Modeling the Future Price of Bitcoin - Is $1,000,000 Possible?

Can the price of Bitcoin reach two thousand dollars, ten thousand, or more?

What is the current price of Bitcoin today?

Even if you consider the blockchain as the fundamental innovation of Bitcoin, the Bitcoin price matters, and indeed, the higher the Bitcoin price, the more Bitcoin is protected from nefarious actors.

In this video we focus on the Bitcoin price, specifically in the attempt to model the future price of Bitcoin.

Big investors make price models for assets but the trouble is they keep this information private.

Will the Bitcoin price go up? How high will Bitcoin go if it does? These are all questions for speculators.

Models may not predict the future Bitcoin price, but the certainly provide a better understanding.

In this video, James D'Angelo walks you through the concepts and challenges of modeling the future price of Bitcoin.

From velocity, transaction volume, supply, to all the big markets Bitcoin proposes to disrupt (hedge funds, gold, e-commerce, money supply, remittances etc).

Better still we walk you through the alpha version of our open-source model. ### Transcript

Hello, this is James D'Angelo and welcome to the Bitcoin 101 Blackboard Series. Today we're going to be looking at modeling the price of Bitcoin. Specifically, we're going to be looking at trying to answer the question, could there be a 50,000, 100,000 or million dollar Bitcoin? And when you go to model Bitcoin clearly it's important to realize that you cannot model Bitcoin accurately. You will come up with no models that will predict the exact price of Bitcoin. That's just plain impossible. But models are really great for building understanding and indeed we've built a model that we're going to show you in a few minutes that really does help understanding how all these different variables might affect the price of Bitcoin.

And here we have a Financial Times article suggesting that, well, there are a lot of models already out there but most of them are private. So, a lot of investors use models. They build their own models to try and determine if it's a [good time to invest, buy Bitcoin](/en/how-buy-bitcoins-online-best-bitcoin-exchange-rate-bitcoin-price/) or even sell. So, let's run through our quick list of sort of the major concerns one might have if you're going to model the price of Bitcoin. And again, it's important to realize that today we're focusing on price. There are so many wonderful amazing things about Bitcoin distributed public ledgers, frictionless, low-cost, decentralized payment systems. But price it turns out is actually a very magical piece of data. And for some, it's the most compelling reason to be involved in Bitcoin. In fact, Bitcoin, as an asset, has outperformed any other asset on Earth over the last five years and perhaps even in history. Okay. So, price with Bitcoin is a very magical thing indeed. And when you go to model price, there's a problem because arguably everything in the world goes into the price of any individual item. So, if there's a war overseas or here at home that will affect the price of all goods, commodities, services, labor, etcetera, and should affect the price of nearly everything in the world. So wars, pensions, regulations, politics -- all can come into play with the price of Bitcoin.

So, you start to see how many variables a real model might have to take an account. Clearly, we're not going to put in all these variables. We're going to put in the big salient ones and one of the biggest ones is transaction volume. And transaction volume is the amount of Bitcoins that are being moved around the system. And fortunately, especially with Bitcoin because it's so transparent you can actually track transaction volumes. And so here's July 12, here we are today, so at the end of June and you can go and kind of move your mouse around and see the transaction volumes that are happening per day. And then you can even sum them up over a year or six months or however you want. And today's transaction volume is somewhere around $60 million worth of Bitcoins that are being sloshed around. And this is really important when you're looking at Bitcoin.

Clearly, if $1 is being sloshed around it's not really an active currency or payment system, okay, so $60 million is certainly nowhere near the US dollar or anything else. But transaction volume as we'll see later really comes into play. In fact, you see it up here in the numerator of this little equation right here. And so the market value of Bitcoin must be enough to support transaction volumes. Clearly, if you want to buy a $80 billion item right now you can't do that in one fell swoop with Bitcoin because there aren't enough Bitcoins at the current price to buy an $80 billion item. So, if you're talking about doing $80 billion of transactions in a day Bitcoin’s not yet the best option. Though still possible, because as you’ll see the velocity of Bitcoin does affect a lot of the ability to increase these transaction volumes even in a given day, another big issue with Bitcoin is sort of this optimism about the future.

And so price increases, as Bitcoin’s price has gone up, it's more a reflection not of usage but of optimism about Bitcoin's future use. So, if you see Bitcoin coming in and maybe taking over Amazon's $38 billion worth of transactions, well, then you're pretty bullish on Bitcoin. You'll see the price going up. But what really happens is people are reading the news each day. They see new regulations and they get this sort of uncertainty about the future. They see the possibility maybe of Bitcoin taking over a big section of transactions but then some days they won't feel assured about it and they might go and sell. And this uncertainty about future translates into present exchange rate volatility, which is obviously a big concern with people dealing with Bitcoins especially if you're looking at Bitcoin as a store of values or something that might replace gold.

You don't want the price flying all over the place if you're going to put your money in there to sort of hold it for a while. You want that to kind of be solid. You want that to be something you can rely on. And even with transactions volatility, though some people say it has no effect at all, really does have an effect. So, someone's got to eat the cost of these volatility issues. And lot of times you will see someone like Coinbase or BitPay trying to eat the volatility cost to provide sort of a stable payment service. And indeed, so far they've been doing that pretty well. And so volatility in turn limits Bitcoin’s use today as a medium of exchange and a store of value.

So, the more volatility there is the more unlikely people are going to be comfortable using it or storing value with Bitcoin. Okay. And so when people are concerned about this idea of volatility of prices going up and down what we're really seeing is that the price is floating. And for many Americans, this whole idea of a currency’s price floating is kind of a new idea. But if you are living in Europe, especially in the '90s or before, you are very used to this idea of currencies floating because if you went from Italy and just crossed the border into Switzerland immediately you would be changing your money for the Swiss franc and you would be looking up immediately the current exchange price and every few minutes that price might change. For certainly over a week or so, you'll see those prices moving and sometimes you'll see those prices moving a lot. So, even the dollar versus the euro over the last 10 years has been fairly volatile. So, it's hard to say whether the euro is volatile and floating a lot or the dollar is volatile or if it's just a combination of the two. But indeed they float. Now Bitcoin is unlike the dollar or the euro because there's no central bank trying to control the volatility of Bitcoins. So, it could be argued that it floats even more than other currencies. Okay.

And, of course, there's this idea of the spot price which is really just the current market price what Bitcoin is being sold at right now. But the interesting thing about a spot price when you're talking models is a spot price is actually a pretty good model. Okay. So, if you want to determine the price of Bitcoin in the future you just take the price today and say that's the price in the future. And statistically it turns out, if you're looking at corn or any other sort of commodity, the current spot price indeed does better than many expert mathematical models. Okay. So, it's always important to at least respect the current spot price. And today we're hovering around $590. So, you could make a very simple model of Bitcoin, which just says that the price of Bitcoin in one year is going to be $590 because that's the price today. And your model will likely do better than many models that are being developed because remember that the spot price is actually a combination of all these individual bets. If we knew the price of Bitcoin was going to be higher next year, well, the price today should go up. It should reflect that same optimism or that same confidence. And, in fact, the current price is really the combination of all bets for and against Bitcoin. And we're starting to see the ability to short Bitcoins. So, millions of dollars now are being put into this market where you can actually short or long Bitcoin in places like etcetera.

So, things have really changed. You’re starting to get these financial derivatives, these instruments that you're able to play around with the price of Bitcoin and make bets for and against it. And this will change the volatility and, as some suggests, will actually control the volatility of Bitcoin. We'll see. Okay. And so Bitcoin is global, anonymous and programmable. And really just to throw those all together, they don't seem like they belong together but the fact that anyone on earth can just roll dice, get a private key, from that build a public address and start receiving Bitcoins means that this is a truly global currency. It is open to everyone to use today. In fact, all seven billion people on earth could hold hundreds of Bitcoin accounts. And not only can they hold them but [they can keep them anonymously](/use-bitcoin-anonymously/). Okay. So, this really changes the game of how we might analyze or model a system like this or how money's being used. And even worse, Bitcoin is programmable. So, you're not just sending links to money you can actually send money using computers. So, we're going to see things that are much faster that change much quicker than ever before. And so all this combined really makes it difficult to model especially because we've never seen anything like this before. Okay.

And we've already talked about volume, which is a transaction volume, which is up here in the numerator on this equation right here. And then there's the supply ratio. Okay. So, how many Bitcoins are there out there? And just like transaction volumes which we can only make a real guess at because, remember, if you have transactions where someone is sending Bitcoins to themselves that really shouldn't be included in your price model. Okay. So, even the purchase and selling of dollars with Bitcoins might not be something that you want to consider when you're looking at modeling Bitcoin's price. So, when you get your transaction volume numbers from our chart on you might want to take these numbers and decide to half them, quarter them, who knows, because we don't know exactly how many of these transactions are really being used for goods and services.

And that's very different from someone sending Bitcoins to themselves where it really doesn't mean anything for the Bitcoin economy, but you could have millions of Bitcoins moving around each day and that would appear here on the transaction volume but not affect the economy. Okay. So, if you're trying to determine transaction volume you're going to have to make a lot of assumptions. But here the same thing is true with the supply. Okay. So, we know the current supply of Bitcoin. Okay. So, there's something like 13 million out there. But we don't know how many of those are lost. So, it's possible some people have suggested that Satoshi Nakamoto has burned all his coins or he doesn't use them or he's lost them all. Okay. So, we're talking about a million Bitcoins, 1/13th of the current amount but we don't know if they're active so that he could use them or if they're lost. And so that does affect the supply. And again, even with supply you're going to have to make some assumptions. Okay. And that's what we're saying here, volume is speculative but so is supply ratio. Okay.

And then there's this whole idea of liquidity and velocity. Velocity being very important it's here in the denominator. So this is velocity. And velocity in particular with Bitcoin is very important because velocity is the amount of times that you can use one coin, for example, in one day. And with Bitcoin, depending on the systems, I mean, you might have a system like Coinbase which allows you to do instant off-chain transactions, you should be able to use one Bitcoin millions of times inside the Coinbase network. As soon as you can send it it should arrive. And so this is an enormous velocity. What we're seeing in practice though is that the velocity is a little bit slower. People are not all using Coinbase and staying internal to Coinbase. They're sending it the old fashion way. And so what you do is you really have to wait 6, 10 confirmations and that slows things down.

So the velocity of Bitcoin in that case is the ability to do one transaction every hour. This is still much, much faster than we're familiar with with the US dollar. In terms of velocity terms, they give these things in numbers, the US dollar has a velocity of 7. Bitcoin is likely to have a velocity more like 50 to a 100 so much faster. And this drives the price down surprisingly. Even though it's a great feature the ability to use the same currency over and over really quick for remittances, for example, means that you might be able to handle all of the world's remittances with just a few Bitcoins. So, it doesn't drive the price up even though people are adopting Bitcoin. So, you're just using it as a rail to transfer money back and forth very quickly so it doesn't create a lot of demand for more units of the currency. Very important to understand velocity.

Another big idea, of course, is this idea of liquidity. And liquidity often in Bitcoin is referred to as volume. And it's just the amount of coins that are actually able to be used at any given point. And so you have some people who are just hoarding their Bitcoins. So their coins are illiquid. Those who are using it to spend and buy things, merchants who take the Bitcoins in and sell them immediately back, those are the liquid Bitcoins. And it turns out that liquid Bitcoins are always much, much less than the M1, which is all the current extinct Bitcoins. So, if you have, say, 13 million Bitcoins right now and maybe you have 1 million lost Bitcoins, right? So you’re down to 12 million. Well, you might consider the fact that over half or maybe even 90% of these 12 million are being hoarded because people are going along with Bitcoin. They are holding them because they think the price will go up. So, you might end up with a volume of only about 2 million Bitcoins or less. Okay. And these are very important things to consider when you're looking at a currency because if you really want to use this currency, well, there is only 2 million coins in existence. So, it actually would drive the price up if there's a lot of demand for the currency and it's 90% illiquid, for example, at the same time.

Another thing that's very difficult to model, in fact, it's absolutely impossible to model, are human emotions. Okay. So people, television, newspapers -- they all get excited for various reasons. And it's not always clear that those are factually-based decisions. So, you see a lot of speculative hype, you see a lot of people buying because other people are buying. You have people talking about it in parties. It's not always something where they're understanding how the blockchain works or how prices move or etcetera, or whether they really see something like the adoption of Bitcoin by as being a price mover. They're just buying because of excitement. And with human emotion it end up with a lot of wild varieties of excitement.

So one piece of bad news could have much worse effect and good news could have much more effect or the opposite. Okay. So, it's important to realize it's just impossible to model human emotions of hype, unit fixation, excitement, speculation, etcetera. So, even if you had access to unlimited information, say you had 10,000 people all gathering information for you about Bitcoin, it would still be impossible to make a perfect model of Bitcoin. In fact, it would still be impossible to make a model that you could guarantee predicts the price better than our good friend, the spot price, which gets things right 50% of the time.

So even with unlimited information, you're just hoping to do better than that. And if you can do better than that, you really know you're doing better than that, well then you should be investing, buying or selling whatever based on the prices you're predicting. But important to realize that almost all models require assumptions, assumptions, assumptions, assumptions. So, we have to make assumptions about velocity, we have to make assumptions about transaction volume, we have to make assumptions about supply, assumptions about how many folks are going to use Bitcoin as a store of value or look at it as a medium of exchange.

Again, all these assumptions basically add up to, well, your model is just something to help you understand the scope of the problem and some of the possibilities. Clearly, with a model you can understand that a Bitcoin is unlikely to go to $1 trillion apiece. Okay. But beyond that, almost everything else is based on some of these assumptions.

And there's a lot amiss with Bitcoin’s price. Okay. And we've talked about some of them already but more use doesn't always increase value. And we spoke about this already with respect to velocity. Okay. Remember, if the coins are being turned over really fast and being used immediately again, just because you have a high transaction volume doesn't mean you're going to have a high price and indeed velocity is here in the denominator with supply. So, the more coins you have, the less your price is going to be. Okay. So, we have assumptions based on how many coins there actually are. So, Bitcoin seems like this perfect system where you know exactly what's in the system but we will never know if some of those Bitcoins are lost. Indeed, we know that thousands of Bitcoins have already been lost but we don't know how many. Could be 3 million. We don't know.

Okay, so again when we talk about velocity -- in theory one Bitcoin could handle all of the world's remittances, in theory. It's impossible to do today but you could see in the future that if you build it on sort of a Coinbase rail or maybe Circle’s new product or something like that we'll be able to send Bitcoins infinitely fast. If one Bitcoin’s worth $10,000, well, you just got to send it fast enough to do $500 billion of remittances a year. That's quite doable actually. Okay.

So, we've spoken a little bit about M1, which is the amount of currency in a system. The current M1 of Bitcoin is theoretically 13 million. At its max, it's going to be 21 million. There will never be more Bitcoins than 21 million. Current M1 of the US dollars is the amount of currency that's actually printed. M2 and M3 start to look at lending of money and fractional reserves when actually a bank is lending out more money than they have. And so you're increasing the money supply without actually increasing the amount of printed currency. With Bitcoin, M1 is the amount that has already been distributed to miners and that today is around 13 million. Okay.

And we've already spoken about margin trading a little bit. But again, recently -- very recently, you can now short Bitcoin, which basically means you loan Bitcoins today, you sell them immediately for US dollars. You hope for the price of Bitcoin to go down. Say, it goes down to $10 where you take the cash that you just made by selling your loaned Bitcoins and now you buy up all the Bitcoins for $10 apiece. You keep the cash difference, and you send back those Bitcoins to the person who was going long on Bitcoins. Okay. So, this idea of shorting and being able to go long margin trading really does play with the value of Bitcoin's price. Right now the market for margin trading of Bitcoins is somewhere in the order of maybe $20 million, very small, but that's increasing exponentially. And so that's something that will affect a lot on Bitcoin's price.

Okay, and so we've already mentioned there are endless unpredictables, regulation, hacking, fraud, media, who knows what human emotion is always included and that is impossible to model. Okay. And we've already mentioned e-commerce adoption. This is one of the big markets that we're going to be showing in our model.

So, let's take a quick look at our model. Okay. We built this model in JavaScript and you can go there immediately to this link right here. But this model takes in from the current amount of Bitcoins, the current price. And if I refresh the page, maybe that's changed a little bit. And today is the big sell-off of the Silk Road coins so everyone is kind of worried about price. So, indeed it's gone down a dollar and a half since an hour and a half ago. So, that's not that bad -- this kind of standard volatility. And here's the market cap. So, if you take the price of each Bitcoin and just multiply it by the amount of extinct Bitcoins you get the market cap which is 7.59 billion. And these are up-to-date prices. Now here we have our model price. And this model price is just based on numbers that we've already put in. So, if you look over here these are default numbers of our model. And down here, we have important variable.

So here you see the number of Bitcoins in the system. So, these are the mined Bitcoins and you can update that. So, there's 12.95 million mined Bitcoins. But then we also have a slider over here for the amount of Bitcoins that you might think are lost and you'll see that that affects the price up there. And clearly, the fewer lost Bitcoins the lower the price. Indeed, price is higher when things are more scarce. So, if more and more of the Bitcoins are lost, you'll see the price go up and that's exactly what happens. And then again, as more Bitcoins get added to the system the price should go down. And we see that. And our model is just a linear model. We're not doing a lot of logs or anything. This is just an alpha version of this model to give people an idea for how these different variables begin to affect. Okay. And we didn't include everything so we have suggestions down here for other things that you might want to add to the model and even up here for different markets. So, let's play around with it real quickly and see how it all works. Okay.

So, here's gold or store of value. So, the current market value of all the gold in the world being used to store value is $8 trillion and silver comes into play and there's other things that you can store money in but we just threw in a trillion right here. Okay. So, that's $8000 billion. And we kind of just made this wild guess as to how much of that market Bitcoin’s actually taken over and this is kind of a weird round number. And we're saying, okay, well, that's 4 billion of this total market cap of Bitcoin It's impossible to determine if these initial values we put are too high or too low. They're just guesses but when you start to play around with the slider you really do get a picture for how things can work. So, say, Bitcoin’s volatility goes down and people really start using Bitcoin for a store of value. You can really see sort of the madness here. Okay. And it's important to realize that this isn't the entire market cap of gold. We set the max, sort of conservatively at 20%.

So if Bitcoin takes over the gold market, just 20%, each Bitcoin will be worth substantially more than it is today. So, 149,000 based on this model. Okay. And we can set all the rest to zero. We can set these to zero. So, say, there's zero lost Bitcoins. Then we update our amount of Bitcoins to 12.95 and then we can just play with the gold price. And you can see that per Bitcoin price goes up to a 123,000 if Bitcoin takes over 20% of gold store of value market. And this is just a single variable we haven't put anything else in here. But you could go down here and start adding some of the negatives, right?

Well, let's look at the risk. The risk that Bitcoin might fail. Maybe, there’ll be a 51% attack or something else, some sort of hacking that will wreck Bitcoin. Okay. And so what's that risk and you can sort of increase that risk and watch the price fall. So, if you believe that there's 50% chance that Bitcoin will fail, well, that should affect the price. Okay. And indeed it does. And you can play with all these variables. You'll see that velocity doesn't affect the price because velocity really doesn't have a lot to do with store value. You’re hoarding so you're not looking to move Bitcoins around a lot. But if you're doing something like e-commerce, for example, and you can see that that doesn't affect the price as much as gold. Golds are much bigger market. But here's Bitcoins acceptance by lots of e-commerce. So, there's already DISH, and other companies, let’s say, Grabbe’s, Amazon and others to the tune of 20% of all of e-commerce. Well, then the price should be around 8000. But then if you go down and look at velocity, well, that should affect the price and indeed it does. Now we don't know the exact velocity, we don't know exactly how it affects price so this is just a simple linear model that gives you a picture. But you can see that all of these things will affect.

Here's merchant pressure. Okay. Remember, merchants are very different than consumers. Merchants usually want the US dollars. Some companies will accept the Bitcoins for purchase and hoard. But that's fairly rare. Most merchants will take the Bitcoins and immediately turn them into US dollars. So, they're actually doing a lot of conversion to US dollars and not the other way around. So, merchant pressures, more merchants that are accepting Bitcoin tend to drive the price down a little bit. We think of it as great news but it's got sort of a downward pressure on the price. Speculation fever when everyone's excited sort of this positive optimism about future value should increase the price.

Regulation pressure right now it's not so high but it could increase. We could see some really nasty regulation around the world. Okay. And my model here is kind of jumping up and down but it's still doing the right math. And volatility clearly is an issue as well and the higher the volatility the lower the price. So, really the idea here is just to play around to get a feel for where Bitcoin can go and you can sort of push all these up a little bit and see the real powerful effect that they have on Bitcoin's price. And then you can add some more of these numbers around, play with what you think might be realistic, you know, maybe we can look into the future and see the price of Bitcoin based on the day that we have 17 million or 18 million Bitcoins in the system. Perhaps, the risk of failure at that point will go way down because we finally decided to put in the protocol something that will prevent 51% attacks which we don't have at all right now, which is absolutely absurd. We really need to do something code-wise to prevent these attacks or at least minimize these attacks. We have nothing in the system right now. So it's -- it's really ridiculous.

But the other nice thing is, say you don't like the model well you can say, “Well, I don't think Bitcoin will ever do anything remittances” and you can just remove that. Okay. But you think that Bitcoin will dive into the hedge fund market, right? And hedge funds, it's written down here at 2.5 trillion so you could put in 2500 billion, right? and then you can say add new market and you can just start sliding that around to your heart's content and you can really see the effect of hedge funds on Bitcoin. And similarly you could add another market, you could say maybe it will take over the rice and bean market. Okay. And say that's a, I don't know, $20 billion market. You can add that as well. Okay. And that will have its effect over here. And the same with these variables down here. Okay.

So you can add variables that you might think are more important than the ones up here. Again, you can remove regulation pressure if you think there’ll never be any regulation at all and you could start putting in your own variables, the effect of film on Bitcoin or media. Right? And you think that maximum effect that it could have on the price would be 50%, real powerful effective media and you could add that variable. You can start sliding that around. And in future versions, you'll see the ability to add variables that will go up or down. Right now I think it's just a negative variable. Yeah. So, film is not doing a positive thing here but in the future version you'll be able to add a positive variable. Almost all the variables we have here turn out to be fairly negative, velocity speculation fever actually goes in the right direction so it increases the price. Merchant pressure drives it down. Velocity drives it down. Risk of failure clearly drives it down. Okay.

So, as we mentioned at the beginning of the video, our question was: could the price of Bitcoin be $50,000, a $100,000, or a million dollars. And so we refresh the page on our model and we look at just sort of these big markets. We won't even include things like hedge funds and trillion dollar offshore deposits which will all of course increase the price of Bitcoin if it moves into any of those markets in a substantial way. But we find out very quickly that even if Bitcoin just starts to take over Gold's position as a store of value the price of Bitcoin certainly could go to $40,000 per Bitcoin even with some of these variables set as negatives. Okay. So, even if velocity kind of goes much higher, even if the risk of failure increases. Okay. So, even with a big risk of failure you can see the price of Bitcoin indeed moving into much higher numbers.

So $50,000, $60,000, $80,000 really seems like a possibility. It's not happening this year. There's no way that Bitcoin with its current volatility is going to take over Gold's position as a store of value or even 10% of it this year. But as we look into the future and these ideas of volatility might come to settle, well, this is something that could happen. Remittances seems like something that everyone's talking about. Will it raise the price? Well velocity will have a lot to do with it but you can start to see that the price of Bitcoin could indeed go over a $1000, $2000, $40,000, $100,000, maybe even more. It's possible. We're not telling you it's probable. We're not telling you that next year the price is going to be any higher than the current price, the spot price. And remember, the spot price is also a very good model. So, the current price of $584 is also a very good model price for the price next year.

So, I hope that helps. I hope it really begins to help you understand the possibilities of Bitcoin in terms of price. Please remember to comment, like, subscribe, do whatever it is you do and we'll catch you at the next video.

Written by James DeAngelo on June 28, 2014.