Five Key Reasons Behind My Confidence in Bitcoin's Future Growth
Beyond the halving: exploring the deeper, unpredictable dynamics of Bitcoin's value proposition
Here are five reasons I am confident that Bitcoin's price will continue to grow:
Metcalfe's Law: "The financial value or influence of a telecommunications network is proportional to the square of the number of connected users of the system." The value of the Bitcoin network grows exponentially with the addition of each user. As Bitcoin continues to penetrate mainstream consciousness, attracting users from diverse demographics and geographies, its inherent value skyrockets. Historical data on network growth and Bitcoin's price correlation strongly support Metcalfe's Law.
Lindy Effect: This concept posits that the future life expectancy of non-perishable entities, such as technologies or ideas, is proportional to their current age. Each additional year that Bitcoin survives and thrives, free from existential threats like network failures and nation-state attacks, it disproves skeptics and gains further trust. This effect underscores Bitcoin's resilience to regulatory challenges, technological threats, and market volatility. While gold has a track record as old as civilization, each year that Bitcoin continues to operate provides substantial new evidence of future success.
Ecosystem Growth: Bitcoin's integration into institutional rails and the blossoming of a vendor ecosystem—including innovations in point-of-sale systems, user-friendly custody solutions, and financial instruments —catalyzes its adoption and utility. These developments create a virtuous cycle, where enhanced utility leads to greater adoption, which in turn drives demand and value. For instance, the emergence of Bitcoin-focused ETFs and futures contracts has opened the doors to institutional investors, while payment processors adopting Bitcoin have made it more accessible to the average consumer, embedding it deeper into the fabric of daily financial transactions.
The Dollar's Debt Death Spiral: The unsustainability of the dollar-centric financial regime, burdened by unsustainable welfare obligations and an ever-increasing debt ceiling, casts a terminal shadow over the future of fiat currencies. Unlike fiat currencies, Bitcoin's capped supply and decentralization make it immune to hyperinflation and government manipulation, posing it as the likely replacement when the global dollar reserve regime fails.
Stock to Flow Ratio: The Stock to Flow (S2F) model, which measures the scarcity of an asset, predicts Bitcoin's price growth with remarkable accuracy. The model highlights how Bitcoin's halving events, which reduce the mining reward by half approximately every four years, drastically decrease the new supply of Bitcoin. This programmed scarcity, akin to precious metals but with greater predictability, makes Bitcoin increasingly rare and valuable. Post the 2024 halving, the annual increase in Bitcoin's supply drops to 0.86% relative to its existing supply, which is less than that of gold.
First & Second Order Derivatives, and Black Swans in Bitcoin Price Predictions:
Understanding Bitcoin's price trajectory involves grappling with variables that behave like first and second-order derivative functions, complicating accurate predictions. Network effects, such as those described by Metcalfe's law and the Lindy effect, alongside the stock-to-flow ratio, represent first-order derivatives. These elements are relatively predictable, as they follow established patterns of growth and scarcity that directly influence Bitcoin's value based on user adoption and the predetermined halving events.
In contrast, ecosystem growth functions as a second-order derivative. This aspect is influenced by the potential for sudden, significant shifts in utility—such as the emergence of killer apps—that can drastically alter Bitcoin's perceived value and utility in unforeseen ways.
Moreover, the dollar's debt spiral introduces another layer of unpredictability with black swan events. While the trajectory towards increasingly unsustainable debt levels is a predictable long-term trend, the culmination of this trend— the end of the dollar's reign as the global reserve currency—will be a series of dramatic and unpredictable events with dramatic consequences for Bitcoin’s value.
Given that the most impactful events are the most unpredictable, I advocate for a strategy of dollar-cost averaging. This approach mitigates the risks associated with trying to time the market, acknowledging the difficulty in forecasting Bitcoin's price movements amidst complex and often unpredictable financial and technological landscapes.
Conclusion: Beyond the network effects, Bitcoin’s price drivers are the combination of Bitcoin's increasing scarcity, its role as a hedge against economic uncertainty, and its growing ecosystem of applications and services. I caution against focusing solely on predictable changes in user adoption and halving events, as these do not capture the most important factors of Bitcoin’s value proposition.
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