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.
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Lowest Value Forward Trendline Like Lowest Price Forward, Lowest Value Forward is an estimate of the adoption curve value of Bitcoin, assuming it is a network that grows consistent with a Gompertz function (the classic “S-curve”).
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23 September 2023
A TEXTBOOK LIKE NO OTHER "The Debauchery of Currency: A Bloody History of Money" is an unconventional textbook that takes you on a shocking journey through the tumultuous history of money. This captivating book uncovers the consequences of poor monetary economics and explains the fundamental concepts of money itself. It sheds light on the nature and value of money, explaining why gold and bitcoin serve as protection against the ravaging effects of currency debasement. In this book, you will learn how inflation and debt have destroyed societies through war and bloodshed. It explains the web of trust, scarcity, and societal consensus underlying the worth of money. From ancient civilizations to modern economies, "The Debauchery of Currency" provides insight into the causes of the violent cycles of wealth creation and destruction. With meticulously crafted content, this book offers valuable insights into how the turbulent past of money led to Bitcoin being called "digital gold." It examines how Bitcoin aligns with the principles of good money established throughout history. This fresh perspective on the evolving finance landscape helps you understand why Bitcoin resonates as a groundbreaking form of currency. "The Debauchery of Currency" is not just informative—it is a thought-provoking journey that brings history to life. Through engaging examples and a comprehensive glossary, it serves as an invaluable resource for both seasoned investors and beginners. This concise guide breaks down complex concepts into easily digestible chapters, ensuring accessibility and engagement for all readers.
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FIGURE 1 Lowest Value Forward and Trendline 100,000
10,000 Metcalfe Value
1,000
Lowest Value Forward Trendline
Actual Price
100
10
Lowest Value Forward
1 3
Mar 2012 3.2
Jan3.4 2013
Mar3.6 2014
An adoption S-curve is a graphical representation that illustrates the adoption or diffusion of a new innovation, technology, product, or idea over time within a population or market. It is called an "Scurve" because the shape of the curve typically resembles the letter "S." The S-curve is a useful tool for understanding and visualizing the pattern of adoption. On a log scale, an S-curve resembles an elliptical shape, like the pointy end of a football or a blimp. The Lowest Forward transformation converts this figure to a straight line. These mathematical manipulations do not impact the inputs or outputs; the transformation is purely for visual convenience. However, it allows us to see, and therefore quantify, the relationships more clearly.
Jan 3.8 2016
Sep 2018 4
Sep 2022 4.2
Dec 4.4 2028
proportional to the square of the number of connected users or nodes in the network. In simpler terms, the more participants or devices in a network, the more valuable the network becomes. This concept highlights the idea that the usefulness and potential of a network increase exponentially as more users join, as it leads to more connections and interactions within the network. Metcalfe's Law is often cited in discussions related to the growth and valuation of communication networks, social media platforms, and other networked systems. Commencing with March 2012, the demarcations are every 5, 7, 11, 16, and 27 months. This is a pattern of triangular numbers, where each difference is a triangular number. The equation for this pattern is:
Time Scale
𝑇𝑇𝑛𝑛 = 𝑇𝑇𝑛𝑛−1 + 𝑛𝑛2
The demarcations shown on the chart are a function of Metcalfe’s Law. Metcalfe's Law is a principle in networking and telecommunications that states that the value of a network is
where Tn represents the nth term in the sequence, and n is the position of the term in the sequence
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23 September 2023
𝑙𝑙𝑙𝑙�𝑃𝑃�𝐿𝐿𝐿𝐿𝐿𝐿 �
low values and values below zero have always indicated favorable buying opportunities. (See “Using Metcalfe’s Law to Forecast Digital Asset Returns.”) FIGURE 2 Price-to-Lowest Value Forward, Log Scale 300% 250%
Lowest Value Forward (LVF) however, has at least three useful applications.
200%
Valuation
150%
The first is an assessment of whether price reflects value.
100%
The difference between price and Metcalfe Value represents a short-term deviation from fundamentals in the short term. For example, in late 2017, Bitcoin was not overpriced relative to its value as determined by network size and user activity.
0%
The difference between price and LVF trend represents a long-term deviation from fundamentals in the long term. For example, in late 2017, Bitcoin was very overpriced relative to its value as determined by the adoption curve value. Price does not always correct, in the short-term, to Metcalfe Value. Price always corrects, in the longterm, to Metcalfe Value and the estimated adoption curve value, proxied by LVF. However, that correction may take years, as it did from 2013-2016.
Lowest Value Forward: The HODLer’s Price
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2022
2021
2020
2019
2018
2017
2016
-50%
2015
50% 2014
Lowest Value Forward is an observation, not a model. Observations are factual, empirical data that describe what is happening or has happened in the natural world. Observations contain only information about the past. Models are constructed by researchers to help explain realworld phenomena. Models, therefore, explain the past. They do not necessarily predict the future.
The Price-to-LVF Ratio gives an indication of downside risk. Calculated as
2013
Application
Investment Decision Rule
2012
(starting from n = 1). Since user growth is proportional to time, n2 in this equation can represent time or user growth. The trend implicitly validates Metcalfe’s Law.
Expectations About Future Performance We know that technologies follow adoption curves, otherwise known as the diffusion of innovations. These curves can be measured, and we have done so in previous research (see “Estimating Bitcoin’s Adoption Curve and Maximum Price.”) Bitcoin’s adoption curve is proceeding very similar to that of the internet (see “Internet Adoption as an Indicator of Bitcoin’s Future Price.”) This growth pattern should provide some insight into future prices. Secondly, by using the lowest values on record, any extrapolations into the future should automatically be conservative. For example, Figure 1 allows us to visualize a price of $100,000 by 2028. However, the actual Metcalfe Value is usually 40% above this Lowest Value Forward. Actual prices are often above even that. Thus, it is
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23 September 2023 highly likely that Bitcoin will reach the $100,000 mark before 2027. Assuming an initial price for Bitcoin of $30,000, we can estimate the annualized rate of return assuming Bitcoin reaches $100,000 in years 2026, 2027, or 2028: 49%, 35%, and 27% respectively.
wealth preservation over time, aligning more closely with the principles of prudent and responsible investing. This requires, essentially, ignoring volatility, suppressing the urge to trade, and measuring interim results in terms of progress toward a final, desired outcome.
These are phenomenal returns when compared to other traditional and alternative investments. Placing confidence around these estimates requires more than just a single metric like LVF. However, there is ample research cited in this note to support the reasonableness of the assumptions embedded in these forecasts.
The HODLer’s Price is not a price at all, but an unobservable value. Where others see uncertainty and volatility, the HODLer sees a consistent path to a distant goal. Where others see money to be spent, the HODLer sees enduring wealth. HODLing is the place where the science of financial wisdom meets the art of investing patience.
Conclusion
References
Drawing from two seminal studies: "Lowest Price Forward" and "Metcalfe's Law as a Model for Bitcoin's Value," this research note combines these methodologies to unveil a consistent trend in Bitcoin's value, reliant not solely on price volatility but deeply rooted in fundamental blockchain metrics. This observation serves as a valuable tool for analysis, although it is important to note that it is an empirical observation rather than a predictive model. The findings present practical applications in the realms of valuation, investment decision-making, and future performance expectations for Bitcoin. The study also suggests the potential for Bitcoin to reach the $100,000 price mark before 2027, offering substantial annualized returns compared to traditional investment options.
The HODLer’s Price
Cane Island Digital Research. (2019). “Why Bitcoin’s Price is https://www.caneNever Looking Back.” island.digital/s/research-note-412.pdf —. (2020). “Estimating Bitcoin’s Adoption Curve and Maximum Price.” https://www.cane-island.digital/s/researchnote-629212.pdf —. (2020). “There Will Never Be More Than 14 Million Bitcoins.” https://www.cane-island.digital/s/research-note417.pdf —. (2021). “Using Metcalfe’s Law to Forecast Digital Asset https://www.cane-island.digital/s/research-noteReturns.” 32221.pdf —. (2023). “Internet Adoption as an Indicator of Bitcoin’s Future Price.” https://www.caneislandcrypto.com/premiumresearch Peterson, Timothy. "Metcalfe's Law as a Model for Bitcoin's Value." Alternative Investment Analyst Review, vol. 7, no. 2, Q2 2018, pp. 9-18. —, —. 20 March 2019. "Bitcoin Spreads Like a Virus." SSRN, https://ssrn.com/abstract=3356098
A HODLer is a Bitcoin investor with an effectively perpetual time horizon. A HODLer thinks in terms of wealth maximization rather than profit maximization. This is the way institutions invest. Wealth maximization, with its patient and deliberate approach, is generally considered superior as it prioritizes long-term growth and
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23 September 2023 Disclosures Bitcoin and digital assets are highly volatile, subject to manipulation, lack of regulatory oversight, and protective legal framework. Its value is largely derived from its acceptance as a store of value and a medium of exchange among those who use it. Consequently, prices may fluctuate widely and unexpectedly, resulting in long and short-term losses. Do not invest more than you can afford to lose. Data provided in this document are indices. It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available through investable instruments based on that index. Cane Island Digital Research LLC does not sponsor, endorse, sell, promote or manage any investment fund or other investment vehicle that is offered by third parties and that seeks to provide an investment return based on the performance of any index. Cane Island Digital Research LLC makes no assurance that investment products based on the index will accurately track index performance or provide positive investment returns. Cane Island Digital Research LLC makes no representation regarding the advisability of investing in any such investment fund or other investment vehicle. A decision to invest in any such investment fund or other investment vehicle should not be made in reliance on any of the statements set forth in this document. Prospective investors are advised to make an investment in any such fund or other vehicle only after carefully considering the risks associated with investing in such funds, as detailed in an offering memorandum or similar document that is prepared by or on behalf of the issuer of the investment fund or other investment product or vehicle. Cane Island Digital Research LLC is not a tax advisor. A tax advisor should be consulted to evaluate the impact of any tax-exempt securities on portfolios and the tax consequences of making any particular investment decision. Inclusion of a security within an index is not a recommendation by Cane Island Digital Research LLC to buy, sell, or hold such security, commodity, or any other asset, nor is it considered to be investment advice. Closing prices for indices are obtained by a third party and have not been verified for accuracy. These materials have been prepared solely for informational purposes based upon information generally available to the public and from sources believed to be reliable. No content contained in these materials or any part thereof (“Content”) may be modified, reverse-engineered, reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of Cane Island Digital Research LLC. The Content shall not be used for any unlawful or unauthorized purposes. Cane Island Digital Research LLC and its third-party data providers and licensors (collectively “Cane Island Digital Research LLC Parties”) do not guarantee the accuracy, completeness, timeliness or availability of the Content. Cane Island Digital Research LLC Parties are not responsible for any errors or omissions, regardless of the cause, for the results obtained from the use of the Content. THE CONTENT IS PROVIDED ON AN “AS IS” BASIS. CANE ISLAND DIGITAL RESEARCH LLC PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM ERRORS OR DEFECTS.
Lowest Value Forward: The HODLer’s Price
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23 September 2023 shown or discussed but does not necessarily manage actual assets associated directly with the index. Index prices do not reflect payment of any sales charges or fees an investor may pay to purchase the assets underlying the index(es) or investment funds that are intended to track the performance of the index(es). The index data shown would be reduced by the imposition of these fees and charges and would cause
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