PlanB - Peter McCormack - Bitcoin

Could Bitcoin Really be Heading to $288K? | PlanB on The What Bitcoin Did Podcast

Check out The What Bitcoin Did Episode Page & Show Notes

Key Takeaways

  • Monetary assets have higher Stock to Flow (S2F) ratios compared to commodities. Otherwise, producers can flood the market and crash the price
  • Bitcoin is the first scarce digital object with its supply cap of 21 million coins
    • Bitcoin halving is a significant event (every ~4 years, or 210,000 blocks, the supply rate of new coins is halved)
  • In the new model, PlanB introduces the concept of “Phase Transitions”, how the properties of an item can completely change
    • For example, Bitcoin went from a proof of concept to payments network, E-gold, and now it’s considered a financial asset
  • Data used in the original stock to flow model showed some clustering; the new model quantifies those clusters and maps them to Bitcoin’s phase transitions
    • The model predicts a Bitcoin price of $288K by 2024
  • If Bitcoin’s S2F doubles and market value doesn’t increase in the coming 4 years, the model will break
  • Post halving, only the strong believers, the efficient miners, and visionary investors will remain
  •  “This thing is not a toy anymore, and it’s maybe not an asset anymore as well. It is going to be much bigger than that.” — Plan₿

Books Mentioned

  • In The Bitcoin Standard, author Saifedean Ammous talks about Austrian economics, time preference, sound money, Bitcoin, and describes the scarcity of a commodity in terms of its Stock to Flow ratio

Resources Mentioned

Intro

Stock to Flow

  • One can describe the scarcity of a commodity in terms of its Stock-to-Flow (S2F) ratio, if you are unfamiliar with S2F:
    • The Stock: the existing supply of a commodity
    • The Flow: extra production in the next period
    • Stock-to-Flow (S2F): How much extra is produced compared to existing stockpiles – (divide the two values)
  • Example: Gold’s stock is 190,000 tonnes / annual production of 3,200 tonnes = S2F 59
    • In other words, it would take 59 years of gold production to double the current stock of gold
    • S2F of Silver: 33 – Palladium: 1.1 – Platinum: 0.4
  • Because they are hoarded, monetary assets have higher S2F ratios than commodities. When assets have low S2F rations, producers can flood the market and crash the price
    • A stark example is Oil, which has an S2F of 0.25

Modeling Bitcoin’s Value with Scarcity

  • Bitcoin is the first scarce digital object because of its supply cap of 21 million coins
    • Satoshi invented digital scarcity: If something is digital, it can be copied, but not bitcoin
  • PlanB discovered the S2F ratio of all commodities is correlated with their market value
    • Bitcoin halving is a significant event (every ~4 years, or 210,000 blocks, the supply rate of new coins is halved) – this doubles its S2F ratio and increases Bitcoin’s value
      • Currently, Bitcoin has an S2F ratio of 27 – the model estimates the price to be little under $10,000 per bitcoin
      • The next halving in May 2020 will double Bitcoin’s S2F to 50, resulting in an estimated Bitcoin price of $50,000-100,000
      • The halving of 2024 will result in S2F of 100, something humanity has never seen before, and a Bitcoin price prediction of ~$400k – 1MM
  • However, while the values of gold and silver were in line with the model, they were not part of it
    • This resulted in the model having 2 formulas, which didn’t feel right to PlanB

Phase Transitions

  • In the new model, PlanB introduces the concept of Phase Transitions, how the properties of an item can completely change – Examples:
    • Water transitions from ice to liquid to gas
      • “It is all water, but water has totally different properties in each phase”
    • USD has phase-transitioned from a gold coin to a gold-backed paper receipt to unbacked paper (fiat currency)
      • “Although we keep calling it Dollar, the Dollar has totally different properties in these three phases”
  • PlanB describes 4 major transitions in Bitcoin narratives, consistent with the halvings observation:
    • Starts out as a proof of concept of magical internet money
    • Evolves to a payments network after achieving dollar parity – 1 bitcoin = $1 
    • Becomes E-gold: A store of value after achieving gold parity – 1 bitcoin = 1 ounce of gold
    • Transforms into a financial asset
  • Bitcoin’s phase transitions represent different assets
    • PlanB elaborates: “BTC “Proof of concept” with S2F 1.3 and only $1M market value is a totally different asset than BTC “Financial asset” with S2F 25 and $114B market value“

Bitcoin Stock-to-Flow Cross Asset Model

  • Both the original model and the Cross Asset model use the same date set: Bitcoin’s S2F and market value over 111 months
    • The data showed some clustering, this was quantified by using a genetic algorithm (minimizing absolute distance)
    • PlanB explains the significance of those clusters: “The more data you use, the more noise you add, if it doesn’t move the cluster, the middle, then the real signal is that cluster”
  • These clusters represent Bitcoin’s phase transitions, each behaving like a different asset
    • PlanB then added other assets like silver and gold, this makes it a cross asset model
  • The new model removes the time element, and instead explores Bitcoin from the perspective of phase transitions

When Does the Model Break?

  • If s2f doubles and market value doesn’t increase in the coming 4 years or earlier, the model will break
    • With that said, putting all your money on a model is “so stupid”, use a model to structure your thinking and get a rough direction
    • “I would rather be roughly right than exactly wrong”
  • “All models are wrong, but some are useful” George Box
    • It would be very useful if the model can forecast the next halving or two correctly

Bitcoin Narratives of the Future

  • The first paper sparked interest from a lot of quants; PlanB hopes strategic planners adopt this paradigm of thinking in phases
    • Given the complexity in the world, one can only speculate future narratives
  • Possible examples: A nation-state deciding to sell oil for bitcoin, or a central bank deciding to accumulate some
    • With all the money printing, it’s an asymmetric risk/return for a country to own some bitcoins
    • However, there will be some phases before state adoption
      • For instance, bitcoin needs to develop into an institutional grade asset first
  • It will take some time before the new data cluster starts forming,
    • Also, like past years, FOMO will drive it to overshoot and to correct hard afterward
  • Post halving, only the strong believers, the efficient miners, and visionary investors will remain
    • This is the perfect setup for growth, regardless of the narrative
  • “This thing is not a toy anymore, and it’s maybe not an asset anymore as well. It is going to be much bigger than that.” — Plan₿
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Notes By Mostafa Khaled

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