If you are getting fed up of all the bitcoin price predictions, well, get used to it, because I plan to post quite a few more before we enter 2020.
Today I am here today to write about bitcoin price prediction in a different perspective though. In this article, I will be comparing the original PlanB stock-to-flow model, which predicts the bitcoin price of approximately USD 100,000 by the end of 2020, with the capped stock-to-flow ratio, which is only forecasting the price of approximately USD 25,000 by the end of 2020.
As more time goes on, the gap between the two predictions is getting wider. Thus it’s very interesting to have a look at it.
Just to make clear what we are talking about here and to give proper credits, the stock-to-flow model is one of the most famous models out there to predict the price of bitcoin in the future. Its original author is PlanB or @100trillionUSD on Twitter. But now we have a new model out there, and people are already discussing this on Twitter. There will be a lot more talks about this new, capped stock-to-flow model. Its authors are from SwissRex. They do not really have that many followers on social media yet, but you can easily start following them on Twitter if you like, as their posts are definitely very interesting.
Let’s look into the basics of both models first.
What is the model of PlanB?
This model is actually quite simple. It says that the higher the stock-to-flow ratio of an asset, the higher its price, and therefore the higher its market capitalization. So that means, it could look something like the illustration below.
Let’s say, bitcoin is currently at point C while gold is at point G. Now with the bitcoin halving coming up, bitcoin is obviously getting closer and closer to gold. So basically it says that the correlation between the stock-to-flow ratio and the market cap has to be linear. The higher the stock-to-flow ratio, i.e. the scarcer the asset is, the higher the market capitalization has to be.
Bitcoin will come very close to gold stock-to-flow ratio after the halving in May 2020, but it will still be behind. Bitcoin will become the asset with the highest stock-to-flow ratio after 2024. That’s important for us to know.
In short, what PlanB assumes is that this correlation is linear. But if we think about it, that would actually mean that at some point in time, there will be no new bitcoins mined, and we won’t be able to divide the 21 million bitcoins by zero. That won’t work. So there is already a problem in this mathematical formula.
Hence the question is, can this correlation here really be linear?
What does the SwissRex model say?
According to this model, there has to be a cap in market capitalization, whether it is at M1, M2, or even at point G.
Of course at the very beginning, the graph looks very linear, but later on it has to be exponential, and there has to be an asymptote. It can never reach exactly at the asymptote level because not everything will get traded in bitcoin in the future. So basically the bitcoin adoption can never be 100%. It can definitely not be above 100%, which would actually happen with the PlanB model. It definitely has to stay below 100% of potential money as market capitalization, whether it’s at M1, M2 or anywhere else.
For those of you who are not up to date, M1 money supply includes:
- Coins and currency in circulation,
- Checkable deposits, and
- Traveler’s cheques.
M2 supply includes:
- Savings deposits,
- Money market funds,
- Certificates of deposit, and
- Other time deposits.
As you can already figure, it does not really matter how you describe it. But what we know for sure is that bitcoin can never have more than 100% of all existing money as market capitalization. I think everybody will probably agree on that.
So which model is better?
Here is the point where the debate between those two models gets quite interesting.
PlanB model is indicating that there will be a hyperinflation, because otherwise, how can bitcoin ever reach the market cap of USD 100 trillion? On the other hand, the other models indicates that there will not be a hyperinflation, and it looks at bitcoin as just a regular asset, like gold or silver.
In other words, the PlanB model is basically looking into a future where bitcoin is really going to replace fiat currency, and maybe other stores of value as well, such as commodities. The SwissRex model is looking into a future where bitcoin is just co-existing pretty much as an asset, next to other assets, with no hyperinflation of the US dollar.
As you can see, predicting the future is not that easy, and there is always a lot of room for interpretation.
So which model do you personally think is more realistic?