Predicting Bitcoin prices using quantitative models, part 3


This is the third part of a multi-part series designed to answer the following question: What is the “fundamental value” of Bitcoin?The first part is about The value of scarcity, the second part – The market moves in a bubble, Part Three-Adoption Rate, Part Four-Bitcoin’s Hash Rate and Estimated Price.

Adoption rate

If more and more people desire a certain commodity, and the number of units in circulation is the same, then the price will obviously have an upward trend. The law of supply and demand governs any market in the world.

If a hailstorm destroys the tomato crop in a certain year, and the number of edible tomatoes is less than expected, considering that the demand remains the same, the increase in the price of tomatoes on the market makes sense. However, imagine that suddenly, people want to buy tomatoes more than in previous years. The demand rises and the supply of tomatoes falls, so the price will rise much more than in the previous case.

There are two reasons for the increase in demand: participants are stable and the number of requests increases or the number of requests is stable but the number of participants increases.Even a combination of the two is possible

In the following example, we only assume that the number of participants increases and the number of goods is the same. Therefore, on the one hand, we have Satoshi Nakamoto who defined Bitcoin (Bitcoin) Must become more and more scarce over time, on the other hand, newcomers gradually entering the market may increase the price of Bitcoin.

Therefore, studying the adoption rate of cryptocurrency in the world market is a problem to understand where the value of Bitcoin is going, and in general, where the cryptocurrency asset class can go in the future.

The increase in the number of wallets is not entirely exponential, but close to exponential growth. In order to predict its future growth, you need to use a “power law” function that can best estimate its curvature. To do this, first we put the graph on a logarithmic scale, and then calculate the function closest to it.

Although this function does not take into account any potential future growth based on the increase in interest that may show in 2021 after the unexpected growth of Bitcoin, this exercise is used to estimate the growth of the number of wallets over time.

In order to use the number of wallets in circulation to estimate the increase in the value of Bitcoin, we need to use a fairly simple function to estimate the average amount contained in each wallet:

Bitcoin capitalization/number of wallets

Now, we estimate the average Bitcoin value of each wallet.However, the data tell A completely different story: 70% of wallets have 0.01 BTC or less, while 2% of wallets have more than 95% of circulating bitcoins, and exchanges have about 7% of bitcoins.

These reports help us understand the huge growth potential of Bitcoin in the future, because people who own most of the assets will obviously not sell it because they know Bitcoin and its potential very well. Those who have 0.01 BTC or less will want to buy more, of course, there will always be a new wallet opened every month.

However, by averaging, we can highlight the average value of these wallet contents in U.S. dollars:

Since the average value of these deposits depends on the value of the Bitcoin price, in order to best estimate the “range” of the Bitcoin price, the red dotted line represents one-tenth of the dollar deposit wallet; and the blue dotted line represents the 90th percentile number. This “range” allows us to determine what the total Bitcoin capital should be over time based on the estimated rate of Bitcoin adoption.

This estimate does not take into account several factors that might make it very cautious. For institutional investors entering the market, the average amount per wallet may be much higher than the blue band identified in the example.

Obviously, these estimates should be regarded as intellectual attempts to understand the dynamics of Bitcoin, and must not be regarded as suggestions or suggestions on behalf of the author.

The graph shows that reaching the goal of $1 trillion or $1 trillion is far from impossible, especially as interest in Bitcoin continues to rise in the coming months.

The creator of the rainbow chart also estimated a similar increase:

This graph is very useful because it summarizes the assumed growth rate of Bitcoin’s value and its bubble trend after each halving.

Obviously, there is no guarantee that Bitcoin will continue to develop according to this logic, but it is important to note that it can do so so that people can also make objective and reasonable investment decisions based on these assumptions.

This article is created by Ruggiero Bertelli with Daniel Bernardi.

This article does not contain investment advice or recommendations. Every investment and trading action involves risks, and readers should research on their own when making a decision. The views, thoughts and opinions expressed here are only those of the author, and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Ruggiero Bertelli Professor of Financial Intermediary Economics at the University of Siena. He teaches bank management, credit risk management and financial risk management. Bertelli is a member of the board of directors of Euregio Minibond, an Italian fund specializing in regional SME bonds, and a member of the board 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 participated in the National Financial Education Project. In December 2020, he published Cherry tree hill, A book on behavioral finance and financial market crises.

Daniel Bernardi Is a serial entrepreneur who is constantly seeking innovation. He is the founder of Diaman, a group dedicated to developing profitable investment strategies. The group recently successfully issued PHI tokens, a digital currency designed to combine traditional finance with encrypted assets. Bernardi’s work is geared towards mathematical model development, which simplifies the risk reduction decision-making process for investors and family offices. Bernardi is also the Chairman of the investor magazines Italia SRL and Diaman Tech SRL, and the CEO of the asset management company Diaman Partners. In addition, he is also the manager of a crypto hedge fund.He is the author The 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 field of mobile payment.

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