Understanding Bitcoin’s Cycles and Its Price Trajectory
Painting By Numbers
Bitcoin moves in four-year cycles. We are in the early stages of a new four-year cycle. At this point in the cycle, the price of the asset tends to skyrocket. Certain data shows that Bitcoin has the chance to hit a valuation of $288K per Bitcoin at this peak of this current cycle (in October of 2021, approximately). Once it hits its peak, it will then likely lose approximately 85% of its value before leveling off at a price somewhere in the vicinity of $130K per Bitcoin. That’s if all goes according to Plan B.
Plan B, an analyst who writes under a pseudonym due to a conflict of interest issue with his (now former) employer, published the article “Modeling Bitcoin Value with Scarcity” in March of 2019. In doing so, he changed the game of investing in Bitcoin, as this article, as well as his “Bitcoin Stock-to-Flow Cross Asset Model” article, gave Bitcoin holders (or “HODLers”, as they often call themselves) a whole new perspective on Bitcoin’s price trajectory. The models in these articles have proven to be so accurate that they make investing in Bitcoin like playing a video game with the cheat codes on. Yes, I am aware that I will probably choke on those words when and if these models break down. However, until now, these models have proven to be the most reliable in the space. Below, I will discuss these models further within the context of a brief overview of each of these Plan B articles. I highly recommend that you read each of the articles in their entirety, though, despite the fact that they are a bit technical and difficult to digest. Carve out a little time in your day for a brain workout.
“Modeling Bitcoin Value with Scarcity”
Important Chart: See chart entitled “Bitcoin and Number of Blocks per Month”
Top Highlight/Quote from this Piece: “People ask me where all the money needed for $1trn bitcoin market value would come from? My answer: silver, gold, countries with negative interest rate (Europe, Japan, US soon), countries with predatory governments (Venezuela, China, Iran, Turkey etc), billionaires and millionaires hedging against quantitative easing (QE), and institutional investors discovering the best performing asset of the last 10 yrs.” (Author’s note: Bitcoin reached a $1trn market cap before this issue of this newsletter was published, and Bitcoin is still currently about six months out from its predicted peak for this cycle.)
Key Takeaways: Bitcoin is the world’s first scarce digital object. Its scarcity can be compared to assets like gold or silver, assets that also serve as stores of value during times of economic turmoil or uncertainty. Every four years, the amount of Bitcoins that are “mined” every ten minutes is cut in half, making the asset more scarce as time progresses. The dominant factor in Bitcoin’s price movement is its scarcity. This article predicted a peak price of $55,000 per Bitcoin after the May 11, 2020 “halving” (the date that marked the beginning of the current four-year cycle). This prediction was later changed to a peak price of $288,000.00 per Bitcoin after Plan B refined his data input. This is explained further in the “Bitcoin Stock-to-Flow Cross Asset Model” article.
“Bitcoin Stock-to-Flow Cross Asset Model”
Important Chart: See chart entitled “Bitcoin S2F Cross Asset Model”
Top Highlight/Quote from this Piece: “This translates into a BTC price (given 19M BTC in 2020-2024) of $288K.”
Key Takeaways: The Stock-to-Flow Cross Asset (S2FX) model illustrates valuations of different assets like silver, gold, and BTC with one formula. This model takes into account what the author terms “phase transitions”. In regard to Bitcoin, these are the different narratives that people have created around Bitcoin like “It’s a cheap payment network”, “It is a reserve currency for cryptocurrency”, or “It’s E-Gold”. As the narratives begin to sound more like mainstream narratives, the price increases (as per the models). (Personally, I am a bit more skeptical of the methodology used in these models, but I also acknowledge that I do not have the best technical mind, nor am I trained to conduct this type of analysis. So, I will skip ahead to showing a representation of the Stock-to-Flow Cross Asset model in a simple, updated illustration.)
Plan B posts frequent updates to the model on Twitter. Here is the most updated version of the model.
And here is my favorite Tweet commenting on the model (@100trillionUSD is Plan B’s Twitter handle).
Lastly, in regard to this model, here is the current price of Bitcoin versus the predicted model price. Bitcoin’s price is currently ahead of what the Stock-to-Flow model predicts.
What the Stock-to-Flow model does not illustrate well, however, are the significant drawbacks that occur within bull market price run ups. In 2017, on average, every time Bitcoin’s price rose between approximately 100-150% it saw a drawback of an average of 30%. So, as you watch mainstream media begin to cover this asset more, you will likely see a narratives ping pong back and forth between gradients of “Bitcoin is the future” to “Bitcoin is dead”. Drama sells, and, quite frankly, you can save it for your mama, ‘cuz I’m living drama free in 2021.
Here’s an even better chart of the same time period.
So, let’s recap. If history is any indicator, the Bitcoin price will not hit its peak in this cycle until October of 2021. And quickly after hitting that peak, it will likely lose about 85% of its value (as it did after the last two bull runs). Again, please keep in mind that I am not your financial advisor, I am not an oracle, and I ain’t yo’ baby daddy. The Stock-to-Flow models are just models. Sure, they are models that have held up pretty well over the course of the last two years, and they are models that will likely be in financial textbooks in years to come, but they are still just models. Do your own due diligence before investing.
A few last key points on Bitcoin’s four-year cycle:
Consider that human psychology plays a part in what the Stock-to-Flow model illustrates; we oscillate between greed and fear (AKA lots of FOMOing into Bitcoin as the price rises and lots of running for our lives when the price drops)
Each time Bitcoin goes through a new four-year cycle, more people buy Bitcoin and less of it is produced
You will probably start hearing people yelling, “This time it will be different”, claiming that Bitcoin is going to $1 million per coin during this cycle; they are probably very wrong, and things likely will not be much different this time
I am paying close attention to the “melt up” currently taking place in traditional markets as I believe markets will crash very hard after the time the S&P 500 reaches about 4600. I’m not sure how much Bitcoin will take a fall with it, but it could be significant. I find this particularly important to keep in mind now as so many institutions are buying Bitcoin and will have it on their balance sheets when this major correction occurs. More on this in a future newsletter, though
Citibank believes Bitcoin can hit $318K in this cycle, and they just declared that Bitcoin is at a tipping point in its history; Guggenheim’s Scott Minerd is predicting a high of $400K; adjunct English lecturer Frank Corva hopes it will hit at least $100K because that would be like having 157 years’ worth of his salary packed into just one Bitcoin (unsourced)
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Big love to everyone.
Frank
What I Am Listening To: “Winter”, by Vinny and the Hooligans
What I Am Reading: Meditations, by Marcus Aurelius
Podcast Episode That I Am Currently Absorbing: The War of Art: Steven Pressfield | Rich Roll Podcast
"Yes, I am aware that I will probably choke on those words when and if these models break down."
With this in now in the rear-view mirror, how cautious should we be about everyone projecting $100-150K BTC, post halving?
great work Frank!