We’re less than a week away from the Halving — can you feel it?

So, let’s talk about Bitcoin. Specifically, what Bitcoin is and how that’s changed over time, 

In the absence of a recognized sole leader, Bitcoiners refer to founding documents and early forum posts to attempt to decipher what Satoshi truly wanted for the currency. This is not unlike US Supreme Court justices poring over the Constitution and applying its ancient wisdom to contemporary cases.

But, as we have entered the second decade of Bitcoin’s life, and as we look beyond the Third Halving, what can we expect? Very little has been written about what Bitcoin, and crypto as a whole, will be and look like in a year, two years, or even in four years during the next halving.

The only metric that seems to define that transition, as far as most people seem concerned, is where Bitcoin’s price will be. Of course, on the surface, price is the most telling and most compelling aspect of Bitcoin on a long term timeframe: it only goes up as available supply goes down.

But, I want to explore what that price increase means. What kind of world does a $20k, $50k, $100k, or $1M dollar BTC look like, and how does the narrative of Bitcoin evolve with that price?

First, let’s look at one of the best metrics for understanding BTC price over time: the stock-to-flow (S2F) model.

Quite simply, stock-to-flow calculates a value based on the supply of new Bitcoins entering circulation through mining versus the existing supply, or “stock”. Essentially, it’s looking at the rate of new Bitcoins being mined, or “created”, each block against Bitcoin’s existing supply, a method which has proven highly accurate in charting price performance.

The retroactive application confirms that the model is extremely competent at charting Bitcoin’s growth, with even last month’s 60% drop still falling within its predicted range.

The simple thesis behind S2F is that, as more BTC is held instead of sold, and as less BTC is introduced to the world, the market has to fight over less and less BTC, making their price increase. Checkmate has long written about S2F, and another prominent proponent of S2F is a guy named Plan B.

Recently, Plan B issued a new S2F model, entitled S2FX, which looks at what comes after the Third Halving in less than a week.

Prior to S2FX, his stock-to-flow chart put BTC/USD at an average of around $100,000 between 2020 and 2024. With the release of the new version, however, the prediction has almost tripled overnight, stating the average bitcoin price of USD$288,000 by the year 2024.

Plan B spoke about the 2024 Bitcoin halving which would increase the stock-to-flow ratio of BTC drastically, estimating the market cap of Bitcoin at that time to be around 10-20 trillion USD.

He added,

“A spectacular moment in time. And the value that goes mathematically with an asset that has a stock to flow over a hundred is somewhere between $400,000 and $1 million per Bitcoin.”

Plan B also spoke about the importance of monetary premium and said,

“I think the monetary premium will go to the asset that captures and holds it the best, and that will be Bitcoin. So it might as well trigger some very unintended consequences like stock markets and real estate markets losing that monetary premium.”

Phase transitions are an important perspective in understanding S2FX model. During phase transitions, things get totally different properties. Transitions are often discontinuous. Three examples of phase transitions are:

Water

The classic example of phase transitions is water. Water exists in four different phases (states): solid, liquid, gas, ionized. It is all water, but water has totally different properties in each phase.

US Dollar

Phase transitions are also present in finance. For example the US Dollar has transitioned from gold coin (One dollar = 371.25 grains of pure silver = 24 grains of gold), to paper backed by gold (“In gold coin payable to the bearer on demand”), to paper backed by nothing (“This note is legal tender for all debts, public and private”). Although we keep calling it Dollar, the Dollar has totally different properties in these three phases.

Bitcoin

The same is true for BTC. 

We can identify seven distinct major themes that have held positions of prominence among Bitcoiners throughout its history. Note that these do not necessarily have to be the most influential narratives — we are instead focusing on major strains of thought that have characterized Bitcoin users.

In rough order of appearance, these are:

E-cash proof of concept: the first major narrative, this was the general view of Bitcoin in its earliest days. Back then, cypherpunks and cryptographers were still appraising the nascent project and determining whether it worked, if at all. Since all prior e-cash schemes had failed, it took a while for people to be convinced of its technical and economic viability and move on to more expansive conceptions of the protocol.

Cheap p2p payments network: an extremely popular and pervasive narrative. Some believe this is what Satoshi had in mind — a straightforward currency for peer to peer internet transactions. A decentralized Paypal or Venmo, if you will. Since microtransactions are a key component of internet commerce, proponents of this view generally believe that low fees and convenience are an essential characteristic of such a currency.

Censorship-resistant digital gold: the counterpoint to the p2p payments narrative, this is the view that Bitcoin primarily represents an untamperable, uninflatable, largely unseizable, intergenerational wealth store which cannot be interfered with by banks or the State. Proponents of this view de-emphasize Bitcoin’s use for everyday transactions, arguing that security, predictability, and conservatism in development are more important. Sound money believers are proponents of this narrative.

Private and anonymous darknet currency: the view that Bitcoin is useful for anonymous online transactions, in particular to facilitate black market online commerce. This is not necessarily mutually exclusive with the e-gold position, as many proponents of the digital gold view believe that fungibility and privacy are important attributes. This was a popular narrative before the chain analysis companies had success de-anonymizing Bitcoin users. Today this narrative is tenuous at best, even with better tumblers and a multitude of tools to secure BTC. 

Reserve currency for the cryptocurrency industry: this is the view that Bitcoin serves an essential purpose as the native currency for the cryptocurrency/cryptoasset industry more generally. This is a view espoused by traders for whom BTC is the numeraire — the currency in which the prices of other assets are quoted. Additionally, traders, businesses, and distributed networks that hold reserves in BTC de-facto endorse this view.

Programmable shared database: this is a slightly more niche view, and generally involves the understanding that Bitcoin can embed arbitrary data, not just currency transactions. If you recall, Satoshi embedded the phrase, ‘The Times 03/Jan/2009 Chancellor on brink of second bailout for banks‘, in the genesis block of BTC. Individuals holding this view tend to see Bitcoin as a programmable, expressive protocol, which can facilitate broader use-cases. In 2015–16, it was popular to express the notion that Bitcoin would eventually absorb a diverse set of functionalities through sidechains. Projects like Namecoin, Blockstack, DeOS, Rootstock, and some of the timestamping services rely on this view of the protocol.

Uncorrelated financial asset: this is a view of Bitcoin that treats it strictly like a financial asset and finds its most important feature to be its return distribution. In particular, its tendency to have a low or nonexistent correlation to all manner of indexes, currencies, or commodities makes it an attractive portfolio diversifier. Proponents of the view are generally not too concerned about owning spot Bitcoin; they are interested in exposure to the asset. Put another way, they want to buy Bitcoin-flavored risk, not necessarily Bitcoin itself. As Bitcoin has become more financialized, this conception has gained steam.

In the chart below, you can see how these weighted various narratives have evolved according to their popularity over time.

These BTC narratives seem very continuous in the chart. However, if we combine the narratives with financial milestones (and later S2F and price data), they look very much like phases with more abrupt transitions:

1. Proof of concept = Bitcoin White Paper Until Dollar Parity

2. P2P Payment Method = After USD Parity (1BTC = $1) Until First Halving

3. E-Gold =  After 1st Halving Until Gold Parity (1BTC = 1 ounce of gold)

4. Financial Asset = After 2nd Halving Until Now ($1B transactions per day milestone, legal clarity in Japan and Australia, futures markets at CME and Bakkt)

The chart below shows the monthly BTC S2F and price data points used in the original S2F model.

Notice how the data clusters into 4 groups?

These four clusters could indeed indicate phase transitions.

Quantifying these clusters can be done by minimizing distance between monthly BTC data and clusters. I use a genetic algorithm (minimizing absolute distance) to quantify four clusters. Future research could focus on different clustering algorithms (e.g. k-means algorithm).

Each of the four identified BTC clusters has a very different S2F-market value combination that seems to be consistent with halvings and changing BTC narratives.

1. BTC “Proof of concept” (S2F 1.3 and market value $1M)

2. BTC “Payments” (S2F 3.3 and market value $58M)

3. BTC “E-Gold” (S2F 10.2 and market value $5.6B)

4. BTC “Financial Asset” (S2F 25.1 and market value $165B)

Like water and US Dollar these four BTC clusters represent four different assets, each with different narrative and characteristics. 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.

With the phase transition perspective of BTC clusters as different assets, we can now add other assets like silver and gold to the model. This makes it a real cross-asset model:

Silver S2F 33.3 and market value $561B

Gold S2F 58.3 and market value $10,088B

The chart shows the four quantified BTC clusters (plus the original BTC monthly data for context) with silver and gold.

Notice something? 

They form a perfectly straight line.

Plan B used regression analysis to make the S2FX model. A big difference versus the original S2F model was adding the silver and gold S2F and market value data in the regression analysis. The S2FX model shows a significant relationship between S2F and market value of these six assets (low p-Values F-test and low p-Values coefficients) with a perfect fit (99.7% R2).

So, what does that tell us exactly?

Well, buckle up for this.

The S2FX model formula can be used to estimate the market value of the next BTC phase/cluster, i.e., Where the BTC S2F will be 2024 for the Fourth Halving event.

The key metric is this:

Market value = exp(12.7598) * 56 ^ 4.1167 = $5.5T ($5,500B)

This translates into a BTC price (given 19M BTC in 2020–2024) of $288,000 / BTC

How do we come to that number?

Well, the S2FX model allows for interpolation instead of the extrapolation used in the original S2F model. The original S2F model makes a forecast that falls outside the data range used in making the model. The new S2FX model makes a forecast that falls within the data range used in deriving the formula:

Basically, fancy math and some realistic projections based on historical data tell us that BTC is about to become a whole lot more scarce, thus becoming a whole lot more valuable.

Of course, this is completely irrespective of current events and likely future macro trends: With the birth of unlimited QE and MMT, this creates the perfect conditions for hard asset hyper-scarcity.

Let’s expand our BTC phase transition timeline to reflect that:

1. BTC “Proof of concept” (S2F 1.3 and market value $1M)

2. BTC “Payments” (S2F 3.3 and market value $58M)

3. BTC “E-Gold” (S2F 10.2 and market value $5.6B) – First Halving

4. BTC “Financial Asset” (S2F 25.1 and market value $165B) – Second Halving

5. BTC “Reflation Hedge” (S2F 56 and market value $5,500B) – Third Halving Until Fourth Halving

6. BTC ” ??? ” (S2F ?? and market value $????) – Fourth Halving

Of course, this is only an optimistic model, and reality has a way of reminding us that theories are merely theories.  

Still, looking at known facts and extrapolating out in a “realistic” way, the S2FX model offers a new way of thinking about BTC transitioning into the fifth phase. What we can learn from this is to try our best to stay away from absolutism and acknowledge that major narratives within the Bitcoin community have changed over time.

. . . and, that’s ok — it’s appropriate to change your mind in response to new data. Purity tests are generally weak since they tend to require that individuals do not evolve.

But, if most of us went back and contemplated own past, we would probably find that we evolved over time, too.

In the end, a healthy respect for Bitcoin history is a necessary starting point of any attempt to define it. It is not unitary, and Bitcoiners are not ideologically homogenous. Bitcoin contains multitudes, and it’s important to remind ourselves of that.

Lastly, we should also remind ourselves that price is the least interesting thing about Bitcoin.

Price is simply the end result of many other factors which we should pay greater attention to — letting us peer into the vast universe of possibilities that await us in the coming years . . . and blocks.