RESEARCH NOTE 23 September 2023
Lowest Value Forward: The HODLer’s Price Executive Summary
Bitcoin’s adoption curve allows for informed valuation. This facilitates rational investment decisions based on fundamental metrics, reducing the reliance on short-term price fluctuations.
The long-term trend in Bitcoin’s price appreciation remains unchanged, even in the context of fluctuating economic and market conditions. This trend is identified using Metcalfe’s Law applied to on-chain metrics.
On the assumption that the adoption curve trend holds, Bitcoin’s long-term investment return prospects far exceed those of traditional and alternative options.
Background In 2019, we published groundbreaking research titled “Lowest Price Forward: Why Bitcoin’s Price is Never Looking Back.” That note discusses a unique characteristic of Bitcoin called the "Never Look Back Price" (NLB price), which represents the last time Bitcoin reached a specific price level and never retraced to that value again. It describes a method to calculate these NLB prices over time and plot them on a "square root time" scale, emphasizing the trend's consistency over ten years. The research highlights that this isn't a forecasting model but a record of Bitcoin's historical lowest prices for increasing lookback periods. It also suggests that investors focused on long-term performance provide a floor value for Bitcoin's price, and Bitcoin's value is driven by its growing network of foundational users, as indicated by various fundamental metrics. In 2018, Peterson published “Metcalfe's Law as a Model for Bitcoin's Value.” This paper demonstrates that Bitcoin’s medium- to long-term price follows Metcalfe’s law. Bitcoin is modeled as a token digital currency, a medium of exchange
with no intrinsic value that is transacted within a defined electronic network. Per Metcalfe’s law, the value of a network is a function of the number of pairs of transactions possible and is proportional to n-squared. A Gompertz curve is used to model the inflationary effects associated with the creation of new bitcoin. The result is a parsimonious model of supply (number of bitcoins) and demand (number of bitcoin wallets), with the conclusion bitcoin’s price fits Metcalfe’s law exceptionally well. This research note combines the two methodologies, applying “Lowest Price Forward” to Cane Island’s proprietary Metcalfe Value for Bitcoin. The result is a consistent trend based not on noisy prices, but on fundamental metrics from the blockchain itself.
Methodology Daily network value was sourced from Cane Island’s proprietary data, with the data series commencing 31 December 2011 through 15 September 2023.
Metcalfe Value Metcalfe Value is a function of three factors: the long-term trend in network value, proxied by nonzero bitcoin addresses; the short-term trend proxied by active addresses; and an adjustment for lost coins (see “There Will Never Be More Than 14 Million Bitcoins.”)
Lowest Value Forward The methodology to calculate Lowest Value Forward follows that of Lowest Price Forward, with an adjustment to reflect the use of a Gompertz growth model (see “Bitcoin Spreads Like a Virus”.) ln(𝑉𝑉𝑡𝑡 ) = 𝛽𝛽 × ln�√𝑡𝑡� + 𝛼𝛼
Where ln(Vt) represents the minimum value from time t to T.
