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Bitcoin is on fire. Without any doubt, supporters of the biggest cryptocurrency are now very happy to see the price movements that Bitcoin has been making since the beginning of October. Thanks to the news connected to the approval of the Bitcoin ETF by ProShares from the US regulator SEC, Bitcoin has even been closing on its ATH. Yet, this is only news that affects the price in the short term. However, there are models of Bitcoin price that predicted that this would happen. Obviously, the models did not predict that the Bitcoin ETFs will be approved, but they show where the price of Bitcoin can go in the next few years. And since Bitcoin seems to be able to break its ATH soon, the proper question is, where can it go next? Well, let’s see together what the popular Bitcoin price prediction models say.
Bitcoin’s Stock-to-Flow model (S2F) is by far the best known price prediction model in the cryptocurrency world. Created in March of 2019 by PlanB, an institutional investor from the Netherlands, who has 25 years of experience in legal and quantitative finance, the model has mostly recently seen incredible increase in support and fame, due to its accuracy.
The model has not only not been broken yet, but the latest prediction of PlanB, on where the price of Bitcoin is going has been incredibly accurate. In June 2021, PlanB posted a tweet stating the following:
“Bitcoin is below $34K, triggered by Elon Musk’s energy FUD and China’s mining crack down. There is also a more fundamental reason that we see weakness in June and possibly in July. My worst case scenario for 2021 (price/on-chain based): Aug>$47K,Sep>$43K, Oct>$63K, Nov>98K, Dec>$135K.”
So far, the prediction was accurate for both August and September prices and we are only in mid October and it already seems that this month’s prediction will be right as well. By that logic, the price of Bitcoin can be on a track to be above the $135K mark by the end of the year, which would be more than double of the price now. But what is this model based on?
To put it very simply, the model is based on the scarcity of Bitcoin. The Stock-to-Flow model ideology has not been created by PlanB, since this modelling technique is commonly used on commodities such as gold or silver, but this pseudo anonymous person was the first one to use it on Bitcoin.
The Stock-to-Flow ratio is based on the amount of the assets that are already in existence, representing the stock, versus the amount of the assets that are being created, usually computed per annum, representing the flow. As PlanB explains in his article, where he introduced the S2F model on Bitcoin, in the case of Bitcoin, the Stock-to-Flow is also subject to halving, since it decreases the value of flow by half in 4 year cycles.
In his very first article on this topic, PlanB has compared the S2F model of Bitcoin with gold and silver and stated that the S2F models of these two commodities are in line with the S2F model of the biggest cryptocurrency. He also showed that once the May 2020 halving occurs, which it obviously already did, the S2F of Bitcoin will double from 25 to 50, being very close to S2F of gold (SF 62). If by any chance you are still not amazed by this model or by its accuracy, here is a short passage from the article that was written by PlanB on 22nd of March 2019:
“The predicted market value for bitcoin after May 2020 halving is $1 trillion, which translates to a bitcoin price of $55 000. That is quite spectacular. I guess time will tell and we will probably know one or two years after the halving, in 2020 and 2021. A great out of sample test of this hypothesis and model.”
Looking at the price of Bitcoin today, everyone can already see that PlanB was not only correct, but his estimation was an understatement of what actually happened. However, the next few weeks will show if the model can predict the price of Bitcoin on a monthly basis with incredible precision.
Stock-to-Flow model on Bitcoin is not the only price prediction model that PlanB has created. Only a year after he released the S2F model, PlanB created another, even more complex model that encompasses not only scarcity of Bitcoin, but also integrates silver and gold into it to make it more precise.
In his BTC S2F cross asset model (S2FX) he thus removes the time parameter and adds other assets thanks to which, according to him, he enables valuation of different assets like silver, gold and Bitcoin with just one formula.
This model is rather complex and to fully understand it one needs to have at least a bit of understanding of statistics, data science or programming. Therefore, this article will not go into depth about the model. It will only provide the most important result that it shows. If you are more interested in the model, here is the official link of S2FX with thorough description from its creator.
The most important price prediction from this model however shows that the next phase of Bitcoin (in the model known as cluster) should see this asset’s market capitalization rise to about 5.5 trillion dollars somewhere between 2020 and 2024. This would translate into a price of single Bitcoin of around 288 000 dollars given the circulating supply of approximately 19 million bitcoins.
Another popular Bitcoin price prediction model is the Rainbow Chart. Rather than this being somehow a complex model, this chart is simply a logarithmic regression that was introduced as early as 2014 on Bitcointalk by user trolololo and is now mostly presented by Uber Holger thanks to his website blockchaincenter.net.
This model is incredibly simple and mostly shows a logarithmic scale of a Bitcoin price over time with 8 different colours, each representing a different stage in the Bitcoin cycle. The colours represent stages that are named in a language that is targeted mostly at crypto fans. The stages are as follows:
Dark Blue – Basically a Fire Sale
Light Blue – BUY!
Green – Accumulate
Light green – Still cheap
Yellow – HODL!
Orange – Is this a bubble?
Dark Orange – FOMO intensifies
Red – Sell, Seriously, Sell!
Maroon – Maximum Bubble Territory
According to this price prediction model, we are currently at the orange stage – Is this a bubble? However, if the price of Bitcoin climbs as high as 78 000 dollars, then Bitcoin price will move to FOMO intensifies stage. To reach the Maroon color and thus Maximum Bubble Territory, the price of Bitcoin would have to be above 143 000 dollars.
There are definitely more models that are trying to predict the price of Bitcoin or other cryptocurrencies. However, these three are by far the most famous ones. It is also important to note that these are all only models. The Rainbow chart model for instance contains a disclaimer that states:
“This model will only be correct until one day it is not anymore.”
That is definitely something that everyone needs to have in mind when looking at any price prediction models. They never contain any financial advice and should thus be treated that way. Moreover, one of the most important saying about any model, not only price prediction models, states that:
“All models are wrong, but some are useful.”
This statement of George E.P. Box shows that now matter how complex or precise the models try to be, they can never represent a real exact behaviour. Yet, it sometimes might be helpful to use the models to see the bigger picture, especially when it comes to Bitcoin price.