Forecasting Bitcoin price using quantitative models, Part 2

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In Part 1 of the series, we assessed four quantitative models for forecasting the price of Bitcoin. We found that while #1 and #2 were too simple and #3 and #4 were too complex, a combination of the two provided the best results. In Part 2 of the series, we build a more complex model that draws on both models while adding additional variables and features. We also explore how well the model performs in forecasting the price of Bitcoin in the past.

In the first blog post in this series, I discussed why using quantitative models is a good idea. In this post, I will present the results of the models, which prices will be used in the model, and which variables will be used. Quantitative model results

This is the second part of our analysis on forecasting bitcoin price using quantitative models. In part 1 we discussed the linear regression model and its model assumptions. In this post we will introduce the exponential smoothing model and show how to use it for forecasting bitcoin prices.. Read more about bitcoin price correction news and let us know what you think.

This is part two of a multi-part series to answer the following question: What is the fundamental value of bitcoin? The first part is about the value of scarcity, the second about market movements in bubbles, the third about the speed of adoption and the fourth about the hashrate and implied price of bitcoin.

Market moves in bubbles

There has been a lot of talk in recent months and even years about bubbles in the bond market. Newspapers – both financial and non-financial – have reported on it, specialized TV channels and respected macroeconomists around the world have talked about the fact that the world’s debt now has negative interest rates. It makes no financial sense to pay or loan someone money, even if that person is the government. We are witnessing an absurd situation, never before seen on the financial markets. The main reason is the huge amount of liquidity that central banks inject into the markets, which they use to finance themselves and thus avoid their own bankruptcy, and which they then carefully return to sovereign states (which are themselves in trouble). After all, John Maynard Keynes’ famous phrase reads: Financial markets can remain irrational far longer than you can remain solvent. In fact, this nonsense prevented the financial system from going bankrupt, so it’s welcome, even if it fuels irrational phenomena like bond markets with negative yields (and thus meaningless bond prices) and stock markets that (not all, but most) reach new highs day after day. One phenomenon that isn’t really driven by central bank money, and that everyone called a meaningless mega-bubble in 2017, is bitcoin (BTC). The price of bitcoin hit a high of $20,000 in December 2017, coinciding with the launch of bitcoin futures contracts by the Chicago Board Options Exchange and the CME Group, two of the world’s largest commodity exchanges, and then hit a low of around $3,100 in 2018, effectively losing more than 80% of its value. Does this mean the bubble has burst? Yes, of course. Does this mean the end of bitcoin? No, of course not. Could new bitcoin bubbles arise in the future? Yes, of course. As always, we want to approach the problem as analytically as possible. We have reconstructed a spreadsheet created by bitcoin founder Satoshi Nakamoto using Excel to ensure that bitcoin is deflationary and not inflationary.

Inflation

The US dollar (and frankly, all the world’s currencies, including the euro) is becoming worth less and less over time due to inflation. We can better understand this phenomenon by thinking about assets. Buying a car 40 years ago was about 13 times cheaper than it is today. For example, a good car that cost $10,000 in 1980 would cost $130,000 today. This phenomenon is called inflation and is caused by a rule that relates the total value of goods in the world to the total amount of money in circulation. If the number of US dollars in circulation doubles, the same goods cost twice as much. It will evolve because money is not a linear phenomenon and it may take some time. In the 1970s and early 1980s, inflation in the United States reached rates of nearly 12% per year, causing much hardship for those without the knowledge and resources to deal with it. Forecasting Bitcoin price using quantitative models, Part 2

Deflation

Bitcoin was created with a deflationary logic, just like commodities like gold and silver. That’s why many consider it the new digital gold, because it has value-preserving properties and not depleting ones, like the dollar or the euro. Related: Is bitcoin a store of value? Experts consider BTC as digital gold Let’s take a look at how this came about and what the implications of these decisions are. Nakamoto decided that the maximum number of bitcoins that could be created and available should be 21 million. (The number 21 will appear several times. It is the Greek letter phi, which we will discuss later). It could decide to introduce a fixed number of bitcoins for each block mined, but this would not create the exponential growth effect that is characteristic of bitcoin, or at least not as pronounced as it is now. So he decided to halve the number of new bitcoins issued every four years, to create a very noticeable and interesting spillover effect that continues to drive the price up. Forecasting Bitcoin price using quantitative models, Part 2 Related: The halving of bitcoin, explanation During the first 210,000 blocks, miners received 50 BTC for each block entered into the distributed ledger, at a time when bitcoin’s value fluctuated from pennies to dollars, so the reward was nowhere near what it is today – and not that hard to beat. In fact, in the beginning, simple computers were sufficient for mining. The first halving took place in 2012, i.e. starting from the 210,001st block, the reward was halved to 25 BTC for each entry in the distributed ledger. In 2016 there was a second bisection that lowered the reward to 12.5 BTC, and a third bisection in May 2020 that increased the reward per block to 6.25 bitcoins, which still equates to about $250,000 with the recent price correction of about $40,000. On topic: 3 good reasons why $30,000 is probably the bottom for bitcoin The next cut in half is planned for 2024, when compensation will be reduced by a further 50%. This trend is expected to continue until 2140, when the final halving is expected, resulting in less than one bitcoin being distributed per year. Forecasting Bitcoin price using quantitative models, Part 2 But how does this halving phenomenon affect the price of bitcoin? Does halving the so-called flow, the inflow of new capital into the market, affect the price of bitcoin itself? As we saw in part one, bitcoin seems to follow a stock-flow model, so a decrease in flow should correspond to an increase in price, while the stock remains the same. Shouldn’t there have been so many bubbles after three halves? Do you know how many bubbles bitcoin has had in its short life? Three dead. They are shown graphically below. Forecasting Bitcoin price using quantitative models, Part 2 Those are the three bubbles bitcoin has had so far, and each time the next highest price has been at least 10 times higher. Of course, this is no guarantee that this will be the case in the future, but there are many factors that lead us to believe that what we experienced in 2017 will not be the last bubble – there will be many more in the future. Can this information be used to determine the correct price of bitcoin? Or at least a potentially achievable price according to this model? Forecasting Bitcoin price using quantitative models, Part 2 In fact, if we look at this chart, where the bisections are marked by jumps on the X-axis, we can estimate the price of the fair value based on the change in the bisection state – that is, the exact price at which bitcoin can aim. Forecasting Bitcoin price using quantitative models, Part 2 Of course, if the bitcoin price tends to return around the line shown in the figure above, we can estimate what the future target price of bitcoin will be, based on the various expected halves. Forecasting Bitcoin price using quantitative models, Part 2 The chart shows that the price target for bitcoin is between $90,000 and $100,000. This information is very useful, not only because it gives us a guarantee that we will reach these prices, but also because we have to take into account in our investment decisions that they may actually reach and even exceed these price levels. Of course, these estimates should be seen as an intellectual attempt to understand the dynamics of bitcoin and cannot in any way be construed as a suggestion or advice from the author. Understanding how bitcoin can reach such high values is not easy, and someone new to this fascinating world will have a hard time imagining how a seemingly worthless asset can have such a high price, especially if you fall into the trap of thinking of it as a currency on par with the dollar. Therefore, it is important to know the different aspects of it. One of the most important factors determining the price of bitcoin is the level of adoption, which will be discussed in the next section. This article was co-authored by Ruggero Bertelli and Daniele Bernardi. This article contains no investment advice or recommendations. Any investment or business transaction involves risk, and readers should do their own research before making a decision. The views, thoughts and opinions expressed in this document are those of the authors and do not necessarily reflect the views and opinions of Cointelegraph. Ruggiero Bertelli is Professor of Economics of Financial Intermediaries at the University of Siena. He teaches banking, credit risk management and financial risk management. Mr. Bertelli is a member of the Board of Directors of Euregio Minibond, an Italian fund specializing in regional bonds for SMEs, and a member of the Board of Directors and Vice President of Prader Bank in Italy. He also advises institutional investors on asset management, risk management and asset allocation. A researcher in the field of behavioral finance, Bertelli is involved in national financial education programs. In December 2020, he published La Collina dei Ciliegi, a book about behavioral finance and the crisis in the financial markets. Daniele Bernardi is a serial entrepreneur who is constantly looking to innovate. He is the founder of Diaman, a group dedicated to developing profitable investment strategies and recently successfully launched the PHI Token, a digital currency that seeks to combine traditional finance and crypto assets. Dr. Bernardi’s work focuses on developing mathematical models that simplify the decision-making process of investors and family offices, thereby reducing risk. Mr. Bernardi is also chairman of Investors Journal Italia SRL and Diaman Tech SRL, and CEO of asset management firm Diaman Partners. He is also a crypto-currency hedge fund manager. He is the author of Genesis of Cryptoassets, a book on cryptocurrencies. The European Patent Office has recognized him as an inventor for a European and Russian patent on mobile payments. This paper was successfully presented at the World Finance Conference.I’ve gotten a lot of positive feedback on my previous article, Forecasting Bitcoin price using quantitative models. This article has inspired me to continue my quantitative analysis of Bitcoin and other cryptocurrencies.. Read more about bitcoin will hit and let us know what you think.

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Emilia James
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