An updated Expected Value (EV) analysis for Bitcoin

[rpietila]

Expected value (EV) is the probability-weighted mean (average) of possible future outcomes.

We are talking Bitcoin, and about 5 years timeframe here, so 2020.

1. Let's start by everyone asking themselves: "What is the probability of Bitcoin price being lower in 2020 than what it is now?"

This scenario includes everything from total technology/network failure to a total breakdown of law and order, or unanimous draconian regulation by every government in the world to kill off everyone who has possession of a string of letters or part thereof, to just a multi-year downtrend in Bitcoin price coupled or uncoupled with increased adoption (2014 is a prime example that price (-80%) and adoption (+100%) do not correlate 1:1).

In a meeting with respected people in the area, the answers ranged from 20-50%, with a clear bias to 20%. Let's use 25% as a median. (The longest time Bitcoin has ever been below its ATH is <2 years, so history is not supporting 5 years of flatlining really.)

2. Then, "What is the probability that we will not reach the ATH in 5 years?"

Counting the major surges alone, we have set a new ATH at $32, $266 and $1242. The first two were taken, each with a 5x or 10x. Now, to be realistic, it may happen that they were isolated incidents, not happening again, but also it's possible that they were not, and there is some merit in the coin, the technology, etc. Of course I could give (and have given) several fundamental reasonings why I believe the latter, but for the purpose of this, let's keep it simple and assume that it can as well happen or not, so 50%.

This naturally includes the case 1., therefore the scenario "anything between 200-1,000 USD" is 25% probable.

3. Now, "if the ATH is reached, what will likely happen?"

Every time previously, once the old ATH was taken, a quick upsurge taking the price to 5x-10x higher in a few weeks followed. Since we are talking conservatively here, let's assume that in half of the cases, it will reach less than that, and the other half is more than that. (In 5 years, which is enough time to fit in the entire Bitcoin price history so far from $0.005 to $200, it is a conservative approach.)

4. Therefore, "In 25% probability of the total scenario universe, Bitcoin will go to higher than $10k in 5 years. How high?"

This is anybody's guess. Until now, the great majority of people who have taken a stand on the subject of Bitcoin price development in any reasonably long-term (2+ years) timeframe, have been proven spectacularly wrong. Bitcoin has exceeded the expectations of most observers.

To assess the average value of a bitcoin in this fat-tail scenario (a scenario where the expected value is dominated by the inordinately high outcomes with low and uncertain probabilities) is difficult, but let's just zoom 2 bubbles forward and assume a 5x on top of 10k.

=>

What we get is 4 scenarios with equal probability:
- $0-200 (mean: $50)
- $200-$1,000 (mean: $500)
- $1k-$10k (mean: $3,000)
- $10k+ (mean: $50k)

The EV for BTCUSD in 2020 is therefore $13,400/BTC. This is 6,000% (60x) higher than the current price. Even if we made gross errors in assessing the probabilities, it's hard to argue that the scenarios themselves are ill-constructed. It is very hard to make holding a position in Bitcoin a losing proposition from here. As people realize what I am saying, it is likely that this will become a self-fulfilling prophecy. Beware - 5 years is a long time!  

[1714799461]

1714799461

[rpietila]

Let's give for the sake of argument some very different probabilities for the scenarios:

1. ($50) = 50%
2. ($500) = 30%
3. ($3000) = 15%
4. ($50k) = 5%.

50*0.5+500*0.3+3000*0.15+50000*0.05 = 25+150+450+2500 = $3,125 EV. That's still a nice 15x gain and still dominated by the fat tail.

If we go extreme and set:

1. ($50) = 75%
2. ($500) = 20%
3. ($3000) = 4%
4. ($50k) = 1%.

50*0.75+500*0.2+3000*0.04+50000*0.01 = 38+100+120+500 = $758 EV. Even now we are talking about an expected 28% annualized gain.

You would have to be in total denial of the width of the scenario universe to believe the previous. But even if:

you completely disregard the possibility of BTC reaching higher than the $3k scenario, and set the $50k to $0, the EV is $258.

That's more than the bonds are paying, right?


TL;DR:
It's possible to speculate on short-term price movements, and I also have a Bitcoin castle to testify it may be successful. But buying and holding is a stellar EV and should definitely be a part of anyone's portfolio who is reading this.

[600watt]

thx 4 sharing

[zoinky]

Such a tasty zone were in.  People here will be seen as visionaries

[Wekkel]

Such a tasty zone were in.  People here will be seen as visionaries

And some as utter fools.

[stonerider]

Utter fools, all of you shall be.

[Ibian]

Yeah. I joined during the runup to 1k and bought all the way up, then all the way down to the 300s where I stopped because I had 3 times my original target count. Missed the 150 coins. Average price is in the 500s.

I have absolutely no trading instinct and have lost enough to stop trying so I'm holding. But I'm good at logical systems. I have no doubt that we will eventually go far beyond what most people currently think of as the moon. But what a fucking rough way to start.

[rpietila]

I have no doubt that we will eventually go far beyond what most people currently think of as the moon.

No no. Hope and "certainty" are not part of successful investing. I believe in 50% probability we'll never reach the ATH again.

Think about it.

But I still take a 60x EV in 5 years with eagerness

[oda.krell]

First, as a caveat: Careful with the resurgence of bull threads. Precious little evidence we're out of the bear market yet. Just saying.


That said, I'm in favor of EV calculations like this one. Definitely a lot more motivated (in my opinion) than the extremely speculative pure price extrapolations from historic price data, that almost invariably arrive at stellar values, without evidence or reasons why price should continue to grow like this...


So, here's my take on EV calculations: the individual probability distributions will vary greatly between whoever does calculations of this kind, but I believe, from a more abstract point of view, the following claims hold:

Claim (A): Calculations of this kind, and the distributions over possible outcomes, broadly fall into 5 "classes", namely:

(1) "Bitcoin fails. Completely." - mass centered around near-zero to single digit USD values per coin.
(2) "Bitcoin will fail to gain any serious traction." - mass centered around values that will sound very low to current "bulls", i.e. single digits, at best double digit price, 5 years from now.
(3) "Bitcoin will be a success. Sort of." - mass centered around prices higher than now, but not vastly higher. High triple digits, low quadruple digits.
(4) "Bitcoin will either fail, or take over the world!" - mass centered around very high prices, high quadruple digits easily, but does assign some mass for "total failure" scenarios.
(5) "Bitcoin will take over the world. Practically ensured." Self evident what that one looks like.

Claim (B): A lot of Bitcoin supporters/investors/believers (lots of smart ones as well, Gavin said something to this effect as well, iirc) believe "Either Bitcoin will be worth *a lot*, or practically *nothing*!". In terms of my classification above, that would be distributions of type #4.

Claim (C): This belief, i.e. "scenario #4", is overestimated/overrepresented among investors. In reality, by the "law of the success of the mediocre", something like scenario #3 is more likely, and should be more widely held as the basis of EV calculations.


So much for the more abstract thoughts on this. Practically, like I said, I consider something like #3 to be the best approximation of what could happen in the future... Bitcoin will be a "qualified success". Maybe similar to Linux (occupying a niche for consumers, but also running the show behind the scenes, just not noticeable to most). Or maybe, it'll be more than a niche product, but mainly for functions that don't require extremely high total valuation of the network (i.e. used widely as "ledger", but not "store of value"). With those premises, I arrive at a value of around $2000 for a time period of ~5 years.

Those estimates and how I arrive at them are way too vague to and uncertain to put my (or anyone else's) life savings into it, in my opinion, but over a 5 year horizon I can reasonably see a factor 10 increase of price compared to where we are now - so not a bad point to put some speculative capital into it.

An increase like this would be not quite as drastic as the "Everyone who holds one single coin will be set for life!" meme, but still pretty remarkable if it would happen (and it would require a far from trivial average price increase of 50-60% per year for that 5 year period). But essentially, a calcuation like above is the basis for the "investment" portion of my Bitcoin stash. The "trading" portion doesn't need this motivation though

[Ibian]

Are we considering at all the likely failure of fiat? With US debt being mathematically impossible to pay off and how interconnected the world economy is, it's just a matter of time. An alternative will be needed, and bitcoin is the most advanced form of money we have ever had. The panopticon portion of the western governments will like it too.

[8up]

Are we considering at all the likely failure of fiat? With US debt being mathematically impossible to pay off and how interconnected the world economy is, it's just a matter of time. An alternative will be needed, and bitcoin is the most advanced form of money we have ever had. The panopticon portion of the western governments will like it too.

This is basically (6) "Bitcoin will be chosen from outside as an alternative to failing fiat currencies". It's close to (5) but the motivation behind is somehow different. Not something we (sort of bitcoin believers) are in charge of.

Edit: It's highly unlikely, as I presume bitcoin will just be seen aa a perfect supplementary to the existing monetary infrastructure.

[oda.krell]

Are we considering at all the likely failure of fiat? With US debt being mathematically impossible to pay off and how interconnected the world economy is, it's just a matter of time. An alternative will be needed, and bitcoin is the most advanced form of money we have ever had. The panopticon portion of the western governments will like it too.

This is basically (6) "Bitcoin will be chosen from outside as an alternative to failing fiat currencies". It's close to (5) but the motivation behind is somehow different. Not something we (sort of bitcoin believers) are in charge of.

Edit: It's highly unlikely, as I presume bitcoin will just be seen aa a perfect supplementary to the existing monetary infrastructure.

I'd say, "fiat is a ponzi, and eventually will fall" is the motivation of those who believe in (4) or (5) distributions, depending on whether they think it'll crumble to dust during their lifetime or only afterwards, I guess

For those among us who aren't exactly sold on that idea, (3) is about as good as it gets, but with plenty of variation still, depending on *how much* of a complement to national currencies crypto will turn out to be.

[ThatDGuy]

First, as a caveat: Careful with the resurgence of bull threads. Precious little evidence we're out of the bear market yet. Just saying.


That said, I'm in favor of EV calculations like this one. Definitely a lot more motivated (in my opinion) than the extremely speculative pure price extrapolations from historic price data, that almost invariably arrive at stellar values, without evidence or reasons why price should continue to grow like this...


So, here's my take on EV calculations: the individual probability distributions will vary greatly between whoever does calculations of this kind, but I believe, from a more abstract point of view, the following claims hold:

Claim (A): Calculations of this kind, and the distributions over possible outcomes, broadly fall into 5 "classes", namely:

(1) "Bitcoin fails. Completely." - mass centered around near-zero to single digit USD values per coin.
(2) "Bitcoin will fail to gain any serious traction." - mass centered around values that will sound very low to current "bulls", i.e. single digits, at best double digit price, 5 years from now.
(3) "Bitcoin will be a success. Sort of." - mass centered around prices higher than now, but not vastly higher. High triple digits, low quadruple digits.
(4) "Bitcoin will either fail, or take over the world!" - mass centered around very high prices, high quadruple digits easily, but does assign some mass for "total failure" scenarios.
(5) "Bitcoin will take over the world. Practically ensured." Self evident what that one looks like.

Claim (B): A lot of Bitcoin supporters/investors/believers (lots of smart ones as well, Gavin said something to this effect as well, iirc) believe "Either Bitcoin will be worth *a lot*, or practically *nothing*!". In terms of my classification above, that would be distributions of type #4.

Claim (C): This belief, i.e. "scenario #4", is overestimated/overrepresented among investors. In reality, by the "law of the success of the mediocre", something like scenario #3 is more likely, and should be more widely held as the basis of EV calculations.


So much for the more abstract thoughts on this. Practically, like I said, I consider something like #3 to be the best approximation of what could happen in the future... Bitcoin will be a "qualified success". Maybe similar to Linux (occupying a niche for consumers, but also running the show behind the scenes, just not noticeable to most). Or maybe, it'll be more than a niche product, but mainly for functions that don't require extremely high total valuation of the network (i.e. used widely as "ledger", but not "store of value"). With those premises, I arrive at a value of around $2000 for a time period of ~5 years.

Those estimates and how I arrive at them are way too vague to and uncertain to put my (or anyone else's) life savings into it, in my opinion, but over a 5 year horizon I can reasonably see a factor 10 increase of price compared to where we are now - so not a bad point to put some speculative capital into it.

An increase like this would be not quite as drastic as the "Everyone who holds one single coin will be set for life!" meme, but still pretty remarkable if it would happen (and it would require a far from trivial average price increase of 50-60% per year for that 5 year period). But essentially, a calcuation like above is the basis for the "investment" portion of my Bitcoin stash. The "trading" portion doesn't need this motivation though

I really enjoyed reading your analysis here, and rpietila's EV analysis above - but I have a question specific to that #3 scenario you mentioned:

If BTC is going to be a "success, sort of" and have the kind of growth that results in ~$2000 in 2020, do you also think that would mean another speculative bubble (or two?) along the way to that point?

[oda.krell]

If BTC is going to be a "success, sort of" and have the kind of growth that results in ~$2000 in 2020, do you also think that would mean another speculative bubble (or two?) along the way to that point?

Funny. Just started forming some thoughts about that yesterday... Short answer: no idea.

Longer answer: I realized I should probably keep the following two events separate, conceptually: 1) price will rise above $1200, 2) there will be another "bubble rally". I'm still inclined to think 1) will take place (or at least, there's a good chance for it), but this is not necessarily only possible in the form of 2). The market has fundamentally changed, maybe. At least for now, it is *strongly* defined by traders removing speculative excess rather quickly (NB: I'm not complaining about that. That's what mature markets tend to do.). So I can see us rising to a new ATH, driven by actual demand, but "bubbles" like of Ye Olde Bitcoin History might be a thing of the past. Or at least, I'm trying to prepare myself for that possibility.

[rpietila]

At least for now, it is *strongly* defined by traders removing speculative excess rather quickly (NB: I'm not complaining about that. That's what mature markets tend to do.).

I wish that was the case, but cannot help but think that when the speculative mania hits for real, the infrastructure is still not as reliable that people would be inclined to sell their bitcoins en masse to cap it. Regulations. Taxes. Scams. AML. KYC. Happens too quickly. Fear to lose out when price is +20% per day. I'd say the bubble is almost certain, but of course more muted than the previous one (which was more muted than the one before, and that more than the one before that in 2011).

[Chef Ramsay]

At least for now, it is *strongly* defined by traders removing speculative excess rather quickly (NB: I'm not complaining about that. That's what mature markets tend to do.).

I'd say the bubble is almost certain, but of course more muted than the previous one (which was more muted than the one before, and that more than the one before that in 2011).

I'm a little unclear about what you mean by saying 'muted'. Do you mean like 'low key' or in what way different than the past ones?

[rpietila]

At least for now, it is *strongly* defined by traders removing speculative excess rather quickly (NB: I'm not complaining about that. That's what mature markets tend to do.).

I'd say the bubble is almost certain, but of course more muted than the previous one (which was more muted than the one before, and that more than the one before that in 2011).

I'm a little unclear about what you mean by saying 'muted'. Do you mean like 'low key' or in what way different than the past ones?

In 2011,  $1->$32 (32x)
3-4/2013,  $15->$266 (17x)
10-11/2013,  $130->$1242 (10x).

So it would appear likely to me that the blowoff phase would come, but would top out in less than 10x the price of the "stable" period before the bubble. Then again, we are more below the trendline now than ever, and I could be completely wrong and we develop a superbubble, only to pop in the $100k or so.

During the advanced stage of the bubble, the marketcap can in a low liquidity environment rise 100:1 (by $100 for every $1 invested), therefore the last double from let's say $50k to $100k would be achieved by a mere 7.5 billion investment.

[oda.krell]

At least for now, it is *strongly* defined by traders removing speculative excess rather quickly (NB: I'm not complaining about that. That's what mature markets tend to do.).

I wish that was the case, but cannot help but think that when the speculative mania hits for real, the infrastructure is still not as reliable that people would be inclined to sell their bitcoins en masse to cap it. Regulations. Taxes. Scams. AML. KYC. Happens too quickly. Fear to lose out when price is +20% per day. I'd say the bubble is almost certain, but of course more muted than the previous one (which was more muted than the one before, and that more than the one before that in 2011).

I'm not fixated on the idea that there won't be any "bubbles" anymore either. Just that I try to separate the notion "we're (mostly) going up from here" (which I consider at least a possibility) and "the market is ruled by traders" (which I consider a certainty, for now). During a real "bubble rally" (like early 2011 and early + late 2013), we went up *and* anyone brave enough to regularly attempt profit taking prematurely was most likely punished, i.e. had to rebuy a lot higher. Until, of course, the end of those bubbles... Then it paid off big time

[rpietila]

My Simple and Sane Savings plan (link in sig) actually promotes unemotional profit taking every time the price rises to the new ATH, and setting the profits aside. I believe taking a calculated risk early on (now) and starting to cash out little by little after a certain target price is hit, be it $1k or $10k, the experience is the best for most people. No trading. No agony.

[nakaone]

we neither have the probabilities for the outcomes nor do we have any kind of estimate for a successful or unsuccessful outcome do we?

estimating the future is all fun and games but using an EV calculation for bitcoin is kind of useless. let us take the following:

the problem with this hugely inflated monetary world and a definetily finite monetary project like bitcoin is that we can hardly design, despites total failure, future outcomes where the expected value is negative, given any common sense.

take the following example: bitcoin fails in 99,9% of the cases and in 0,1% it reaches gold parity: it would give you an expected value of one bitcoin of 451,x $ in 2020 [all factors staying constant]

http://www.wolframalpha.com/input/?i=8000000000000%2F17718750

the core difference to use cases where ev calculations are useful (gambling well basically all closed systems) is that you are confronted with an undetermined almost self creating future, and even if you think you can solve that you have the problem that we only run the future once

all that being said - every person grasping the concept of virtual currency and who has half a brain understands that this economy will be growing and therefore be an EV+ spot, to which amount, as Keynes would put it: we simply do not know

[pleaseexplain]

Hi

Counting the major surges alone, we have set a new ATH at $32, $266 and $1242

I do not know the reasons for surge 1 and 2 ( and would by the way like to know) but it seems clear that gox used manipulation to achieve the third. I know speculators came in but I see it as different somehow.

ie as the market either gets more regulated and/or wiser to being conned there will be less manipulation and less effect when it happens in places like exchanges

so should in trying to forecast you should only be using "genuine" speculation movements? I realise they may be moving the price on false external information but at least it is not the exchange itself that is doing the manipulating?

[ElectricMucus]

Hi

Counting the major surges alone, we have set a new ATH at $32, $266 and $1242

I do not know the reasons for surge 1 and 2 ( and would by the way like to know) but it seems clear that gox used manipulation to achieve the third. I know speculators came in but I see it as different somehow.

ie as the market either gets more regulated and/or wiser to being conned there will be less manipulation and less effect when it happens in places like exchanges

so should in trying to forecast you should only be using "genuine" speculation movements? I realise they may be moving the price on false information but at least it is not the exchnage itself that is doing the manipulating?

How would you do that when there is a fat chance it's all Bullshit?
This was originally posted around the time of the 2011 hype: http://nerdr.com/bitcoin-exchange-scam-bitcoins-are-worthless/

[rpietila]

How would you do that when there is a fat chance it's all Bullshit?

+1. You never know. So leaving out any of the datapoints because of alleged bullshit is not good.

Many astute guys have a theory that TPTB are bullshitting us the final last time with a move that goes to high-5 digits, sucking their money in the game, crashing the price, and gaining a public record of all the people who are thinking independently enough to buy in, but are not paranoid enough to realize that it was a bankster/government con all the way from Satoshi to the FEMA camp.

Do I believe that? It's certainly a possibility. Instead of burdening my mind too much about the probabilities of the scenarios, I have found it much more helpful to group them under "harassment" and develop my skills to cope in the odd chance that 8 government guys want to raid your house and confiscate everything, or lock you in an institution, deny your lawyer and force-feed psychiatric drugs, or sue you over Kafkan made-up victimless crime allegations, or make up a national televised sex scandal over your employee you never even kissed.

After going through those, my interest in nitpicking about how likely it is for Bitcoin to reach the ATH exactly, is pretty pointless. It is more important for a person, whether he is denied Internet access or not, than whether he has a few million more or not. In western countries you may be denied Internet and lawyer without fair trial, and that is a human rights issue.

I am always ready to bet, though, if the odds are good enough. To get to $1,000/BTC from here, we need it to go up 4x. So if I have $1,000, I'd be at $4,000 when the price is $1,000. I also get to benefit from the close cases, for example $500 means a double. So, in USD terms, I'd probably not bet $1,000 unless I got $15-20k in the event of Bitcoin hitting $1,000. Actually it's more likely that you find the other side of the bet more interesting! Anything goes for me. I don't hope, I do the maths.

[rpietila]

we neither have the probabilities for the outcomes nor do we have any kind of estimate for a successful or unsuccessful outcome do we?

We do. See OP. Just adjust the scenarios or the probabilities thereof.

This is a very simple case really, there is a timeframe, and the assumption that BTC will have a price in USD. It always holds true, because "no price" == 0 USD, and "USD fails" == inf USD, in which case the calc reverts to the purchasing power instead.

Estimating the probability is difficult, of course. Few actually placed their bets in 2011 based on the conviction that the price would go up 500x in 2 years. If I had needed to think about it in detail, I would have given "$2->$1200+ in two years" a probability of ~1%.

Of course we cannot know in retrospect what the probability was, but we know the outcome was 500x. And we can consider that perhaps the probability was higher than my estimate, and certainly higher than the majority's estimate.

take the following example: bitcoin fails in 99,9% of the cases and in 0,1% it reaches gold parity: it would give you an expected value of one bitcoin of 451,x $ in 2020 [all factors staying constant]

This is the beauty of EV. If there is a positive case good and probable enough, it makes it all worth it.

Consider 2 cases of extreme gambling with a very slim chance of winning, and very negative EV.

- Lottery
- Insurance.

In both, you can expect (EV) to get a 30-40% payout over a period of 5 years (so -60..-70% EV), with a microscopic chance of hitting it big. With insurance, the condition even is that you cannot really end up better off than in the beginning so that's even worse than lottery.

I'd much rather invest in something like Bitcoin. Anyone who knows about Bitcoin and continues to gamble off his fortune with insurance payments clearly does not have a clue what he is doing.

[Grafzep]

Many astute guys have a theory that TPTB are bullshitting us the final last time with a move that goes to high-5 digits, sucking their money in the game, crashing the price, and gaining a public record of all the people who are thinking independently enough to buy in, but are not paranoid enough to realize that it was a bankster/government con all the way from Satoshi to the FEMA camp.

Do I believe that? It's certainly a possibility.

Hilarious!

You do realise that those nagging voices are not "many astute guys"?


...Nurse!

[rpietila]

I realize many more things now than as little as a year or two ago.

It's called "experience". 

[inca]

I realize many more things now than as little as a year or two ago.

It's called "experience". 

I would be curious to know if you discussed future price movements at the recent bitcoin invite-only retreat rpietila?

[rpietila]

I realize many more things now than as little as a year or two ago.

It's called "experience". 

I would be curious to know if you discussed future price movements at the recent bitcoin invite-only retreat rpietila?

Of course I did. The whole thread is because of that!

The price is more behind the best-fitting trend than at any time in history, so either Bitcoin is going to die, or revert to the trend (or something in between ofc). The EV calc strongly favors investing now.

Another thing that strengthened my conviction was that some of the guys there were actually short. You know, when guys of that caliber are short, and they cover, it's going to have an effect on the price. They are not fools, they had better information and balls than I did a year ago, to actually go short instead of just lightening up, but also they are not fools to destroy themselves when the price goes back up. 300-350 was mentioned as the mental stop loss zone that marks the end of the downtrend and triggers short covering.

[HeliKopterBen]

Another thing that strengthened my conviction was that some of the guys there were actually short. You know, when guys of that caliber are short, and they cover, it's going to have an effect on the price. They are not fools, they had better information and balls than I did a year ago, to actually go short instead of just lightening up, but also they are not fools to destroy themselves when the price goes back up. 300-350 was mentioned as the mental stop loss zone that marks the end of the downtrend and triggers short covering.

Interesting that die-hard believers are actually short.  An epic short-covering rally may be in the cards if the short side of the trade is crowded. 

However, I wonder if they are short off-exchange because exchange data does not support the short-covering theory with 80% long and 20% short. 

[uvwvj]

As always Risto puts out good numbers but I honestly would rather this be calculated for another year 2021 versus 2020, with halving (unless having comes early) as the inflation drops below 2% and mined coins will be about ~85% completed.

IMO this is the make or break year for the "experiment" - if it passes we have a currency and not just an asset imo.

[inca]

Another thing that strengthened my conviction was that some of the guys there were actually short. You know, when guys of that caliber are short, and they cover, it's going to have an effect on the price. They are not fools, they had better information and balls than I did a year ago, to actually go short instead of just lightening up, but also they are not fools to destroy themselves when the price goes back up. 300-350 was mentioned as the mental stop loss zone that marks the end of the downtrend and triggers short covering.

Interesting that die-hard believers are actually short.  An epic short-covering rally may be in the cards if the short side of the trade is crowded. 

However, I wonder if they are short off-exchange because exchange data does not support the short-covering theory with 80% long and 20% short. 

Apparently it is possible to go long with btc and not just fiat. This might explain why the long position is so skewed. The price is actually correlated well with the fluctuations in the short contracts far more.

[Grafzep]

I realize many more things now than as little as a year or two ago.

It's called "experience". 

Every day is a school day, if we're lucky.

I love experience.

[79b79aa8d5047da6d3XX]

Claim (A): Calculations of this kind, and the distributions over possible outcomes, broadly fall into 5 "classes", namely:
(1) "Bitcoin fails. Completely." - mass centered around near-zero to single digit USD values per coin.
(2) "Bitcoin will fail to gain any serious traction." - mass centered around values that will sound very low to current "bulls", i.e. single digits, at best double digit price, 5 years from now.
(3) "Bitcoin will be a success. Sort of." - mass centered around prices higher than now, but not vastly higher. High triple digits, low quadruple digits.
(4) "Bitcoin will either fail, or take over the world!" - mass centered around very high prices, high quadruple digits easily, but does assign some mass for "total failure" scenarios.
(5) "Bitcoin will take over the world. Practically ensured." Self evident what that one looks like.

Claim (B): A lot of Bitcoin supporters/investors/believers (lots of smart ones as well, Gavin said something to this effect as well, iirc) believe "Either Bitcoin will be worth *a lot*, or practically *nothing*!". In terms of my classification above, that would be distributions of type #4.

Claim (C): This belief, i.e. "scenario #4", is overestimated/overrepresented among investors. In reality, by the "law of the success of the mediocre", something like scenario #3 is more likely, and should be more widely held as the basis of EV calculations.

So much for the more abstract thoughts on this. Practically, like I said, I consider something like #3 to be the best approximation of what could happen in the future... Bitcoin will be a "qualified success". Maybe similar to Linux (occupying a niche for consumers, but also running the show behind the scenes, just not noticeable to most). Or maybe, it'll be more than a niche product, but mainly for functions that don't require extremely high total valuation of the network (i.e. used widely as "ledger", but not "store of value"). With those premises, I arrive at a value of around $2000 for a time period of ~5 years.

I agree about Claim (B): the scenario yielding Class (4), which once seemed reasonable, should not be the default expectation. Aminorex’s argument to that effect, IIRC, was: (i) even if Bitcoin fails, it is simply not conceivable that we go back to a world without an open source peer to peer digital cryptocurrency; (ii) so if Bitcoin fails, something better takes its place; (iii) if that happens, current Bitcoin holders will be in as good position as anyone to transition to the better system, which has improved chances of success. A catastrophic scenario is therefore not necessarily a wipe-out for attentive bitcoiners.

Of course, if a catastrophic scenario unfolds and Bitcoin gets replaced we would not be talking about the same thing anymore, so it’s futile to calculate EV. The point is only that Class (4) is ruled out. We might also agree that Class (5) should be ignored for the purposes of conservative valuation. So our question becomes one of giving decent estimates for what counts as Class (3), and of assigning respective probabilities.

With this in mind, let’s look at a simplistic scenario that strays as little as possible from rpietila’s original analysis, but gives (admittedly arbitrary) finer grained possibilities for the qualified success case than oda.krell contemplates, and no moonshot.

At the low end of qualified success would be, let’s say, ATH = $1200/BTC.
 
The high end of qualified success might be defined as: total market cap of BTC equal to half current market cap of AAPL (largest publicly traded company) =  $740B/2 = $370B. Since there will be ~18M BTC in circulation in 2020, this gives us ~ $20,500/BTC. Such a capitalization after 11 years would count as successful, but is neither world-conquering nor in some sense completely out of the ordinary (Google went from 0 to $400B in 15 years, although of course this is a different type of case).

Let’s take a third point at the average between the previous two: $10,850/BTC, and assign equal probabilities to each of the three.

The scenario, then, is:
1.  ($50) = 25%
2.  ($500) = 25%
3a. ($1,200) = 17%
3b. ($10,850) = 17%
3c. ($20,500) = 16%

50*0.25+500*0.25+1,200*0.17+10,850*0.17+20,500*0.16 = $5,466/BTC EV.  That’s ~ 23x current price.

A more conservative variation would be to assign 0.25 probability to being at ATH in 5 years, and split the remaining 1/4 for the other two points. We might also lower the value of a coin in the worse case scenario to a merely symbolic $1.
1.  ($1) = 25%
2.  ($500) = 25%
3a. ($1,200) = 25%
3b. ($10,850) = 12.5%
3c. ($20,500) = 12.5%

1*0.25+500*0.25+1,200*0.25+10,850*0.125+20,500*0.125 = $4,344/BTC EV.  That’s ~ 18x current price.

[600watt]

[
I'd much rather invest in something like Bitcoin. Anyone who knows about Bitcoin and continues to gamble off his fortune with insurance payments clearly does not have a clue what he is doing.

this !

[oda.krell]

I agree about Claim (B): the scenario yielding Class (4), which once seemed reasonable, should not be the default expectation. Aminorex’s argument to that effect, IIRC, was: (i) even if Bitcoin fails, it is simply not conceivable that we go back to a world without an open source peer to peer digital cryptocurrency; (ii) so if Bitcoin fails, something better takes its place; (iii) if that happens, current Bitcoin holders will be in as good position as anyone to transition to the better system, which has improved chances of success. A catastrophic scenario is therefore not necessarily a wipe-out for attentive bitcoiners.

Of course, if a catastrophic scenario unfolds and Bitcoin gets replaced we would not be talking about the same thing anymore, so it’s futile to calculate EV. The point is only that Class (4) is ruled out. We might also agree that Class (5) should be ignored for the purposes of conservative valuation. So our question becomes one of giving decent estimates for what counts as Class (3), and of assigning respective probabilities.

With this in mind, let’s look at a simplistic scenario that strays as little as possible from rpietila’s original analysis, but gives (admittedly arbitrary) finer grained possibilities for the qualified success case than oda.krell contemplates, and no moonshot.

At the low end of qualified success would be, let’s say, ATH = $1200/BTC.
 
The high end of qualified success might be defined as: total market cap of BTC equal to half current market cap of AAPL (largest publicly traded company) =  $740B/2 = $370B. Since there will be ~18M BTC in circulation in 2020, this gives us ~ $20,500/BTC. Such a capitalization after 11 years would count as successful, but is neither world-conquering nor in some sense completely out of the ordinary (Google went from 0 to $400B in 15 years, although of course this is a different type of case).

Let’s take a third point at the average between the previous two: $10,850/BTC, and assign equal probabilities to each of the three.

The scenario, then, is:
1.  ($50) = 25%
2.  ($500) = 25%
3a. ($1,200) = 17%
3b. ($10,850) = 17%
3c. ($20,500) = 16%

50*0.25+500*0.25+1,200*0.17+10,850*0.17+20,500*0.16 = $5,466/BTC EV.  That’s ~ 23x current price.

A more conservative variation would be to assign 0.25 probability to being at ATH in 5 years, and split the remaining 1/4 for the other two points. We might also lower the value of a coin in the worse case scenario to a merely symbolic $1.
1.  ($1) = 25%
2.  ($500) = 25%
3a. ($1,200) = 25%
3b. ($10,850) = 12.5%
3c. ($20,500) = 12.5%

1*0.25+500*0.25+1,200*0.25+10,850*0.125+20,500*0.125 = $4,344/BTC EV.  That’s ~ 18x current price.

Very interesting post. I like the argument for/against some of the distribution classes.

In detail, I personally would consider slightly lower network valuations as sufficient to call it a "qualified success", in case the ledger function will be picked up widely, but only to the point where the network doesn't need to be secured by ultra high valuations. Practically, even with a network valued at just a few billion USD (and with the respective mining hardware behind such a valuation), nobody other than a few state actors can hope to brute force attack the network, which might be "good enough".

By the way, my EV calculations are intended to be: "EV per unit of Bitcoin, or an alternative cryptocurrency replacing Bitcoin in a manner that will be foreseeable to those who saw the value of Bitcoin in the first place".

I arrive at my "conservative" $2290 value for the qualified success scenario - a factor 10 increase - by the following (crude) approximation:

Code:

1$ 1%
10$ 5%
50$ 10%
500$ 21%
1000$ 26%
2000$ 21%
5000$ 10%
10000$ 5%
50000$ 1%