Modeling Bitcoin Value with Abundance

Scarcity and Abundance

As we all know, Bitcoin is a scarce asset. Bitcoin’s algorithm dictates a strict inflation rate that halves approximately every 4 years and which currently stands at around 1.7% per annum. Bitcoin’s Stock-to-Flow ratio, which measures the circulating supply of Bitcoins in relation to annual production, currently stands at around 60 years, meaning that it would take 60 years for Bitcoin’s supply to double if the current rate of production was maintained. However, the terminal amount of Bitcoin is ultimately capped at 21 million coins.

What can Weimar tell us about Bitcoin?

One of the poster childs for money creation gone bad is probably the so-called ‘Weimar Hyperinflation’ which took place from around 1921 to 1923 in Germany. Under the heavy burden of World War I reparation payments, the German government was eventually forced to pay its conquerors via the “printing press” which led to a strong depreciation of the German Mark and a simultaneous ballooning of consumer prices and the general cost of living in Germany.

The Monetary Abundance Model of Bitcoin

In this article, I will use Frenkel’s monetary approach to analyse Bitcoin’s recent price developments vis-à-vis the US Dollar (USD per BTC).

Chart 1: Variables of the “Monetary Abundance Model”
Table 1: Prais-Winsten Regression: Log(USD/BTC) versus Log(US M2 Money Supply), coincident and lagged
Table 2: Prais-Winsten Regression of the ‘Monetary Abundance Model’ of Bitcoin
Table 3: Prais-Winsten Regression of the ‘Monetary Abundance Model’, including the Stock-to-Flow Ratio

Bottom Line

All in all, the findings imply that “Weimar” could tell us a lot about the recent price developments in the USD/BTC exchange rate and that Bitcoin could potentially be a superior hedge against monetary debasement as US money creation empirically appears to be magnified in the USD/BTC exchange rate.

References

[1] Plan B on Medium: Modeling Bitcoin Value with Scarcity

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