Quantify scarcity, telling you from the SF model why bitcoin must go up!

UP BLOCKCHAIN REVIEW: On October 31, 2008, Satoshi Nakamoto published a Bitcoin white paper; on January 3, 2009, Bitcoin created a block, and on January 8, 2009, the Bitcoin code was released. Since then, the blockchain journey has created the bitcoin market worth more than $90 billion today.

It is as scarce as gold and silver. It is the world’s first digital cryptocurrency and can be sent via the Internet, radio, satellite, etc.

In this year, Nakamoto said in a bitcoin forum: “As a thought experiment, imagine that some kind of base metal is scarce like gold but has the following characteristics: anonymity, not a good electrical conductor, not particularly powerful, no Any practical viewing use… it’s a magical property: it can be transmitted through communication channels.”

This kind of digital scarcity has value, but how much is it worth? This article uses inventory and liquidity to quantify scarcity and simulate the value of Bitcoin.

Scarcity, inventory and liquidity

“Scarcity” is defined in the dictionary as “something that is not easy to find or obtain in a certain situation”; “lack of something”.

Smart contract pioneer Nick Szabo has a more useful definition of “scarcity”: “unforgeable costs.”

In 2008, Szabo published the same blog titled “Antiques, Time, Gold and Diamonds”. The article mentioned: “ What do antiques, time and gold have in common? Due to the original cost or historical impossibility, They are costly and their costs are hard to destroy. … In the implementation process, there are some problems that are difficult to overcome by computers. This cost cannot be calculated. If we can overcome these problems, we can get one. A little bit of money.”

“Precious metals and collectibles are irreparably scarce due to the high cost of creation. This feature makes them “worth” and its value is largely independent of any trusted third party…. .. But then again, you can’t pay online with metal. Therefore, if there is a protocol, you can create unforgeable expensive bits online, have minimal dependence on trusted third parties, and then securely store and transmit with similar minimum trust. And analysis, how good it should be. “

Bitcoin is fundamentally different from legal currency, altcoin without a supply cap, no proof of work (PoW), low hash, or a small group of people or companies that can easily influence the supply. Bitcoin has a cost that is difficult to calculate because the production of new bitcoins requires a lot of power, and bitcoin is not easy to forge.

In addition to technical interpretation, economist Saifedean Ammous talked about the scarcity of the inventory flow (SF) ratio. He explained why gold and bitcoin are different from consumer products such as copper, zinc, nickel, brass, etc. because they have high SF.

Aousous mentioned in the Bitcoin Standard: “For any consumer product, doubling the output will eclipse any existing inventory, and the price will plummet and damage the interests of the holder. For gold, inventory will increase by 3%. Not 1.5%, the annual output doubles, and the price may produce a negligible “surge.” It is the continuous decline in the supply of gold, which makes it the root cause of the role of money throughout human history…..high inventory of gold The flow ratio makes it the lowest price elasticity of supply…. The existing bitcoin inventory in 2017 is about 25 times the amount produced in 2017. This is still less than half of the golden ratio, but Around 2022, Bitcoin’s inventory flow ratio will exceed gold”

Therefore, SF can quantify scarcity.

SF = stock / liquidity

Inventory is the size of existing stock or reserves, and the flow is annual production (SF = 1 / supply growth rate). Below, let’s look at the SF values ​​of some metals.

The above table proves that gold has the highest SF value: 62, which means that it takes 62 years to produce the current gold stock. Silver ranks second in the SF value, at 22. This high SF makes them money.

The SF of palladium, platinum and all other commodities is only slightly above 1, and existing stocks are usually equal to or lower than the annual production, and it is almost impossible to obtain higher SF for commodities. And once someone hoards them, the price rises, the output soars, and the price falls instantly.

Bitcoin has been dug up 17.5 million pieces, and the current annual output is 700,000 pieces, so SF=25, which makes Bitcoin the same currency category as gold and silver.

Bitcoin’s supply is fixed, halved every four years. Until now, Bitcoin has undergone two production cuts, so “halving” is very important for Bitcoin’s SF.

BTC inventory and liquidity

As can be seen from the table above, when SF is higher, the market value tends to be higher.

Data archaeology

In theory, you can query the monthly block number directly from the Bitcoin blockchain through Python, RPC, and bitcoind, but the actual number of blocks differs greatly from the theoretical quantity because the block is not strictly “generated every 10 minutes.” Under such conditions, in 2009, the number of blocks was significantly small.

But now block production is much more stable than before, and traffic and inventory can be calculated by the number of blocks per month and the known number of bitcoins.

Now that you know the gold (SF 62, market capitalization of 8.5 trillion US dollars) and silver (SF 22, market value of 308 billion US dollars) data points, the next will be based on this model.

Bitcoin price model

In the model, the SF logarithmic axis is used to show a good linear relationship between In(SF) and In (market value).

This chart shows that linear regression analysis of the data allows us to see the results directly: There is a statistically significant relationship between SF and market value, and the relationship between SF and market value is not accidental. Of course, other factors such as regulation, hacking, and news can also affect prices, which is why not all points are on a black line, and the dominant driver is still scarce SF.

Interestingly, gold and silver in completely different markets are also in line with SF’s bitcoin model value, which provides additional psychological support for the model. At the peak of the bull market in December 2017, the Bitcoin SF was 22 and the market value of Bitcoin was $230 billion, very close to silver.

Since the halving of bitcoin production has a huge impact on SF, it is clearly marked in the chart, with dark blue being half a month and red being just halved. The next halving is in May 2020, then the SF will change from the current 25 to 50, which will be very close to the gold SF 62.

According to the SF model, although the formula has different parameters, the result is the same. It is expected that after the bitcoin production is reduced in May 2020, the market value of Bitcoin is 1 trillion US dollars, equivalent to a unit price of 55,000 US dollars. Although this price sounds incredible, time will prove the truth of this hypothesis and model.

Number of Bitcoins and the number of blocks produced per month

It should be noted here that after halving in November 2012, Bitcoin is almost immediately adjusted for price; after halving in June 2016, the adjustment rate is much slower, probably because of Ethereum competition and DAO hacker attack.

In addition, during the downward difficulty adjustment period in 2009 and mid-2011, mid-2015 and end of 2018, the number of blocks per month decreased; from GPU mining in 2010 to ASIC mining in 2011 There are more pieces coming out every month.

Power law and fractal

Power law is a kind of relationship, which means that a relative change of quantity causes a relative change of the other quantity. Regardless of the initial size of these quantities, they reveal the potential regularity of the seemingly random complex system properties. Complex systems, usually with varying degrees of variation between phenomena, are independent of the scale we are observing. Therefore, the images we take on one scale are similar in some ways to the images we take on another scale. This “self-similar” property is the basis of the power-law relationship.

We saw this in Bitcoin: The market patterns in 2011, 2014 and 2018 look very similar, but bitcoin prices are on completely different scales, $10 in 2011, $1,000 in 2014, 2018 10,000 dollars.

The SF model also gives us confidence that Bitcoin will rise in the future:

Gold and silver are completely different markets, but they are consistent with the value of SF’s bitcoin model.

Bitcoin has signs of power law and fractals.

The final question is, where does all the money needed for the $1 trillion bitcoin market value come from?

The answer should be silver, gold, countries with negative interest rates (Europe, Japan, the United States), predatory governments (Venezuela, Iran, Turkey, etc.), billionaires and millionaires hedged quantitative easing (QE), and institutional investors. After all, Bitcoin is the best performing asset in the past 10 years.

Source : Up Blockchain Review


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