In any market, be it for fruits and vegetables or financial assets, prices are determined by the intersection of supply and demand.
If tomatoes become scarce due to a flood, with the same demand, the price in the supermarket will inevitably be higher, just as it will be higher if, with the same supply, twice as many people want to buy tomatoes.
In the financial market, if the offer is unlimited, the price is not changed by the demand, as in the case, for example, of a mutual fund.
Related: Don’t Be Naive: BlackRock ETF Won’t Be Bullish For Bitcoin
If more subscribers want to buy this fund, more shares are simply issued at something called the net asset value (NAV), that is, the correct value of the fund’s assets.
For example, suppose a fund has a capitalization of $100 million, made up of 10 million units at a value of $10. If an investor wants to invest $10 million, 1 million units are issued at a value of $10, and the capitalization of the fund becomes $110 million.
It would be a different story if the available shares were limited to 10 million, so anyone wanting to buy the shares would have to find someone willing to sell them. In that case, the price may not be $10 anymore, but it will depend on how much the buyer is willing to pay and how much the seller wants to earn. It would create a situation where the price would fluctuate according to unequal supply and demand. If an asset was in high demand, obviously the price could go up much higher than the correct price.
But how can you estimate the correct price?
In 2021, I published data trying to estimate the fair value price of Bitcoin, illustrated in the chart below. He suggested that in June of that year we had hit a relative high for Bitcoin (BTC). (At the time, I hoped it wasn’t true, but it was.) How had you estimated this value?
The background example above helps us understand the logic behind this estimate.
If a fund’s capitalization is given by the number of shares outstanding multiplied by the NAV, or the price, it is also true that it could also be estimated as the number of investors in the fund per average amount held by each investor.
So, in the case of Bitcoin, if you could estimate the average amount held in each wallet per
the number of wallets in circulation, I can also estimate the capitalization of Bitcoin and, accordingly, by dividing by the number of Bitcoin in circulation, derive its price.
Luckily for us, the transparency offered by the blockchain allows us to collect much of this information with a high degree of reliability. For example, the number of Bitcoin addresses with a non-zero balance can be easily tracked simply by running a network node.
As can be seen from the graph, the average amount (USD) in wallets fluctuates due to supply and demand (many wallets hold Bitcoin without ever moving it), so if we take the 90th percentile and the 10th percentile, we can find a range that can lead us to subsequently estimate the price of Bitcoin.
Now, once the growth curve (on a logarithmic scale) of the wallets in circulation has been estimated, it is possible to estimate a range within which the price of Bitcoin should move.
This model is simple, but simplicity is its strength: we don’t know if a user owns different addresses or if a single address is “owned” by multiple users, as in the case of an exchange’s cold wallet, but we can trust these. relationships, especially when compared in terms of large numbers and over a full price cycle time horizon.
Related: Bitcoin ETFs: Even Worse For Cryptocurrencies Than Central Exchanges
For example, in the last days of a crypto winter, as in recent months, we can typically detect an increase in withdrawals from cryptocurrency exchanges and a reduction in balances held on these centralized platforms. Since keeping crypto assets in the custody of third parties is generally considered more dangerous, this signal is considered bullish as it shows investors’ preference to hold a long Bitcoin position for the long term rather than holding it in a trading account to take advantage of. short positions. – Speculative opportunities in the term.
Therefore, this phenomenon is accompanied by an increase in addresses (withdrawal of a few accumulated cold wallets to fill many unique addresses controlled by individuals) and lays the foundation for a cyclical price appreciation also based on the model described in this article. .
The data in this chart and this model indicates that the price of Bitcoin could reach its next top in the fall of 2025 at $130,000, and possibly higher.
As always, it’s important to note that this forecast is not financial advice. It can only be taken as an expected value based on some assumption with a certain degree of confidence. But similar estimates of price growth also emerge from other predictive models. The recent surge of interest in this asset class among institutional players such as BlackRock, the world’s largest asset manager, seeking approval for a spot Bitcoin ETF, may indicate that they have some faith in these models.
Daniele Bernardi is the founder of Diaman, a group dedicated to the development of profitable investment strategies. He is also Chairman of Investors’ Magazine Italia SRL and Diaman Tech SRL, and CEO of asset management firm Diaman Partners. Also, he is the manager of a crypto hedge fund. He is the author of The Genesis of Crypto Assets, a book on crypto assets. He was recognized as an “inventor” by the European Patent Office for his European and Russian patents related to the field of mobile payments.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
This post Demand is driving Bitcoin price to $130K
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