Where the Block Are We?

Nearly two block years from the next Bitcoin peak

At the moment I write this we are five months away from the next Halving (or, “Halfining” for Hal Finney).

If you believe that “Halfinings” are the most important driver of value and market capitalization for Bitcoin due to the Nakamoto consensus algorithm enforced scarcity, as I do, then you should really chart things out in block time.

It’s easy to do, a Block year is 52,500 blocks or 1/4 of the 210,000 block duration epochs between each Halving. For convenience all Block months are equal in length, with a duration of 4375 blocks. As an aside, it is quite straightforward to compute stock-to-flow in block year terms.

As I write this on November 22nd, we are at block height 817,901 and there are 22,099 blocks until the next Halving, that will occur with block 840,000 and which is estimated for a date around April 24, 2024.

There is 0.42093 of a block year remaining, or 5.051 block months.

Now conveniently in recent years the durations of block years, that used to run faster than Gregorian calendar years, have been rather close to the calendar year. But the Block calendar has run faster by about eight months in aggregate, since the Halving will occur at the end of April 2024 rather than in January, 2025.

It has been noted by many that the Bitcoin four-year cycle roughly aligns with the presidential election cycle and the four-year business cycle. (Does the latter still exist? https://www.schroders.com/en-be/be/professional/insights/why-this-economic-cycle-is-different/)

But if the security (enforced with 500 ExaHashes/second of computational power) and the scarcity of Bitcoin supply (enforced by Halvings) are the fundamental value drivers, then we ought to think about timing in block calendar terms.

The business cycles are harder to track, sloppier than they once were for a host of reasons. These include, among others, the impact COVID had on supply chains,  the increasing geopolitical tensions of a New Cold War environment, large fiscal stimulus programs, and unusual central bank policies ever since the Great Recession.

This is not to say all these things do not impact the Bitcoin market value on the demand side but the constrained supply outlook is clear with an ever-tightening decrease in emission of new Bitcoin for the next century to come. This exponential ratcheting down, cutting supply in half each 4 block years has proved to be a huge driver of value. There is less than 1.5 million Bitcoin yet to be minted. Half of that will be minted (mined) prior to the spring of 2028. Then there will be less than 3/4 million to ever be minted, and half of that will be minted from spring of 2028 to spring of 2032, and so forth.

Disinflation now, disinflation forever.

In general it seems that Bitcoin goes up three out of every four years followed by a large selloff in the “crypto winter” that lasts about a year (so called because other cryptos are affected as well).

But here we are Bitcoin only. Only the best, most secure Proof of Work coin for us. No rent-seeking proof of stake coins that are not grounded in real energy and enormous hashrate are of interest.

As we look at the next cycle to start at the fourth Halving in April, 2024 it is natural to wonder when the peak will be. A year after Halving, or perhaps a year and a half?

Most analysts try to evaluate this in calendar years, let’s look at this in block years instead.

First Halving - 210,000 - Nov. 28, 2012 - 4 block years elapsed

Second Halving - 420,000 - July 9, 2016 - 8 block years

Third Halving - 630,000 - May 11,  2020 - 12 block years

Fourth Halving - 840,000 - April 24, 2024(?) - 16 block years

Fifth Halving - 1,050,000 - April 2028(?) - Bitcoin will reach 20 block years of age

While in block years, everything is regular, we see that the period between the first two Halvings was shy of 4 Gregorian calendar years by about 4-1/2 months. And the period between the second and third shy by two calendar months. For the latest epoch the time chain (blockchain) is only running faster by about 2-1/2 weeks relative to Gregorian calendar time. The time chain has become more stable, the fortnightly difficulty adjustments are more effective in this sense, with less deviation from the nominal 10 minute block time.

Now let’s look at peak prices, when did they occur? We do this with prices measured on one block month intervals, we are just trying to get at the big picture here.

Peak after First Halving - 16 block months after - 5.33 block years of age

Peak after Second Halving - 18 block months after - 9.5 block years of age

Peak after Third Halving - 18 block months after - 13.5 block years of age

To date peaks occur typically 16 - 18 block months after Halvings. If the next epoch runs faster in block time by about two weeks over the four years’ cycle then a peak occurring 18 block months after would occur in mid-October of 2025. If 16 block months that would be in August 2025.

There is a lot of room left in this bull run for Bitcoin. We are at about 15.5 Block years now and a reasonable expectation for the time of the next peak is at 16 block years plus 18 block months, that is, around 17.5 block years or slightly before.

The Lindy technology adoption power law model shown in the first figure below has a power law index of 5.4 and an expected fair value of $46,300 now and $89,200 at 18 block months after the Fourth Halving. The regression for the power law fit uses monthly data since block year 2, and has an R^2 of 0.94 (F-test is 2535 for 163 data points).

With a power law model the expected increase in fair value is k/B where k is the best fit power law index and B is the number of block years elapsed since January 3, 2009 when Bitcoin began. So currently the annualized fair value expectation is 35% per block year. By the time of the peak it will still be running above 30% per annum.

Of course at peaks the price is running up well above fair value and one standard deviation (taken on log10 of price) amounts to a factor of a little over 2 in price.

So the price could easily go to $180,000 or more in the next epoch’s run up. In the second chart we show the +1 and -1 standard deviation lines as well. One sees that prices readily move above the one sigma line during the peaks at 5.33, 9.5, and 13.5 block years.

You may note that the volatility in log price has dampened somewhat in recent years, but even using just the last four years’ data the standard deviation is 0.253 in log base 10 terms, or a factor of 1.79, implying a plus one sigma level of around $160,000 at the next peak if it occurs in August to October of 2025.

Splitting the difference we might say greater than $170,000 in September 2025 is very achievable, if the power law trend holds for another two years.