Stephen Reed's Million Dollar Logistic Model

[BitDreams]

Thank you for this chart!

[1714065731]

1714065731

[SlipperySlope]

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.

[blackvoice]

A logistic model of bitcoin adoption by speculators predicts that exponential growth will eventually end.

Here is the widely used general model . , ,

http://upload.wikimedia.org/wikipedia/commons/thumb/1/11/Diffusion_of_ideas.svg/330px-Diffusion_of_ideas.svg.png

In this multi-year thread I will update and monitor a particular model that assumes a million dollar maximum bitcoin price. I chose a high price because plausible arguments can be made that bitcoin will eventually replace fiat currency worldwide.

I use the MtGox price series through 2011 and Bitstamp prices thereafter as the input data. The logistic trendline passes through the earliest recorded bitcoin price, and is subsequently hand-fit to the remainder of the price series.

I simply guessed at the maximum bitcoin price. Periodic review will determine when the rapid exponential growth of bitcoin stops. Note that this model ignores the fact that when bitcoin is fully adopted by the underlying economy, it will continue to grow in price at least in proportion to economic growth.

The below chart is plotted with a log price axis . . .

https://i.imgur.com/7HmlJdg.png

Here is the same logistic model using a linear price axis . . .

https://i.imgur.com/EZ9mIFM.png

Log10 delta from the trend . . .

https://i.imgur.com/0KsawJd.png

The entire spreadsheet of data and analysis is published here and is updated daily.


Whatever price one selects for the maximum, the slope of the exponential portion of the log-S-Curve is the same - as I discovered when I performed sensitivity analysis on the model. Accordingly, the rate of growth that we have so far witnessed will continue at the same breathtaking acceleration until it inevitably begins to rapidly taper off.

I dedicate this thread to long term bitcoin holders, and to the author of this classic forum post from June 2011, at a time when bitcoin was priced at $13 - having risen 260x from $0.05 only a year before. ...

I am pretty confident we are the new wealthy elite, gentlemen

http://astrohacker.com/ahc/bitcoin-is-the-economic-singularity/

After reading this, the scale of black market and digital economies and the effect Bitcoin will have on them I am pretty certain we are going to be very wealthy men -- even with a sum as small as 10 Bitcoins. It's just so hard to believe. We are only in the beginning storms with these significant rallies from 10 to 20 dollars. I will not be surprised to see prices from hundreds to thousands in the coming months.

The world just isn't going to be the same and we have been blessed as the pioneers.

What are you going to do with your Bitcoin wealth once your coins hit upwards of $10,000 a pop?

Here are the thread music video themes . . .

Zhou Tonged - Holding (Billy Joel - The Longest Time)
"The sky's the limit, and I'm in it to win it".

Laura Saggers - 10,000 Bitcoins
"Its having someone to share the dream, I'm so glad you share yours with me"

Here is the thread destination image . . .
https://i.imgur.com/5Zo5uzt.gif
To The Moon !!!

Slippery Slope's Relevant posts . . .

• The Logistic S-Curve
• A logistic graph of European smartphone adoption, as an analogy for bitcoin adoption
• Some Plausible Estimates of Maximum Bitcoin Value
• Bitcoin price doubles about three times a year on average, and will keep going up at this rate until the final growth slowdown
• The Million Dollar Bitcoin S-Curve
• What events in 2014 can propel bitcoin higher?
• Relative Growth of Bitcoin Market Capitalization vs Cumulative Wallets
• Bitcoin Merchant Adoption - Influence Diagram
• Bitcoin mining and electricity consumption at $1 million per bitcoin
• The Joy of Mining
• The Logistic Model is now revised to use mainly Bitstamp prices
• March 2014 Logistic Model Status
• Metcalfe's Law Explains 10x Price Growth Vs. 3.2x Transaction Quantity Growth
• Summer 2014 Bitcoin Bubble - First Projection
• Log10 Differences From the Logistic Model Trendline
• The assumptions of the Logistic Model

Notable conversations started by others . . .

• super exponential and other alternative models
• amount of daily fresh money required for million dollar bitcoin
• parametric price model
• amount of daily fresh money required for million dollar bitcoin
• Coinbase 80% buy-and-holders an indicator of Bitcoin's store of value?
• applicability of technical analysis
• March 25, 2014 - are we near a bottom?
• banks and bitcoin

Memorable quotes by others . . .

No financial planner would have my goals.  If they did, they would be institutionalized.  Also, I can't afford to hire anyone smarter than me, and I won't hire anyone dumber than me.  

(editor: Hal Finney's prescient reply to Satoshi Nakamoto's announcement back in 2009 - the very beginning . . .)
http://www.mail-archive.com/cryptography@metzdowd.com/msg10152.html

As an amusing thought experiment, imagine that Bitcoin is successful and
becomes the dominant payment system in use throughout the world.  Then the
total value of the currency should be equal to the total value of all
the wealth in the world. Current estimates of total worldwide household
wealth that I have found range from $100 trillion to $300 trillion. With
20 million coins, that gives each coin a value of about $10 million.

So the possibility of generating coins today with a few cents of compute
time may be quite a good bet, with a payoff of something like 100 million
to 1! Even if the odds of Bitcoin succeeding to this degree are slim,
are they really 100 million to one against? Something to think about...

If the projection is correct my miniature Bitcoin holding will no longer be so miniature. LOL.

I assure you, nothing resists corruption.

There is already ample evidence of corruption in Bitcoin, both in the early days and now.

(editor: SWIFT is the 2000+ employee firm managing existing bank transfers in 212 countries)

Re: 'SWIFT' -- could adopt Bitcoin and campaign with 'All the money in the world handled by all the nodes in the world'.

In 1982 there were only 12 billionaires.   In 2000 there were about 300.   And now 1,500.   So in 2025 maybe 10,000+ billionaires.  

Leadership from Bitcoin, innovation from the Altcoins. I wonder what consolidation among coins will look like? I hope enthusiasts discover methods of gracefully merging those deserving more than abandonment. Nothing sadder than pulling up a QT wallet and finding no peers.

I still think you're kinda nuts, but it's fun to keep dreaming with you during this fun ride, up, down, up, down...

You can manipulate charts/lines almost anyway you want to make a point.  I'm not saying you specifically are doing this, but you are certainly "reaching" a bit.

TA practitioners and sages eventually all suffer from Apophenia. They can't even help themselves at some point, they will chart a cockroach running up a wall to  look for patterns.

Technical analysis is always trumped by fundamentals over the long run.

Start with an anti-fragile base and build on top of it. Just like Microsoft has chosen to stop supporting WindowsXP on April 8th, Bitcoin developers can dump the old code and build from the ground up with the goal of lasting more than 27 years.

Bitcoin works at the core so enforcers can concentrate on the edges.

I believe the more the law understands bitcoin the more they will work to support it. Bitcoin benefits everyone but the sharks.

Very nice job.

So late to see it.

I hope I can see it one year ago.

[rpietila]

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.

I wanted to say a few words on those.

• 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.

I think this is a useful assumption in a conversation setting. But it is not true. Gold and silver can still be transacted with, and they hold their value. Although silver lost 75% of its value relative to gold in the last 150 years, gold is still keeping its purchasing power and, relative to dollar, has gone up more than 30x in 50 years.

If Bitcoin fails, the most probable failure modes I would say, are the ones where it falls far short of its potential of $10M (fixed money supply) or $1M (augmented supply) per coin. Anything below $100k would be considered a failure, and I cannot say, which order of magnitude is more probable than the other ($100k, $10k, $1k, $100, $10?). Definitely there is also the possibility for going to zero, but most of that possibility comes from black swan events, not as a result of normal market moves. Markets like diversity.

Notably Kelly formula gives you wrong results if you flat-out assume that the outcome is binary. Because then you could only invest P(I win) amount, regardless of the winning odds.

• 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.

Here I would like to hear, what are the actual traits you refer to!

• 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.

This is the novel thing, whose understanding makes some wealthy and others bite their nails. It is so simple, so easy to understand (took several years for me to understand though but at least I am trying to make it easier for the others), yet so paradigm-shifting.

• 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.

There are several interconnections that form the purchasing power, and therefore everybody cannot be arbitrarily rich. There would be less people to serve others for example, and the lack of service indicates misery, not wealth. I would say the hard limit of the market cap of Bitcoin is the total market cap of world stocks, bonds, (similar instruments), bank accounts and gold combined. OR about 100% of the market value of all the land, infrastructure, real estate and other physical things. My off-the hat analysis shows that both of these figures are about 200-300 trillion USD. Maximum per bitcoin would be $10 million.

It can be less, if the supply of bitcoins would be softened by the use of real bills, for instance. Or if there are other cryptos that eat a share of the pie (highly unlikely - they may be transactional, but for the storing of wealth, the current situation shows that BTC is the only one).

• 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 would not be too worried of that. If it looks like sustained self-feeding exponential growth, we want to participate nevertheless, because the odds are so great!  

[BitchicksHusband]

• 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.

Hey Slippery, could you expand on this point?  What is the "weird argument" you could make, just out of curiosity.  And what measures do you plan on using to find the halfway point?

[pandacoin]

I'm following your logistic model. Thanks for this thread. Even Bitcoin can't reach 1 million dollar, it will be huge when all world's adoption complete. As rpietila says it may be 300.000$, but it will definitely raise for the next years.

[SlipperySlope]

Metcalfe's Law and Complete Triumph of Bitcoin Indicate $100 per Satoshi in 2022.

• 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.

Hey Slippery, could you expand on this point?  What is the "weird argument" you could make, just out of curiosity.  And what measures do you plan on using to find the halfway point?

Here is the outstanding chart provided by Peter R that best illustrates the application of Metcalfe's Law to bitcoin prices . . .



And here are relevant daily transaction quantities as reported by coinometrics.com . . .



Peter_R's formula for transactions is V = $1.50 * Tx² , where V is the bitcoin market cap.
Using today's quantity of transactions: V = $1.5 * 58244² = $5,088,545,304 as compared to the actual market cap $6,117,800,905 reported by bitcoin charts. Note that the figure I used for quantity of transactions varies by time of day and day of week, but 58K is a fair approximation.

Here is the weird part, and by weird, I mean the cognitive difficulty of believing the future math given a simple assumption. The assumption is that Bitcoin completely replaces the current financial transactions performed by credit cards and consumer international payments. The arguments in favor of this assumption are that bitcoin is more efficient, is faster to settle, is not subject to fraud, has no danger of identity theft, and that bitcoin technology cannot be adopted by the incumbents without cannibalizing their legacy business model.

Here then is the math. I figure a total of 356,034,000 daily transactions for the incumbents today. Suppose that bitcoin transactions merely replace the incumbents, and ignore the additional quantity of possible bitcoin transactions, e.g. micropayments and other bot-to-bot low-fee payment activity permitted by programmable money,  

Plugging the incumbent transaction quantity into Peter_R's Metcalfe Law model, V = $1.5 * 356,034,000² = $190,140,313,734,000,000. Although the total number of mined bitcoins is currently 12,679,275, assume 19 million bitcoins at the time when bitcoin transactions replace the incumbents.

Accordingly, the price of a single bitcoin as predicted by Peter_R's Metcalfe Law model is $10,007,384,933, which equals $100 per Satoshi, supposing that Bitcoin transactions replace the incumbents.

My logistic adoption model can predict the soonest when that price value can be reached, using the 10x average annual growth expected before the halfway point of adoption. By the logistic adoption model we reach $100K in 2016. To reach a value six orders of magnitude greater would require six more years beyond 2016, namely 2022.

A consequence of this projection is that because the quantity of bitcoin transactions merely increases by 3.2x annually on average, In the year 2020, the Bitcoin Economy would be only one-tenth of so of the size of the incumbents yet would be very, very valuable, priced by Peter_R's model at $1 per Satoshi.

I ask you, how could such a price per bitcoin be justified? What properties of the Bitcoin Economy and human nature would permit such a possible world to exist?

The best idea I have come up with, is that Bitcoin is very precious and holders will be loathe to spend it. The idiom is that everyone has their price. Given the projections of the models, I conclude that for bitcoin that price will be very high. Capital flows to its wisest custodian. It may be then that as the years pass, bitcoin will increasingly be held by those who will not sell, or if they do then it is only the smallest portion of their holdings.

It is helpful to consider the value of the incumbent daily transactions. Again Coinmetrics.com has the data . . .



The sum of the incumbent dollar volume is $37,526,000,000. Given the replacement assumption, what fraction of the projected bitcoin market capitalization is used for daily transactions? I divide  $37,526,000,000 by $190,140,313,734,000,000 which yields 0.0000001973595145.

The Metcalfe Law model, and the assumption of complete replacement of the incumbents, indicates that only the tiniest fraction of bitcoin will transact - less than one coin in a million will suffice.

[SlipperySlope]

• 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.

. . .  And what measures do you plan on using to find the halfway point?

Chiefly those employed by the excellent site: bitcoin pulse.

We are far from 50% adoption. In a couple more years I expect the economic Ivory Tower to be shaken to its very foundations, and for others to follow, and greatly improve upon, the ideas that have been surfacing here.

[jmw74]

As i've mentioned in the other forum, the above graph is extremely misleading.

For example, look at the mountain in 2011.  Does anyone honestly believe that this was people "adopting" bitcoin as a currency?  Absolutely not, it was 99.9% speculative trading.  The values on that graph cannot be used to predict anything in terms of adoption, because both the price and the number of transactions are swamped by speculation.

I don't think Metcalfe's law applies to speculation.  Or at least, speculative trading adds value at a much lower rate than trading for goods and services.  Speculators only trade with one other network participant:  the exchange.  Real users trade with whoever is selling something they want.

Don't get me wrong, there may actually be a nice correlation to the number of real transactions with the real (non-speculative) value of bitcoin.  But in order to get those numbers you need to know who's trading bitcoin for goods and services, and be able to factor out the speculative part of the price.  The former might be possible, but the latter probably is not.

[SlipperySlope]

[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.

I think this is a useful assumption in a conversation setting. But it is not true. Gold and silver can still be transacted with, and they hold their value. Although silver lost 75% of its value relative to gold in the last 150 years, gold is still keeping its purchasing power and, relative to dollar, has gone up more than 30x in 50 years.

If Bitcoin fails, the most probable failure modes I would say, are the ones where it falls far short of its potential of $10M (fixed money supply) or $1M (augmented supply) per coin. Anything below $100k would be considered a failure, and I cannot say, which order of magnitude is more probable than the other ($100k, $10k, $1k, $100, $10?). Definitely there is also the possibility for going to zero, but most of that possibility comes from black swan events, not as a result of normal market moves. Markets like diversity.

Notably Kelly formula gives you wrong results if you flat-out assume that the outcome is binary. Because then you could only invest P(I win) amount, regardless of the winning odds.

Thanks for steering me to Kelly. I found the original paper easiest to understand as I know a little about information theory, and the examples given were clear.

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.

Here I would like to hear, what are the actual traits you refer to!

Mostly, I assume what you characterized as asymmetric information flow. You said it better than I.

[SlipperySlope]

As i've mentioned in the other forum, the above graph is extremely misleading.

For example, look at the mountain in 2011.  Does anyone honestly believe that this was people "adopting" bitcoin as a currency?  Absolutely not, it was 99.9% speculative trading.  The values on that graph cannot be used to predict anything in terms of adoption, because both the price and the number of transactions are swamped by speculation.

I don't think Metcalfe's law applies to speculation.  Or at least, speculative trading adds value at a much lower rate than trading for goods and services.  Speculators only trade with one other network participant:  the exchange.  Real users trade with whoever is selling something they want.

Don't get me wrong, there may actually be a nice correlation to the number of real transactions with the real (non-speculative) value of bitcoin.  But in order to get those numbers you need to know who's trading bitcoin for goods and services, and be able to factor out the speculative part of the price.  The former might be possible, but the latter probably is not.

I find Metcalfe's Law a convincing fit to the data. Peter_R can best defend it.

[BitchicksHusband]

Metcalfe's Law and Complete Triumph of Bitcoin Indicate $100 per Satoshi in 2022.

• 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.

Hey Slippery, could you expand on this point?  What is the "weird argument" you could make, just out of curiosity.  And what measures do you plan on using to find the halfway point?

Here is the outstanding chart provided by Peter R that best illustrates the application of Metcalfe's Law to bitcoin prices . . .



Peter_R's formula for transactions is V = $1.50 * Tx² , where V is the bitcoin market cap.
Using today's quantity of transactions: V = $1.5 * 58244² = $5,088,545,304 as compared to the actual market cap $6,117,800,905 reported by bitcoin charts. Note that the figure I used for quantity of transactions varies by time of day and day of week, but 58K is a fair approximation.


Seems to line up so far...


Here is the weird part, and by weird, I mean the cognitive difficulty of believing the future math given a simple assumption. The assumption is that Bitcoin completely replaces the current financial transactions performed by credit cards and consumer international payments. The arguments in favor of this assumption are that bitcoin is more efficient, is faster to settle, is not subject to fraud, has no danger of identity theft, and that bitcoin technology cannot be adopted by the incumbents without cannibalizing their legacy business model.


I'm not sure that bitcoin completely replacing everything else is a fair assumption.  TV didn't replace radio and even though we've had e-mail for about 20 years now, the last telegraph office (started in the 1800s) just closed.  So we probably won't see this in our lifetimes, even if it is inevitable.


Here then is the math. I figure a total of 356,034,000 daily transactions for the incumbents today. Suppose that bitcoin transactions merely replace the incumbents, and ignore the additional quantity of possible bitcoin transactions, e.g. micropayments and other bot-to-bot low-fee payment activity permitted by programmable money,  

Plugging the incumbent transaction quantity into Peter_R's Metcalfe Law model, V = $1.5 * 356,034,000² = $190,140,313,734,000,000. Although the total number of mined bitcoins is currently 12,679,275, assume 19 million bitcoins at the time when bitcoin transactions replace the incumbents.

Accordingly, the price of a single bitcoin as predicted by Peter_R's Metcalfe Law model is $10,007,384,933, which equals $100 per Satoshi, supposing that Bitcoin transactions replace the incumbents.


I don't think that it will replace all other financial systems (especially by 2022 or anything), but even 10% of that would be 1 billion and 1% is 100 million, both of which are insane prices (in a good way).


My logistic adoption model can predict the soonest when that price value can be reached, using the 10x average annual growth expected before the halfway point of adoption. By the logistic adoption model we reach $100K in 2016. To reach a value six orders of magnitude greater would require six more years beyond 2016, namely 2022.

A consequence of this projection is that because the quantity of bitcoin transactions merely increases by 3.2x annually on average, In the year 2020, the Bitcoin Economy would be only one-tenth of so of the size of the incumbents yet would be very, very valuable, priced by Peter_R's model at $1 per Satoshi.

I ask you, how could such a price per bitcoin be justified? What properties of the Bitcoin Economy and human nature would permit such a possible world to exist?

The best idea I have come up with, is that Bitcoin is very precious and holders will be loathe to spend it. The idiom is that everyone has their price. Given the projections of the models, I conclude that for bitcoin that price will be very high. Capital flows to its wisest custodian. It may be then that as the years pass, bitcoin will increasingly be held by those who will not sell, or if they do then it is only the smallest portion of their holdings.

It is helpful to consider the value of the incumbent daily transactions. Again Coinmetrics.com has the data . . .



The sum of the incumbent dollar volume is $37,526,000,000. Given the replacement assumption, what fraction of the projected bitcoin market capitalization is used for daily transactions? I divide  $37,526,000,000 by $190,140,313,734,000,000 which yields 0.0000001973595145.

The Metcalfe Law model, and the assumption of complete replacement of the incumbents, indicates that only the tiniest fraction of bitcoin will transact - less than one coin in a million will suffice.

Thanks, Slip.

[marcus_of_augustus]

The Metcalfe Law model, and the assumption of complete replacement of the incumbents, indicates that only the tiniest fraction of bitcoin will transact - less than one coin in a million will suffice.

I think this fits with the use of Bitcoin as a monetary good of final settlement, store of value, like gold, and the transaction network is used more like a clearing system (e.g. SWIFT or FEDWIRE). Whereby it moves relatively rarely compared with a transactional currency or daily payment system. Some figures on Bitcoin money velocity would be interesting.

[Peter R]

The Metcalfe Law model, and the assumption of complete replacement of the incumbents, indicates that only the tiniest fraction of bitcoin will transact - less than one coin in a million will suffice.

I think this fits with the use of Bitcoin as a monetary good of final settlement, store of value, like gold, and the transaction network is used more like a clearing system (e.g. SWIFT or FEDWIRE). Whereby it moves relatively rarely compared with a transactional currency or daily payment system. Some figures on Bitcoin money velocity would be interesting.

The accuracy of ^ this chart depends on how good blockchain.info's algorithm is at recognizing "change" (which it subtracts from total output volume).

Young forum member "eXSn" is right now trying to get feedback on his idea for splitting the bitcoin money supply into "active" and "inactive" portions, and then calculating V for just the active portion:  

https://bitcointalk.org/index.php?topic=572090.0

[SlipperySlope]

The Bitcoin Network Will Probably Be Compelled To Abandon Electricity-Consuming Proof-Of-Work in 2018

Here is a simplified projection of Peter_R's Metcalfe Law bitcoin valuation model. I project that bitcoin transactions grow at the rate 3.2x until 2022 at which point the daily number of transactions equals the daily number of incumbent credit card transactions. The model projects that bitcoin mining pools will receive an income of over $200 billion in 2017, the majority spent by them on mining equipment, but a very substantial portion - perhaps a third - will be spent on electricity. It is widely known that bitcoin mining is entirely wasteful unless the heat can be reused.



Countries around the world have already implemented severe steps, affecting all consumers, that phase out incandescent light bulbs because more efficient alternatives exist. Bitcoin pool miners have relatively few members and thus little political influence that would prevent bureaucrats from asking for better alternatives. And at least one such altcoin-implemented alternative exists - Proof of Stake, which requires little in the way of equipment and electricity but does require miners to hold bitcoin in proportion to their chances of obtaining the scheduled block reward.

In an earlier post, I puzzled how a single Satoshi could be valued at $100 - which is predicted by the up-to-now close fitting Metcalfe Law relationship between transaction quantity and price. Proof-of-Stake is an answer as to what would motivate holders of bitcoin to never sell. The bitcoin mining reward in table above, would be effectively distributed to network-attached holders in proportion to their holdings.

In 2018, should Proof-of-Stake be substituted for the existing Proof-of-Work, then all network-attached holders would fairly share, in proportion to their holdings, over $2 trillion worth of bitcoin.

[Peter R]

The Bitcoin Network Will Probably Be Compelled To Abandon Electricity-Consuming Proof-Of-Work in 2018

Here is a simplified projection of Peter_R's Metcalfe Law bitcoin valuation model. I project that bitcoin transactions grow at the rate 3.2x until 2022 at which point the daily number of transactions equals the daily number of incumbent credit card transactions. The model projects that bitcoin mining pools will receive an income of over $200 billion in 2017, the majority spent by them on mining equipment, but a very substantial portion - perhaps a third - will be spent on electricity. It is widely known that bitcoin mining is entirely wasteful unless the heat can be reused.

Thanks for referencing my work, SlipperySlope.

I personally expect the square of the number of transactions, N, to diverge from the V = ($1.50) N² model prior to 2022. In fact, I expect it to occur should the market cap grow by another 100X (and the number of transactions grow by another 10X).

I think this current Metcalfe model is capturing more of the "store of value" properties of bitcoin, along the lines of what marcus_of_augustus said when he used the SWIFT analogy.  Bitcoin as a store of value alone could easily take us into the mid 5 figures, due to its useful properties (it has zero weight, is difficult for corrupt governments to confiscate, can be sent anywhere in the world, and the keys can be stored in your brain or geographically distributed in m-of-n form).  

Should bitcoin's usefulness as a "medium of exchange" also be realized (after lifting the 1Mbyte blocksize limit), perhaps it will be convenient to add a new term to the equation:

   V = c_SOV N_SOV² + c_MOE N_MOE²,

where SOV = store of value and MOE = medium of exchange.  c_SOV may still be approximately equal about $1.50, but I expect c_MOE to be significantly less.  We'll have to think of ways to isolate the "store of value" transactions from the "medium of exchange" transactions. I already have a few ideas here I'd like to explore…


Lastly, I don't think I would say that the energy spent on bitcoin mining is wasteful.  Beyond securing the network, bitcoin mining also helps efficiently distribute new coins.  In fact, I would argue that any other coin-distribution method (e.g., lottery, air drop, etc) would result in more waste.  


BTW--I appreciate the interest you've been paying to my model, SlipperySlope, and I've been enjoying your thread (I especially liked your plot where you subtracted the trend line from the log-price chart to isolate the below-trend and above-trend periods)!

[SlipperySlope]

Lastly, I don't think I would say that the energy spent on bitcoin mining is wasteful.  Beyond securing the network, bitcoin mining also helps efficiently distribute new coins.  In fact, I would argue that any other coin-distribution method (e.g., lottery, air drop, etc) would result in more waste.  

Imagine a 2018 US Senate Energy and Natural Resources hearing in which a panel of Bitcoin Core developers and Washington State mining datacenter owners answer difficult questions prepared in advance by zealous staff.

Senator X: Is it true that all that electricity, whose infrastructure was paid for by the public as a whole, is simply wasted?

Core Developer Y: No Senator, Beyond securing the network, bitcoin mining also helps efficiently distribute new coins.

Senator X: But these vast datacenters perform meaningless calculations to win a sort of lottery - is that all it amounts to?

Core Developer: Yes, but that method was designed by Satoshi Nakamoto and has stood the test of time.

Senator X: Remember that you are under oath. Is there not some other way to secure the network that does not waste so much power that we could otherwise use for the public good?

Core Developer: None that has gained the adoption of what we call Proof-Of-Work.

Senator X: I am glad you mentioned that. I don't really understand - I'm not an expert like you . . . But my staff has learned of an alternate scheme that has been used in other digital virtual currencies named Proof-Of-Stake. Could you explain that to us and why it cannot be used?

Core Developer: Well, we would have to fork the Blockchain!

. . .

[SlipperySlope]

[I personally expect the square of the number of transactions, N, to diverge from the V = ($1.50) N² model prior to 2022. In fact, I expect it to occur should the market cap grow by another 100X (and the number of transactions grow by another 10X).

I think this current Metcalfe model is capturing more of the "store of value" properties of bitcoin, along the lines of what marcus_of_augustus said when he used the SWIFT analogy.  Bitcoin as a store of value alone could easily take us into the mid 5 figures, due to its useful properties (it has zero weight, is difficult for corrupt governments to confiscate, can be sent anywhere in the world, and the keys can be stored in your brain or geographically distributed in m-of-n form).  

Should bitcoin's usefulness as a "medium of exchange" also be realized (after lifting the 1Mbyte blocksize limit), perhaps it will be convenient to add a new term to the equation:

   V = c_SOV N_SOV² + c_MOE N_MOE²,

where SOV = store of value and MOE = medium of exchange.  c_SOV may still be approximately equal about $1.50, but I expect c_MOE to be significantly less.  We'll have to think of ways to isolate the "store of value" transactions from the "medium of exchange" transactions. I already have a few ideas here I'd like to explore…

I am very excited about the sidechain technology soon to be revealed in open source code, that will enable altcoin features to be applied directly to the Bitcoin network by way of the two-way peg. In particular I would expect sidechains to address usefulness as a medium of exchange.

I will provide any data you need to adjust your model in the public spreadsheet that supports this multi-year thread. Let me know what needs to be recorded daily and I have the time and motivation to do it.

[Peter R]

Lastly, I don't think I would say that the energy spent on bitcoin mining is wasteful.  Beyond securing the network, bitcoin mining also helps efficiently distribute new coins.  In fact, I would argue that any other coin-distribution method (e.g., lottery, air drop, etc) would result in more waste.  

Imagine a 2018 US Senate Energy and Natural Resources hearing in which a panel of Bitcoin Core developers and Washington State mining datacenter owners answer difficult questions prepared in advance by zealous staff.

Senator X: Is it true that all that electricity, whose infrastructure was paid for by the public as a whole, is simply wasted?

Core Developer Y: No Senator, Beyond securing the network, bitcoin mining also helps efficiently distribute new coins.

Senator X: But these vast datacenters perform meaningless calculations to win a sort of lottery - is that all it amounts to?

Core Developer: Yes, but that method was designed by Satoshi Nakamoto and has stood the test of time.

Senator X: Remember that you are under oath. Is there not some other way to secure the network that does not waste so much power that we could otherwise use for the public good?

Core Developer: None that has gained the adoption of what we call Proof-Of-Work.

Senator X: I am glad you mentioned that. I don't really understand - I'm not an expert like you . . . But my staff has learned of an alternate scheme that has been used in other digital virtual currencies named Proof-Of-Stake. Could you explain that to us and why it cannot be used?

Core Developer: Well, we would have to fork the Blockchain!

. . .

I understand the argument here, and agree that is seems as though mining is wasteful.  That was probably your point.  Your fictitious conversation illustrates the difficulty in explaining the benefits of PoW to a general audience.  

But now let's consider the rest of your story.  After the network switches to proof of stake, someone would have the following great idea:

Congressman Y: We have saved the people of the world huge amounts of natural resources by adopting PoS.  To reward the world with this new found abundance, we will issue new bitcoins and direct them towards projects for the greater good of humanity.  We will appoint a wise group of experts to determine the optimal amount of bitcoins to be issued so that we can maintain inflation at 2%, keep the people employed, and grow the economy.    

If bitcoin ever leaves PoW, I think it will be the beginning of the end.  I'm not saying it can't happen….

[SlipperySlope]

I understand the logic here, and agree that is seems as though mining is wasteful.  Maybe that was your point.  Your fictitious conversation illustrates the difficulty in explaining the benefits of PoW to a general audience.  

But now let's consider the rest of your story.  After the network switches to proof of stake, someone would have the following great idea:

Congressman Y: We have saved the people of the world huge amounts of natural resources by adopting PoS.  To reward the world with this new found abundance, we will issue new bitcoins and direct them towards projects for the greater good of humanity.  We will appoint a wise group of experts to determine the optimal amount of bitcoins to be issued so that we can maintain inflation at 2%, keep the people employed, and grow the economy.    

If bitcoin ever leaves PoW, I think it will be the beginning of the end.  I'm not saying it can't happen….

Ha. You are fast. I wanted to edit my post to include the Energy Charter Treaty signed by many countries in 1991 whose Article 19 requires that each Contracting Party "... shall strive to minimise in an economically efficient manner, harmful Environmental Impacts arising from energy use.". Governments already have a means to regulate bitcoin mining worldwide.

I point out the likelihood of a forced bureaucratic solution, because I want our industry to provide a solution given plenty of time to consider and implement it. The hardest part for us I think, would be the riddance of commercial miners and the equipment providers that benefit most from the earned block rewards.

Proof-of-Stake would reward network-attached, blockchain-maintaining bitcoin holders about 10% annual bitcoin dividends, halving according to schedule, on their respective held coins. If there was a 12 month or more advance notice of the blockchain fork, then datacenter owners could retain the bitcoin otherwise spent on new equipment - giving them a substantial stake in the new scheme.

The PoS scheme enables numerous more miners to participate with ordinary computers, and upon a blockchain fork, those new miners would outvote the current pools, who actually have only one miner for the entire pool, as the pool members submit shares and do not maintain a copy of the blockchain.