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Scarcity Drives Price?

I’m gonna temporarily veer away from blabbing on about cancer and sickness and death. For this post, since I know I have a handful of Bitcoin (BTC) readers, I’m going to write about an exciting development in the Bitcoin space. I hope my fellow “sat stackers” will correct me if I’m factually wrong in what I say below.

The Rise Of PlanB

Ever since the $20K peak in BTC price in 2017, the Bitcoin space has been pretty much boring and uneventful. However, in March of last year, an unknown, soft-spoken, humble, dutch financial quant, whose handle on Twitter is PlanB@100trillionUSD, released an innovative paper titled “Modeling Bitcoin Value with Scarcity“.

Ever since its release, the paper has been gaining more and more traction in the BTC community and PlanB is being slowly elevated to celebrity status. His genius is that he pursued a novel approach to modelling Bitcoin’s price action over the last decade. His open, rigorously scrutable model is based on quantifying Bitcoin’s price in terms of its scarcity. Monthly price data from the first 11 years of Bitcoin’s existence fits PlanB’s simple, but elegant, model nicely.

The reason for all the increasing buzz in the Bitcoin community is that the first version of PlanB’s model (S2F) predicts a price of around $55K within the next four years. The second version of the model (S2FX) updates that prediction to $288K!

Lots of smart people have been trying to tear down the model but no one can (as far as I can tell) mathematically disprove his theory and analysis. Mind you, PlanB has said many times himself, it’s just a model, and as George Box once said: “All models are wrong. Some, however, are useful”. PlanB cautions that even though the real price data from 2009->2019 fits his model closely, the model could breakdown and fail at future predictions.

The Data And The Model

The figure below shows the real bitcoin monthly price data as a time series (colored dots) superimposed on what PlanB’s S2FX model (disjoint white line) predicts. Note that the Y axis is logarithmic in order to cover the large range in price appreciation over the years.

Of huge importance to PlanB’s scarcity model are the Bitcoin “halving” events that occur by design approximately every 4 years. During each abrupt discontinuity, the “flow” of BTC rewards to the miners that keep the BTC network secure is cut in half, thereby increasing Bitcoin’s Stock(pile)-To-Flow (S2F) ratio by a factor of 2. The hypothesis underlying the model is that the higher the S2F ratio of any commodity, the higher its price.

Stocks, Flows, And Producers

In my next post, health willing, I will try to understand and explain stock(piles), flows, commodity pricing (gold, silver, copper, oil, pork bellies, etc), and the quantification of perhaps Bitcoin’s greatest price-driving attribute: scarcity.

Categories: bitcoin
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