To invest, you have to “guess” the future. That turns the investor into something of a fortune teller. What’s the point? Well, the idea is to buy low today and sell high tomorrow. The benefit is in the price change over time.
Would you like to know how much a Bitcoin will be worth in the future? Well, even if you don’t believe it, There are people who are dedicated to making predictions about the price of Bitcoin based on mathematical and statistical models.
However, One of the most important events that affect the price of Bitcoin is the halving, which occurs approximately every four years. Halving is when the reward miners receive for validating network transactions is cut in half. This means that there are fewer new BTCs in circulation, increasing its scarcity and value. The next halving is expected to happen in 2024, and some models predict that the price of Bitcoin could reach $160K or more by then.
One of these models is that of Ecoinometrics, which analyzes previous halving cycles and divides them into four phases: accumulation, takeoff, frenzy and reaccumulation. Each phase has a different duration and performance, and the price of Bitcoin usually follows a “long-term” uptrend. Based on this model, the price of Bitcoin could grow 10X from the previous all-time high, which was $69,000 in November 2021. Sounds like a well-oiled machine. Everything is easy, mechanical, automatic and predictable.
Another very famous model is that of PlanB, which is based on the stock-flow relationship, which measures the scarcity of an asset by comparing its existing supply with its annual production. This model compares Bitcoin to other scarce assets like gold and silver, and predicts that the price of Bitcoin could hit $288K in the current cycle.
Have you ever wondered how price predictions are made? Have you trusted those mathematical models that promise you that Bitcoin will reach the moon in the next halving? Well I don’t. And I’ll explain why.
It’s not that I have anything against mathematics or those who use it. It seems to me that these models have a fundamental problem: they are based on very questionable assumptions (dogmas) and very limited data. And that makes them very vulnerable to errors and biases.
One of those assumptions is overemphasis on the power of scarcity. These models assume that Bitcoin is a scarce asset and that this (only) makes it more valuable. But scarcity (alone) is not a sufficient condition for value. You also have to take into account utility, demand, supply and competition. And these factors can change a lot over time and with context. And they are not as predictable as the scheduled delivery of a code.
Another of those assumptions is that of excessive faith in history as a writer of the future. These models are based on historical data from previous halving cycles. But history does not repeat itself, it rhymes. And each cycle is different and has its own characteristics. No.or we can extrapolate the past to the future without taking into account the variables that may alter the result.
For example, what if there is a global economic recession? What happens if there is a stricter or more favorable regulation? What if there is a technological innovation that makes Bitcoin work better or worse? What if there is a demographic or social change that affects interest or sentiment towards Bitcoin? These are just some of the factors that can influence the price and cannot be predicted with models based on historical data. Expectations must be rational.
It is as if we wanted to predict the weather for the coming year only with the data of the first two months of summer. It is evident that the sample is very small and that it does not reflect the diversity and complexity of the climate. Well, the same thing happens in the case of these models. The last two bullish cycles occurred in macroeconomic contexts very different from the current one, and using such data to forecast the future blindfolded is very risky.
It is important to keep in mind that these models are only estimates based on assumptions and data of doubtful reliability, and that they do not offer any guarantee that they will be fulfilled. The price of Bitcoin is subject to many other factors that can change at any time and are beyond our control.
Having rational expectations means not falling into the trap of thinking that the past is repeating itself. It means not blindly trusting that all cycles are identical. It means being prepared for surprises. And it means using common sense when analyzing a historical record. It means not being carried away by irrational optimism or crippling pessimism. It means being realistic, but not boring. It means having dreams, but not hallucinations. It means not believing everything the gurus and smoke sellers say. It means asking questions and looking for answers. It means learning from mistakes, but not repeating them. It means having criteria, but not prejudices.
For example, if you want to know how much Bitcoin will be worth in the future, you cannot ignore changes in monetary policy. Levaluations in times of abundance cannot be the same as in times of scarcity. And this is the first time that Bitcoin has navigated such troubled waters. However, there are those who insist on relying on past glories to predict the future. It is like expecting the water level in the river to be the same during the dry months as it is during the rainy months.
These models are built with data from the rainy months to predict the dry months. That happens because these forecasting models exclude the effects of demand on price and focus only on supply. In the past, models of this type have worked, because the macroeconomic context has been almost the same during the period 2008-2021. But now the context is different. The inability to recognize the exceptionality of the new situation is the source of so much confusion. Does the past always repeat itself? Let’s reflect on this answer.
Disclaimer: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information presented here should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
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