The Assumptions of the Logistic Model

The sound math of the logistic model rests on a foundation of assumptions the validity of which we can only guess at.

Here are the notable assumptions of the model to ponder . . .

• Whether Bitcoin succeeds or fails is a binary decision. It either completely takes over the existing fiat system and therefore becomes extremely valuable, or it utterly fails to do so and its value becomes zero. This opinion is widely held and makes sense - winner takes all, so to speak.
• The behavior of those who learned about Bitcoin already and adopted it, indicates the likely behavior of those who have not yet learned about Bitcoin and may adopt it. Works so far.
• Despite the presence of serial price bubbles, the average price trend can be modeled as a logistic adoption of technology. Never been tried before. Academic financial literature makes no connection between technology adoption and a price series.
• The maximum price at full adoption is one million USD. This is the weakest assumption of the model. We could possibly be past the halfway point of adoption now - but I think that is unlikely. Indeed, I can make a weird argument based on the quantity of transactions and Metcalfe's Law that the maximum price could be way, way higher - which the average price of bitcoin would reach by continuing to increase 10x per year until say 2020 should that be the halfway point of adoption. Very hard to believe but the math says so.
• The logistic model has two other parameters that I fit by hand to make the average trend line fit the price series. This is a weak assumption because there is no math to support it. It very well could be the case that the data series is not long enough to see the true trend. Had I constructed this model in 2011 that is the mistake that I would have made. Only time will tell - perhaps another year to gain more confidence in the hand-fit model parameters.

Oh it gets better. The sound math of the logistic model rests on a foundation of assumptions the validity of which we can only guess at.

Here are the notable assumptions of the model to ponder . . .

• Whether Bitcoin succeeds or fails is a binary decision. It either completely takes over the existing fiat system and therefore becomes extremely valuable, or it utterly fails to do so and its value becomes zero. This opinion is widely held and makes sense - winner takes all, so to speak
• The behavior of those who learned about Bitcoin already and adopted it, indicates the likely behavior of those who have not yet learned about Bitcoin and may adopt it. Works so far.
• Despite the presence of serial price bubbles, the average price trend can be modeled as a logistic adoption of technology. Never been tried before. Academic financial literature makes no connection between technology adoption and a price series.
• The maximum price at full adoption is one million USD. This is the weakest assumption of the model. We could possibly be past the halfway point of adoption now - but I think that is unlikely. Indeed, I can make a weird argument based on the quantity of transactions and Metcalfe's Law that the maximum price could be way, way higher - which the average price of bitcoin would reach by continuing to increase 10x per year until say 2020 should that be the halfway point of adoption. Very hard to believe but the math says so.
• The logistic model has two other parameters that I fit by hand to make the average trend line fit the price series. This is a weak assumption because there is no math to support it. It very well could be the case that the data series is not long enough to see the true trend. Had I constructed this model in 2011 that is the mistake that I would have made. Only time will tell - perhaps another year to gain more confidence in the hand-fit model parameters.

I am sure now that you would get along great with my wife. She likes the sort of place that lets you bring back the plastic cup from last time to use for ice tea.

Ha. I am allowed some pocket petty cash by the fiscal guardian of our household. I could spend it secretly on a variety of legal petty vices, or fast food and such outside my meal plan.

But I am putting every last buck into my local Robocoin ATM.

Virtue feels good - no hangover, no bad buzz headache, no overstuffed greasy food feeling. Just saying.

You know, one of the mind-bending aspects of the Bitcoin Economy is the notion that merely by postponing spending, you become wealthier. Most observers would say that your plans are not virtuous, in fact they are vices by the very definition of vice.

I am curious to know to what extent you actually execute your plan - which I think will be an option in 2015. I have an hypothesis, without evidence so far, that the Bitcoin Economy encourages virtuous economic behavior, especially saving.

I propose that you consider postponing your binge for 12 additional months, so that your coin will be valued at $100,000 each, and in that time you may have matured sufficiently to spend more wisely - for example helping your loved ones.

I love the flood of endorphins during the weeks of bitcoin bubble mania.

The crashes, paradoxically have never hurt, as I have always been mining, earning or buying coins during the bottoms.

+1

Awesome. Totally Awesome.

I shall look into helping out those developers.

We are well below 1% in my opinion. Transaction quantity growth is 3.2x annually so it will take several more years to exceed the reported current quantity of worldwide credit card transactions - 6000x in total. In the below S-Curve chart from my million dollar model, you cannot even see the difference between the price and the horizontal axis.

Thanks for bringing this chart to my attention. I shall add it to the top post of my logistics model thread.

In this 12-hour Bitstamp chart, I moved the support trend line down to $470, which does not change my biased expectation of a sideways or upside breakout through the long term resistance trend line - within 30 days.

Supposing that support holds at 480 through the lower volume weekend, the declining resistance trend line from the November 2013 peak becomes close enough to the support that there could be a breakout next week - resuming the rally I am biased to expect, because many share the belief that the bottom of the previous bubble collapse is behind us.

Here is the 12 hour chart extended in to the next couple of weeks.

In the USA, the Securities and Exchange Commission compels every securities marketing text to include this warning. Indeed there is relevant academic research to show that winners in a particular time period are less likely than average to be winners in the subsequent time period.

Yet common sense reveals the defect in your reasoning. Supposing you were given a choice of buying one of two retail store chains. Company A has a history of closing stores and losing money, and company B has a history of opening stores and making money. Which company would you prudently buy? The one whose price chart is falling or the one whose price chart is rising?

A weaker form of your argument I could agree with . . .

Past performance is not indicative of future results, given that the conditions that led to the past performance have changed

Charting in particular and technical analysis in general, seeks to quantify human emotion, and the algorithms of trading bots that create and reverse price trends. This notion is sufficient to rebut your point, but there is more.

Long term Bitcoin charting works in the same way that I can predict the received luminosity of a certain candle at 10 meters by charting the luminosity at various lesser distances from the candle. There is an underlying mechanical principal involved and charting finds the parameters of the model.

For long term bitcoin price charting, the principal is the incremental temporal spread of a disruptive technology, starting a zero adoption and culminating at full adoption by the population of those who are ever going to use bitcoin - and recognizing that there is a population of those who will never ever use bitcoin. The latter we do not care about.

I, for one, am a proud chartist.

That is a comfort. Thanks.

Corsair 1200AX. Long modular cables, enough to hook up 3 300w cards each and powered PCI risers.

Would you agree that Elliott Wave counts as you recognize them indicate a completion of the November 2013 bubble collapse?

How about donating a 0.1 BTC each year instead? You might be surprised at the result and the good it would do.

And here is the confirming chart of the adjusted number of bitcoin transactions. I say "confirming" because the price reversed from the recent bottom shortly before the transaction quantity did the same.

Revisiting the trendline that I last posted, we see that the recent news about Chinese exchanges has conveniently stopped the rally short term at about the 550 resistance point. Because I believe that we are now between the bottom of the November 2013 bubble and the beginning of the next bubble, I am biased to expect that prices will move sideways through the resistance before resuming the rally. 

Yeah, when alone I allow myself to think that it is my financial genius - not! But the reality is that frugality, compound interest, e.g. stocks, bonds, income-producing real estate, and the simple passage of time are sufficient. That is the message of the mentioned book.

Bitcoin will disrupt my lifestyle to the extent that it disrupts the legacy financial infrastructure.