. After all, we all have our hobbies and mine is to write research and test my own hypotheses.
Hypothesis 1: Bitcoin will top above $100,000 by end of 2025
Hypothesis 2: Bitcoin will top below $400,000 by end of 2025
The purpose of these hypotheses is for me to summarize my opinion in a few statements, test them and write subsequent pieces in which I discuss whether these hypotheses were accepted or rejected, as a requirement of the scientific method to be valid and a continuation of this hobby.
To see how my Bitcoin opinion is working out for me, click here.
I also have a piece on Bitcoin mining vs owning Bitcoin directly vs owning Bitcoin stocks. Of the three, I believe that owning Bitcoin mining stocks such as Riot Blockchain, Marathon Digital and Bit Digital might be better than simply owning Bitcoin. If you would like to read why I believe this, you can access my piece from here.
The one price
Just for the fun of it, if I had to try to predict the exact number at which Bitcoin would top I'd say $180,000. Yes, if I had to pick one number it'd be $180,000. Why?
If Bitcoin grew to 180,000, then a 62%-65% correction would put it back to about $68,000 - $55,000, which I think will be the bottoming zone after. In other words, from $15,000 to $68,000 is needed to recapture previous highs. In the worst case, we could have a kind of double top which is at about $70,000-$77,000 and total collapse back to $20,000k (this is how the dot.com bubble ended, with a double top in 2002). However, I find this scenario a bit implausible (given macro conditions - inflation and the prospects of the stock market). My overall macro outlook which in 2020 predicted the 2021-2022 crash of markets, suggests that the stock market will not top before 2026-2032 (you can read more here). Therefore, I'd say until the top of Bitcoin is likely to be By April 2025-January 2026. If in this period price is about $180,000-200,000, it would perfectly meet the necessary conditions to be a market cycle top. Then, we would need to have another 1-2 years of a sideways/downside action of at least -50-60%. This number cat at best double and become $360,000-$400,000, but this would not represent a much higher profit than selling at $180,000-$200,000 as the missed gain would be only 100%. This is why I personally would use a mix of at least four sales orders at different targets which meet my criteria.
This brings me to my last point, neither Bitcoin nor stocks know that you own them or that I own them. While we might envision our dreams coming true due to their ownership, they have plans of their own and do not care about our plans. Therefore, for me "planning my play and playing my plan" remains the most solid approach to decision-making. Planning my play requires to understand all potential outcomes and devise a strategy based on my own interpretations of scenarios.
Reminder
If this is the first piece that you read on this blog, I strongly advise you to go to the "purpose of the blog" page to understand what this blog is about. You can do this by clicking here. At least scroll down to the middle of the page and read the section named - "What does this blog include?" for an explanation on each of my blog series and the type of content that is included in each of the series.
Disclaimer
No one should buy or sell anything because of anything I post inside my blog. This is all that it is, a way for me to track my own thoughts, organize my research and share my unique opinions. Any opinion posted on this blog is just that - an opinion. The purpose of these pieces are to act as a motivational information tool. This is a blog about my life goals and the decisions I use to try to achieve them.
Nothing on this Blog constitutes financial or investment advice, a recommendation that any security/cryptocurrency, portfolio of securities/cryptocurrencies, other investment products, transaction or investment strategy is suitable for any specific person. Every person has unique personal circumstances, financial situation, goals, and risk capacity. No one should use the content of this Blog to make financial decisions.
In short, nothing in this blog is financial advice! Do your own research & Do your own due diligence. If you have investment questions, I highly recommend you seek help from an authorized (regulated) financial planner, which I am not.
