The price of bitcoin grows according to a straightforward mathematical equation, which correlates to phenomena found in nature as well as Facebook’s growth and share price.
Bitcoiners love drawing lines on charts. They love the idea that you can predict future price if you just find the right formula. If the line needs to be changed to fit the data, so be it. There are lots of these charts around, often with pretty colours and lots of crazy lines. Log charts are the favourite, because they show bitcoin continuing to grow exponentially.
Most of these charts are junk, wishful thinking, like children drawing fairies in crayon on the wall. They keep having to be updated because the price doesn’t fit them.
However, there is truth in the idea, and now we have a straightforward, convincing example that really fits the data well. Timothy Peterson of Cane Island Alternative Advisors makes the comparison between bitcoin and Facebook’s growth, using an equation that also fits the spread of viruses in nature. ‘We derive the relationships between price, number of users, and time, and show that the resulting market capitalizations likely follow a Gompertz sigmoid growth function. This function, historically used to describe the growth of biological organisms like bacteria, tumors, and viruses, likely has some application to network economics.’
This makes perfect sense, and it has long been recognised that the value of a network is a square factor of its size (which is what makes Facebook so valuable, and why it’s so hard for new social networks to gain a foothold).
Petersen’s formula fits bitcoin extremely well, giving a lower bound for the price. In a bubble or strong bull market, the price deviates significantly from this line, but it has never dropped below it.
It’s a very convincing piece of analysis and an explanation of why bitcoin should continue to grow and gain value. For what it’s worth, it suggests that bitcoin probably has bottomed for this cycle. And it suggests that, while bitcoin’s growth will slow, it still has a long way to go.
Red hot news, scorching wit and searing opinion pieces from Crypto Inferno.
Join us on