BTC price graph
Korok Ray
A few years ago, European researchers published a power law model that fits the long-term price trend of Bitcoin. The basic idea is that power laws are useful for describing various phenomena in nature and science. Previously, the power law that fit Bitcoin was a simple equation
Price = A(t – t_0)^n
where t is time, t_0 is initial time, A is scaling factor, and n is exponent. Simply put, the price of Bitcoin is a function of the time that has passed since its inception. This relationship is best visualized by taking the logarithm of both sides. That way, you will arrive at
logPrice = logA + n log(t – t_0)
We can then fit a linear regression to log price against log time.
My data is from 2011 and I can see that there is a very clear linear trend in log-log space. This differs from the previous analysis, which used log prices and plotted them against time. Here we are plotting log price against log time.
The author's full article on power law theory provides a deeper explanation of why power laws work in nature. Most of the essay is worth reading, but there is one point I disagree with. The author claims that the power law has nothing to do with scarcity as it is a statistical fit to price charts. But scarcity is the cornerstone of Bitcoin's value proposition, and that's exactly why new buyers continue to enter the market.
but why?
My explanation for why power law theory applies is the FOMO cycle. Because Bitcoin is clearly scarce, new adopters must always be assured that the limited supply will lead to higher prices in the future and not lead to price crashes, which can occur with other assets such as gold. I know. If the price of gold increases, gold miners can increase production. Therefore, new gold miners shift the gold production supply curve forward and can mine more gold, leading to a fall in the price of gold.
The issuance of new Bitcoins is determined by the protocol, which Bitcoin miners cannot change. Bitcoin miners can only contribute new hashing power to the network, increasing their chances of earning block rewards. However, unlike gold miners, they do not influence the overall market price.
Therefore, new Bitcoin buyers know that there will always be other buyers who will face the same decision-making problem later on. However, fewer coins will be available to these buyers. Therefore, once you know about this guaranteed scarcity, it is best to enter the market. At any given time, there is always someone ahead of you who bought more Bitcoin at a lower price when it was available. Also, there will always be someone after you who will buy at a higher price when fewer Bitcoins are available. price. This cycle ultimately causes an upward trajectory in prices. No other virtual currency has such unique characteristics.
Of course, there are shocks to the system, such as the collapse of FTX, Mt. Gox, Silk Road, and China's crackdown on Bitcoin mining. These are deviations around the trend line. But the main principle here is to continuously spread knowledge about Bitcoin to the entire population.
Will this ever stop? There is no guarantee that the FOMO cycle will continue once Bitcoin adoption becomes widespread across the world. At that point, prices stabilize and volatility decreases, as befits a widely held asset. But we are far from that point and believe there is some truth behind power law graphs.
It is intellectually dishonest to admit that price has no impact on Bitcoin adoption. An honest assessment of human behavior is that price is the only thing that matters. Bitcoin's proven scarcity guarantees that new buyers will enter the market. We don't even know if Satoshi was aware of this fundamental feature of Bitcoin's scarcity, as the white paper doesn't even mention a supply cap. But as the power law shows, something is causing this behavior. Proven rarity.
