If we look at the above chart, we have to admit that it has all the characteristics to make a great bitcoin meme. In essence, this chart says, “Number go up, 98% accuracy.” And underneath the hood of this meme is some extremely difficult math that I have no idea how to read, never mind question or verify. What these two factors create is the perfect storm for people taking it seriously without ever really looking at it too seriously. Hubris, if you will.
But I have a fundamental problem with the premise of this “valuation” tool for bitcoin. According to Plan B in his medium article, “The hypothesis in this study is that scarcity, as measured by SF, directly drives value.”
Now, I’m no economist (thank God for that), but as far as I understand it, the value of anything is driven by both supply AND demand. And in my opinion the whole premise of this model only looks at one half of the total equation. There is no doubt, and Plan B’s model illustrates this point quite dramatically, that bitcoin has amazing supply side economics for the whole “number go up” equation. But to completely ignore any changes on the demand side (the other side of the “number go up” equation) makes no sense to me.
The SF model should work pretty well to model the value of things for which the demand side of things remain fairly consistent. This explains why the SF model could maybe work for gold and silver. Gold and silver have been in existence for thousands of years; their utility or use case “discovery” has been completed a very long time ago and because of that demand for gold and silver won’t swing dramatically, barring any massive crises. But this is undeniably not true for bitcoin. Bitcoin, which has only existed for 10 years, is still very early in its utility and use case “discovery” process. This means that demand for bitcoin will fluctuate massively as we discover new use cases, or some use cases turn out to be unworkable.
A highly unlikely hypothetical example to help me explain what I mean:
Bitcoin at a $200bn market cap is quite small in the world of financial assets. Now, let’s say there is some very persuasive Chinese communist party member who, like me, believes that bitcoin is the next big thing. This member then convinces Xi Jinping that China should be piling into it in order to gain the upper hand in the fight for the new reserve asset of the world. Having convinced him of this, the Chinese government moves with its characteristic speed and efficiency to buy as many bitcoin as they possibly can.
Now the way the market works means that for bitcoin to reach $7 trillion in market cap, it doesn’t mean that $6,8 trillion worth of capital needs to flow into the system. If the Chinese are willing to pay up, they could easily lift the market cap there (especially if you fuckers hodl like you promised you would!).
Now imagine other governments find out about this and start piling in as well? That should drive the price of bitcoin sky high and keep it there for a long time.
Imagine all this happens at the end of 2019 way before the halving of the bitcoin supply. Unlikely, I know, but just imagine. That would mean that Plan B’s model would have been way off and left you, the person using it as a measure of “value,” as a net seller to the Chinese government.
This works the other way round as well. Why, if “scarcity, as measured by SF, directly drives value,” does Bitcoin Cash and BSV, which has exactly the same supply side characteristics as Bitcoin, have almost no value? Might it be a demand side problem?
I guess another question I would ask Plan B if I ever had the opportunity would be: At what point would you consider the model to have failed to predict the value of bitcoin?
If bitcoin reached $100,000 before the halving even took place, would you consider it just front-running of the halving? If bitcoin remained where it was today up to the next halving in 2025, and then shot up to $1,000,000 would you consider that market inefficiency?
I guess my question would simply be: Is the SF model actually falsifiable?
Is this good for bitcoin? Yes.