Assessing the Ups and Downs of Bitcoin Price Using a Simple Mathematical Model

Interplay of Supply and Demand in Markets

In any market, the interplay of supply and demand forms the basic premise for determining prices. This is true for various markets, such as the fruit and vegetable market or the financial asset market. For instance, in the instance of a flooding disaster that causes a scarcity of tomatoes, the price would inherently increase if the demand remains constant. Similarly, if the demand for tomatoes doubles with a given supply, the price would also amplify.

How Price Functions in the Financial Market

In contrast, the financial market, such as a mutual fund, doesn’t exhibit a change in price if there is an infinite supply. The mutual fund, irrespective of the number of subscribers, increases the issuance of shares at the Net Asset Value (NAV), which indicates the true value of the fund’s assets. For instance, consider a mutual fund with a capital of $100 million, divided into 10 million units, each unit valued at $10. If an investor brings in an additional $10 million, new units of the fund would be issued at $10, enhancing the fund’s capital to $110 million.

If the available shares were capped at 10 million, the shares' price would rely on the buyer's willingness to pay and the seller's expected profit. The fluctuations in the price would be attributed to the irregularities between supply and demand. As a result, the correct price could be subverted due to high demand.

Estimating the Correct Price Based on Fair Value

Last year, I revealed data that provided an estimated Fair Value Price of Bitcoin. This estimation disclosed a peak in Bitcoin’s value in June the same year. The logic behind this assessment can be comprehended through the mutual fund example.

The total capitalization of a mutual fund is obtained by multiplying the number of units in circulation and the NAV. Alternatively, it could also be calculated using the number of investors and the average amount held. Similarly, in Bitcoin’s case, the true price can be derived by estimating the average amount held in each wallet and the number of wallets in circulation. Post evaluation, the capitalization of Bitcoin can be calculated by multiplying these two parameters. By dividing this result by the number of Bitcoin in circulation, we earn an estimate of Bitcoin’s value.

Applying the Model to Bitcoin

Thanks to blockchain transparency, obtaining this data with reliability is feasible. For instance, the Bitcoin addresses holding a non-zero balance can be tracked using a network node. Based on the data from this model, compared with other predictive models, Bitcoin's price is expected to reach a high of $130,000 by fall of 2025.

However, this prediction isn’t financial advice. It is a conjecture based on specific assumptions with a certain degree of certainty. Given the recent institutional interest in this asset class from BlackRock, it is clear that these predictive models carry some weight. Ultimately, this article is intended for informational purposes only and does not constitute legal or investment advice.