All bitcoin models destroyed: Stock-to-Flow, Power Law, Rainbow
With bitcoin nearing all-time highs and many commentators in disbelief as its price nears $100,000, Bitcoiners are harkening to an old Michael Saylor prediction: “All your models are destroyed.”
The original point of Saylor’s declaration was to disavow pricing models that Hedgeye CEO Keith McCullough was espousing on his trading show. Saylor proposed to McCullough an example of a few billionaires spontaneously deciding to buy bitcoin.
This exogenous shock to the relatively thinly traded bitcoin market would shatter all of the technical and correlative indicators popular among Hedgeye traders.
In this way, bitcoin has a history of defying expectations and has survived numerous death pronouncements. As bitcoin proves its staying power over time, it tends to defy predictions that once captured the attention of large communities and technical analysts.
Speculative Bitcoin Adoption Price Theory
One early forecast for bitcoin assumed from its outset that there would soon be near-universal adoption of bitcoin. The creator of the Speculative Bitcoin Adoption Price Theory predicted that the currency would hit $2,500 by November 2013.
Bitcoin broke that early model, however, failing to even reach $1,200 that month. Nor has it reached anywhere close to near-universal adoption, as its creator predicted would have happened by now.
More than a decade since the model’s publication, the vast majority of humans have never owned or used bitcoin.
Stock-to-Flow
Stock-to-Flow is a traditional measure to compare the existing supply of a commodity (the “stock”) to the new supply that is added every year (the “flow”). By design, bitcoin has a predictable timeline for generating new coins every 10 minutes and reducing this block reward through four-year halvings.
This hard-coded supply schedule toward 21 million bitcoins allowed analysts like Plan B to easily create a Stock-to-Flow model. For example, the model noted that each halving would double the ratio between stock and flow and induce a new wave of higher prices.
However, bitcoin easily broke this rudimentary model. Plan B predicted that bitcoin would hit $100,000 several times from 2021 through 2023. It never has.
Moreover, as fans realized this model was destroyed, they also realized that the model was simply auto-correlative, not predictive. Autocorrelation is a statistical phenomenon where prior prices influence — not predict — future price lines.
Read more: MicroStrategy investors cheer bitcoin ‘yield’ — but few read fine print
Bitcoin Power Law
Earlier this year, the Bitcoin Power Law became a contentious topic in the Bitcoin community. Its creator Giovanni Santostasi claimed it was a reliable model for predicting bitcoin’s price range.
It charted a log of bitcoin’s price against the log of time. Its advocates said the price of bitcoin should grow at a bullish rate over time, rewarding people willing to withstand temporary price slumps.
However, Santostasi eventually acknowledged that his law was not a predictive law at all but rather a descriptive, curve-fit calculation overlaid atop data.
A few weeks later, he betrayed the Bitcoin maximalists he had attracted and endorsed a so-called power law on Kusama, a small altcoin.
His one-time advocate and X Spaces host Fred Krueger blocked him.
Bitcoin Rainbow Chart
As the name implies, the Bitcoin Rainbow Chart uses chromatic bands to denote possible future price ranges. The upper edge of the rainbow in red indicated the maximum price range and the lowest violet band indicates how low analysts thought bitcoin could fall.
As Plan B’s Stock-to-Flow lost credibility, Eric Wall popularized the Rainbow Chart as something of a joke. The playful silliness of the rainbow image became a clever way to underhandedly profess understanding of the role of pricing models in the bitcoin community while acknowledging its expanding, unpredictable volatility.
Nonetheless, some long-term investors still prefer its colorful predictions.
The Rainbow Chart actually originated in 2014. It faded from popularity for a few years but reemerged after Wall’s endorsement in 2020.
Bitcoin broke below the Rainbow Chart during the bear market of 2022, however. As a good-natured compromise, some people tried to keep its colorful meme alive by adding an indigo color below the violet band.
Read more: Bitcoin flippened silver and Saudi Aramco — are Google and Amazon next?
Bitcoin models destroyed
Like all predictive models, the Rainbow Chart had difficulty anticipating unexpected events. In this case, it was the collapse of Terra/LUNA, Three Arrows Capital, FTX, Celsius, BlockFi, and many other crypto calamities during 2022.
Obviously, there are countless bitcoin pricing models. Some have formal names like Carhart 4 Factor or Metcalfe’s Law, but even individual traders may create a personal model. Technical analysis communities like TradingView exist to publish and encourage discussion of thousands upon thousands of newly invented predictive methodologies.
Inevitably, whether bitcoin will destroy all models or only some of them is a matter of wordplay. At least for most of bitcoin’s most publicized models, it seems intent on a destructive path.
