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History Rhymes; It Rarely Repeats — Beware of the Extrapolations…

mordial HODLer desire, but it’s still not an ideal thesis to place in front of the market.

As you can see from this chart, Pantera shows the bitcoin price over the last eight or so years on a logarithmic y-axis — which is, by the way, the only useful way to view that chart — and then adds a best fit linear trend line (on a log scale that is an exponential curve).

From here, they extrapolate a bitcoin price “guide” to the end of 2019. They do not list their R², but reverse-engineering the chart to the end of June 2018 gives us a figure >0.85. A pretty solid fit.

While their curve might end up being an accurate prediction (all predictions are obviously guesses, some more educated than others), we do suspect some eyebrows were still raised among the audience (ours included).

The issue is that extrapolating exponential trend lines — or even extrapolating at all in bitcoin — is a somewhat dangerous business. There are several reasons, here a few of the more critical:

Past performance does not imply future performance. Just because bitcoin has grown exponentially thus far does not mean it will continue to do so, this applies to all extrapolations Extrapolating the curve a little further into the future reveals some pretty absurd results (see chart below), suggesting this thesis cannot possibly be correct long term, which in turn raises the question of short term validity Trend lines are only valuable if there is some causal relationship which can be inferred — and preferably modeled — between the two variables. *While we appreciate that Metcalfe’s law could apply here, it cannot grow to infinity either In both intellectual thought and quant/systematic trading models, trended data causes over-weight assumptions and skews logic

To illustrate, we have taken the liberty of extrapolating that “fit” trend-line 10 years forward to show where it would leave us at the end of 2028.

10-Year Bitcoin Price Trend Growth According to the linear (exponential) fit, the price of a single bitcoin should, by 2028, approach $10bn. For reference, that puts the bitcoin market cap somewhere above $200qd (that’s quadrillion or 1,000 trillion… had to look it up myself).

Unless the Federal Reserve decides to take a page out of the book of the Central Bank of Zimbabwe…such an outcome seems rather absurd.

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