Quick Update on Lindy Model for Bitcoin
A simple power law of time
This is not investment advice. Bitcoin is highly volatile and you should determine according to your own circumstances how much risk you can afford to take in this new technology.
We update our Lindy model for Bitcoin fair value, that is based on a power law of the number of blocks laid down. The number of elapsed block years is simply the block height divided by 52,500 and is one quarter of the 210,000 block count between Halvings. This is Bitcoin’s natural block calendar, its rhythm.
The Lindy moniker in this case refers to ‘persistence of technology’. The longer it persists, the more likely it is to hang around in the long term and be relevant. Bitcoin is now almost 14 calendar years old.
The power law model is P = Q*B^k where Q is a normalization price at one Block year elapsed, and B is the number of elapsed block years. One performs a linear regression in log space by regressing the log of price against log Q plus k*log B.
Using (Block) monthly data for the past 12.4 years provides this best fit regression:
P = $0.0146 * B^5.50 with a standard error in the power law index of 0.12. This can be recast into:
P = $29,601 * (B/14)^5.5 for easier comprehension. Thus the fair value price, according to the model, in May of this year, when B was 14, was $29,601.
And the fair value best fit and intermediate term projection yields:
May 2022: 14 Block years $29,601
Nov 2022: 14.5 Block years $35,902
May 2023: 15 Block years $43,272
May 2024: (next Halving) 16 Block years $61,725
with this model, which has an excellent R^2 (correlation squared for the fit to the data) of 0.94.
The message is, hang in there, sorry, HODL on, for the longer term. If price catches up to fair value by the next Halving it will be over 3 times higher than today.
The volatility is high, of course, with the past four years’ volatility running at 0.233 in log10 price terms or a factor of 1.71. With a current price of $19,216 the Z-score, (log of actual price minus log of fair value price and normalized to the volatility) is -1.11. So this downward excursion is not that extreme, given the historical volatility.
Figure 1. Log-log chart of Lindy model and some historical price points. The model is a straight line on a log-log chart. The blue star shows the current price and age of blockchain.
The figure shows a long term projection on a log-log plot, which I assert is an even better way of looking at things than a log price vs. linear time plot. The y-axis has the $ price historically and projected. The x-axis has the elapsed Block years on a log scale. The green circles are the best fit model. Only some of the 150 actual price data points used in the regression are shown as orange circles, yearly points up to 10 years, and half yearly data points afterwords. The blue star is today’s price. In big picture terms it remains consistent with the long term projection.
In this projection Bitcoin would reach $1,000,000 in just over 12 Block years. And Block years are just slightly shorter than calendar years, on average. One quick trick is the expectation for annualized increase in fair value at time B is simply k/B. Thus with k = 5.5 and present value of B = 14.44, the expected fair value increase over the next year is about 38%.
There is no assurance of this, we do not know what challenges Bitcoin faces to further adoption in the next decade. Certainly government regulation and central bank digital currencies are two of the most important considerations. The current macroeconomic environment of slowing economy and presumably peaking inflation is not favorable. Bitcoin has been positively correlated with tech stocks.
The model is a good approximation in early years to a more sophisticated S-curve (Weibull cumulative distribution function) analysis. Bitcoin may saturate at some point below a $20 trillion plus market cap implied in the above chart.
But on the supportive side, we have the ongoing crisis of confidence in fiat currencies, which is being manifested in a strong dollar against the Euro, Yen, Pound, Yuan, and almost all developing market currencies. Bitcoin is an alternative to all fiats, since it is an asset, with no debt attached, in a world awash in debt. And with rising interest rates, credit blowups will occur more frequently.
Inflation is close to 10% across the developed world, and Bitcoin’s supply inflation, currently below to 2%, will drop below 1% in less than two years. Bitcoin is absolutely scarce, with less than 9% of its total supply yet to be minted over the next 120 years on an ever-tightening schedule. And it is highly secure, with a hash rate well over 200 Exahashes/sec.
Bitcoin is superior global monetary technology, the world should increasingly recognize that over time.