Forecasting Bitcoin price using quantitative models, Part 3

This is the third in a multi-part series that aims to answer the following question: What is the “core value” of Bitcoin? Part one is about the value of scarcity, Second part – the market moves in bubbles, Part three – the adoption rate and part four – the hash rate and estimated price of Bitcoin.

The adoption rate

If more and more people want a certain good and the same number is in circulation, the price will of course tend to rise. It is the supply-and-demand rule that rules every market in the world.

If one year from now a hail storm destroys the tomato crop and there are fewer edible tomatoes than expected, it makes sense for tomato prices in the market to go up, considering that demand has stayed the same. However, imagine for a moment that people suddenly want to buy a lot more tomatoes than they did in previous years. Demand increases and the availability of tomatoes decreases, therefore the price will increase much more than in the first case.

The demand can grow due to two factors: participants are stable and the number of requests is increasing, or the number of requests is stable but the number of participants is increasing. A combination of both is also possible

In the following example we have only assumed that the number of participants increases with the same quantity of goods. So on the one hand we have Satoshi Nakamoto, who defined that Bitcoin (BTC) has to become increasingly scarce over time, and on the other hand, there is a possible spike in the price of Bitcoin due to new people entering the market little by little.

The point is, therefore, to study the rate of adoption of cryptocurrencies in world markets to understand where the value of Bitcoin is going and, overall, where the cryptocurrency asset class may go in the future.

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

Although the function does not take into account potential future increases due to an interest rate hike that could manifest itself in 2021 following unexpected growth in Bitcoin, this exercise is used to estimate the growth in the number of wallets over time.

To estimate the growth in value of Bitcoin based on the number of wallets in circulation, we need to estimate the average amount in each individual wallet using a fairly simple function:

Bitcoin capitalization / number of wallets

Now we have an estimate of the Bitcoin value each wallet has on average. However, the dates are tells a completely different story: 70% of the wallets have 0.01 BTC or less, while 2% of the wallets own over 95% of the bitcoins in circulation and the exchanges own about 7%.

These reports help us understand the huge growth potential of Bitcoin in the future, as those who own a large portion are obviously not selling it as they know Bitcoin and its potential well. Those with 0.01 BTC or less will be tempted to buy more and of course new wallets will be opened every month.

However, if we take the average, we can highlight an average value, expressed in US dollars, of the contents of these wallets:

Since the average of these deposits is determined by the value of the Bitcoin price, the red dotted line represents the tenth percentile of the wallets deposited in US dollars in order to best estimate a “price range” into which Bitcoin could go; while the dashed blue line represents the 90th percentile. This “range” allows us to determine how much Bitcoin’s total capitalization should be over time, based on the estimated Bitcoin adoption rate.

This estimate doesn’t take into account several factors that might make you very cautious. For institutional investors entering the market, the average amount per wallet could be much higher than the blue ribbon identified in the example.

Obviously, these estimates should be construed as an intellectual attempt to understand the dynamics of Bitcoin and absolutely cannot be taken as a suggestion or advice from the authors.

This graph shows that the goal of hitting a trillion capitalization, or $ 1 trillion, is far from impossible, especially if interest in Bitcoin continues to rise over the coming months.

Similar growth is also estimated by the creators of the rainbow chart:

This chart is very useful as it summarizes the suspected growth rate of Bitcoin value and its bubble trend after each halving.

Of course, there is no guarantee that Bitcoin will continue to move with this logic, but it is important to note that this is possible so that even after these assumptions one can make objective, reasonable investment decisions.

This article was co-authored by Ruggero Bertelli and Daniele Bernardi.

This article does not provide investment advice or recommendations. Every step of investing and trading involves risk, and readers should conduct their own research in making their decision. The views, thoughts and opinions expressed herein are those of the authors alone and do not necessarily reflect the views and opinions of Cointelegraph.

Ruggero Bertelli is Professor of Financial Intermediary Economics at the University of Siena. He teaches banking operations, 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. In addition, he works as asset management, risk management and asset allocation advisor for institutional investors. As a Behavioral Finance Fellow, Bertelli is involved in national financial education programs. In December 2020 he published The mountain of cherry trees, a book on behavioral finance and the financial crisis.

Daniele Bernardi is a serial entrepreneur constantly on the lookout for innovation. He is the founder of Diaman, a group dedicated to developing profitable investment strategies that recently successfully issued the PHI Token, a digital currency with the aim of fusing traditional finances with crypto assets. Bernardi’s work focuses on developing mathematical models that simplify the decision-making processes of investors and family offices to reduce risk. Bernardi is also chairman of the investor magazines Italia SRL and Diaman Tech SRL and CEO of the asset management company Diaman Partners. He is also the manager of a crypto hedge fund. He is the author of The emergence of crypto assets, a book on crypto assets. For his European and Russian patents in the field of mobile payments, he was recognized as an “inventor” by the European Patent Office.

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