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Bitcoin Price Forecasting Using Quantitative Models, Part 2


This is part two of a multipart series that aims to answer the following question: What is the “fundamental value” of bitcoin? part one is about Scarcity value, Part two – the market moves into the bubble, part three – the adoption rate, and part four – the hash rate and the estimated price of bitcoin.

The market moves in a bubble

In recent months or years, there has been a lot of talk about Bubble Bond is evolving in the markets. Newspapers – both financial and non-financial – talked about it, with special television stations and eminent “macro economists” from around the world discussing how negative interest rates are in today’s world debt.

Giving or lending money to someone is financially counterproductive, even if that person is a state. We are facing an absurd situation that has never happened before in the financial market scenario. The main reason is linked to the huge liquidity put into the markets by central banks, which they use as money to avoid their own insolvency, only then, judiciously, return it to the states (they themselves, in difficulty) Let’s do it.

After all, John Maynard Keynes has a famous phrase Reads:

“Financial markets can remain irrational for longer than you remain solvent.”

In fact, this absurdity has made it possible to avoid bankruptcy of the financial system, so it is welcome, even if it feeds on irrational events, such as bond markets with negative returns (and therefore inane bond prices) and shares Markets are touching (not all, but most) new highs day by day.

One incident that is not really inspired by central bank money, which everyone has dubbed a meaningless mega bubble in 2017, is bitcoin (B T c) Bitcoin price $ 20,000. Reached a high level of In December 2017, coincides with the launch of Bitcoin Futures. Chicago Board Options Exchange And this CME Group, The world’s two largest commodity exchanges, and then peaked at least $ 3,100 in 2018, effectively losing more than 80% of its value.

Does it represent the bursting of bubbles? Sure. Does this represent the end of bitcoin? certainly not. Could there be more bitcoin bubbles in the future? Of course.

As always, we would like to see the problem as analytically as possible. We reconstructed the table created by Bitcoin founder Satoshi Nakamoto using Excel to ensure that bitcoin was deflationary and not inflationary.

Inflation

The US dollar (and all currencies in the world, in truth, including the euro), due to inflation, have been worth less and less over time. If we think about the value of the property then we can understand the phenomenon better. Buying a car 40 years ago is about 13 times less than it is today, so a good car that cost $ 10,000 in 1980 would cost $ 130,000 today.

This phenomenon is called inflation, and is driven by a rule that relates the total value of goods in the world to the total currency in circulation. If the number of US dollars in circulation doubles, the price of the same goods will double. It will “trend” because the currency is not a linear phenomenon, and it may take some time to happen.

In the 1970s and early 1980s, inflation in the United States reached close to 12% per year, creating many difficulties for those who did not have the knowledge and means to counter it.

Deflation

Bitcoin was created with a deflationary logic, similar to commodities like gold and silver. This is why many consider it to be the new digital gold, as it preserves the price characteristics, not like the dollar or the euro.

related: Is Bitcoin a denomination of value? BTC experts as Digital Gold

Let’s take a look at how it was possible to make it, and what the effects are as a result of these choices.

Nakamoto decided that a maximum of 21 million bitcoins should be created and available. (The number 21 will appear many times. This is the Greek letter Phi, which we will talk about later). He could have decided to ingest a certain amount of bitcoin for each block mined, but doing so would not have caused the exponential growth effect characteristic of bitcoin, or at least not marked as it is today.

As a result, they decided to halve the amount of newly issued bitcoins every four years, to create a very marked and interesting stock-to-flow effect that would push the price up further.

related: Bitcoin holting, explained

For the first 210,000 blocks, miners were paid 50 BTC for each block written on distributed bookkeeping, at a time when the value of bitcoin fluctuated from a few cents to a few dollars, so the remuneration was low Was no less comparable. Today’s – neither challenge was as hard to win. In fact, in the early years, ordinary computers were enough to do mining.

The first stop was in 2012 – that is, from the 210,001th block onwards, the remuneration for each write on the distributed ledger was halved to 25 BTC. In 2016, a second stop occurred, which reduced the remuneration to 12.5 BTC, and again The third stop is happening In May 2020, remuneration was brought down to 6.25 bitcoins for each block, which is still around $ 250,000, with a recent price correction of about $ 40,000.

related: 3 Good Reasons Why $ 30,000 is Probably the Bottom for Bitcoin

The next stop is scheduled for 2024, when the remuneration will be further cut by 50%. This will probably continue until 2140, the year the final stop is expected, which will deliver less than 1 bitcoin in the previous year.

But how does this halt event affect the price of bitcoin? Does the so-called “flow,” or stopping the flow of new capital into the market, affect the price of bitcoin itself? As we saw in the first part, bitcoin seems to follow the stock-to-flow model; Therefore, the decrease in flow should be consistent with the increase in price, while maintaining the same stock. Now that we have three stops, shouldn’t we have had as many bubbles?

Do you know how many bubbles are in your short life of bitcoin? Three deaths. They are shown graphically below.

Bitcoin has faced these three bubbles so far, and each time the next maximum price has risen by at least 10 times. Obviously, it is no guarantee that it will do so in the future, but there are many factors that lead us to believe that what we experienced in 2017 will not be the last bubble – there will be more in the future.

Can this information be used to determine the true price of bitcoin? Or at least, the value potentially obtained according to this model?

In fact, if we take a look at this graph, where the stops are highlighted by a jump in the x-axis, corresponding to the change in the position of the holting, we can estimate the fair value – that is, the correct price. On which there may be a trend towards bitcoin.

If the price of bitcoin returns around the line described in the figure above, then it is clear that we can predict what the future target price of bitcoin will be based on the various stops that await us.

From the graph, it is clear that the target price of bitcoin is between $ 90,000 and $ 100,000. This information is very useful not only because it guarantees that we will arrive at those prices, but also because we must keep our investment decisions in mind, because it can actually get there and even exceed those price levels. .

Clearly, these estimates should be taken as an intellectual effort to understand the dynamics of bitcoin and cannot be considered author’s suggestion or advice at all. It is not easy to understand how bitcoin can reach such values, and it will be a difficult time for someone arriving in this fascinating world for the first time to imagine how a worthless asset can cost so much, especially If you fall into the trap of thinking about it. As a dollar-equivalent currency.

To do this, it is necessary to know the various aspects of it. One that is certainly fundamental to determining the price of bitcoin is the adoption rate, which is to be described in the next section.

This article was co-authored Ruggero Bertelli and Daniel bernardic.

This article does not contain investment advice or recommendations. Every investment and business move involves risk, and readers should do their own research when making decisions. The views, opinions and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointegraf.

Ruggero Bertelli Is a professor of financial intermediary economics at the University of Siena. He teaches banking management, credit risk management and financial risk management. Bertelli is a board member of Euregio Minibond, an Italian fund specializing in regional SME bonds, and a board member and vice-president of the Italian bank Prader Bank. He is also an asset management, risk management and asset allocation consultant for institutional investors. As a behavioral finance scholar, Bertelli is involved in national financial education programs. In December 2020, he published La Colina de Siligi, A book about behavioral finance and the crisis of financial markets.

Daniel bernardic There is a serial entrepreneur who is constantly looking for innovation. He is the founder of Daimon, a group dedicated to the development of profitable investment strategies, which recently successfully released PHI tokens, a digital currency with the goal of merging traditional finance with crypto assets. Bernardi’s work is oriented toward mathematical model development, which simplifies the decision-making processes of investors and family offices for risk reduction. Bernardi is also the chairman of investor magazine Italia SRL and Daimon Tech SRL, and CEO of asset management firm Daimon Partners. In addition, he is the manager of a crypto hedge fund. She . Is the author of Origin of crypto assets, A book about crypto assets. He was recognized as an “inventor” by the European Patent Office for his European and Russian patents related to the mobile payment sector.

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