We all know that prediction is tricky job, especially when it concerns the future… and Bitcoin, being a relative newcomer on the monetary stage, is loaded with more than the usual number of factors that could render the most carefully crafted forecasts wildly in error. But I’m going to make a stab at it, anyway! Please keep in mind that these projections are for entertainment only. No actual statistics were killed or tortured in the making of this post. Read on to see where I think Bitcoin is headed.
First of all, please note that dollar prices will not enter much into these deliberations. In these times of unprecedented fiscal and monetary policies, unheard of debt levels, depression level unemployment and GDP collapse, the future value of the US Dollar, and of all national currencies, is in severe doubt. A short squeeze on the Dollar could drive it much higher against other currencies, and force liquidation of many assets including gold and Bitcoin to service and pay down debt, pushing it higher in terms of those as well. On the other hand, massive amounts of new fiat currency entering circulation could lead to much lower valuation of each currency unit when measured against gold and assets like Bitcoin. These are not the concerns of this analysis.
I will be concerned only with the ratio of gold to BTC, currently about 163 grams per bitcoin. If both rise or fall about the same amount when priced in USD, then the ratio will stay about the same. If the USD price of gold falls in half, but the USD price of BTC stays about the same, I will consider that Bitcoin has doubled in value, because you could sell one bitcoin and buy twice as many grams of gold with the proceeds, and so on. If the Dollar ceased to function, or even to exist, people would still be able to trade gold for Bitcoin and vice versa, and the relationships discussed here might still apply.
If you are unfamiliar with grams, and prefer to think in troy ounces, just divide the prices shown here by 31.1; for example, 163 grams (the current price of bitcoin) is a little over 5 ounces. 1000 grams, or 1 kg, is about 32 ounces. 10 kg is about 322 ounces.
Take a look at the chart below (click on the chart for a more detailed PDF version). My analysis starts by noticing the relative heights and timings of the highs in mid-2011, late-2013 and late 2017. The second peak is about 48 times higher than the first, while the third peak is about 17x the second. So the rate of growth in the peaks seems to be slowing.
Now look at the time between peaks. From the 2011 peak to the 2013 peak was 910 days, and from the 2013 to the 2017 peaks was 1,473 days, or 1.62 times as long. If that “time stretch” factor stays about the same, the next peak would occur about 2,400 days after the last one, putting it in mid-2024. This sets the timing for the arrow labeled “Next High?” on the chart. A “log log regression” of the price peaks gives the light green curve, and suggests the price we might see at that time is around 5 kg per BTC, a gain of about 3,000% from current levels.
Running a similar regression on the low points of the price series gives the light red line, marking the lower limit of the Bitcoin channel. Almost all of the Bitcoin prices observed since trading began lie between the red and green curves. In my model, prices near the red line represent buying opportunities, while prices near the green upper line represent selling opportunities. We are currently in "buy" territory, although it is possible that even better opportunities may lie just ahead.
Next, notice the distance between the red and green lines for any given date. In 2011, the upper bound was about 84x the lower bound. A year later, the ratio was 47x. By 2015 it was 22x, and at the start of 2020 it had fallen to 12x. This is a good thing, demonstrating a decline in overall peak-to-trough volatility. If this pattern holds up, the ratio will be about 9x in mid 2024, and about 6.5x by the end of the decade. Still high by forex and bond standards, but less than 10% of the 2011 volatility!
There is another way of estimating the timing of Bitcoin highs. Many observers think that the booms and busts of Bitcoin are driven by the halving events that occur about every 4 years. Past halvings occurred in 2012, 2016, and 2020. the next one will be in mid-2024. These events, hard-coded into the Bitcoin software, cause a reduction in the reward miners are paid for running the network and certifying the blockchain’s integrity. Because miners always have a choice between paying to run their mining computers and just buying bitcoins in the open market with the money instead, these events do have a fundamental impact on the BTC price. Although there is a steep and sudden change in the mining reward, the BTC price doesn’t change suddenly because there is no surprise involved — the timing of these events is known to all the participants well in advance.
After some delay, the BTC price has moved to a new high following each halving so far (or more precisely, a peak occurred before each halving, dipped around the time of the halving, and then rose to a new high, starting the cycle over again.) Looking at the time difference between the peaks and the following halvings we see 539 days between the mid-2011 and late 2012, 948 days between late 2013 and mid-2016, and 877 days between late 2016 and mid-2020.
Things were still pretty wild and woolly, changing fast in 2011 and 2012; but the last two cycles are each about 900 days from peak to halving. If that holds true in the next cycle, we might expect a top in late 2021. This defines the timing of the arrow labeled “Halving High?”. The corresponding price target would be about 2.2 kg.
Interestingly, the halving-based timing model suggests that mid-2024 (the next halving) should see prices near the lower limit (0.6 kg). This is the exact opposite of the prediction of the time-stretch model, which predicts a price near the high limit (4.9 kg)!
I won’t attempt to reconcile these forecasts for now, but it will be very interesting to see how things play out over the next few years. My personal guess is that the halving effect will dominate; we will see lower prices through the summer of 2020, rising through the fall and winter, then accelerating to a new high by the end of 2021, corresponding to the “halving high” model, but this could just be wishful thinking on my part. The results of the November elections in the US, and the economic response to the ongoing pandemic are among many factors that could upset this cyclic analysis.
Over the longer term, as the halvings result in smaller and smaller changes in the rate of creation of new bitcoins, and the market for Bitcoin becomes saturated, its price will stabilize.
One final comment: As I was preparing this forecast, I began to wonder how reasonable these price targets were, in some real world sense. As a sanity check, I decided to compare the value of all bitcoins (21 million will be eventually mined) to the value of all the gold in the world.
According to the World Gold Council, the total above-ground stock of gold, including jewelry, private investment, official holdings, and other forms, as of end-2019, was 197,576 tonnes. One tonne is 1000 kg, so total above-ground gold could be stated as about 200 million kg. Since there will be roughly 20 million bitcoins, it is fair to say that at a price of 200/20 = 10 kg per BTC, the total value of all bitcoins would be roughly the same as all the above-ground gold. The 10kg (10,000 gram) level is the top of the price chart above.
If this model holds, by the end of the decade the total value of Bitcoin should be cycling around the total value of gold, from about one-third the value at lows, to twice the value at highs. I know of no particular reason why Bitcoin shouldn’t be much more valuable (or much less valuable) than gold, but I find the possibility of converging on equivalence interesting.
Please let me know your thoughts in the comments below, or by email to [email protected].