The Mathematical Formula Behind Bitcoin Bullishness: Crypto CEO

  • Jack Mallers is the 28-year-old CEO of Strike.
  • Mallers told Insider that bitcoin is the best cryptocurrency to invest in right now.
  • Mallers said Bitcoin’s stock-to-flow ratio sets Bitcoin apart from all other crypto investments.

When Satoshi Nakamoto created bitcoin, he capped the total amount of cryptocurrency that would exist at 21 million.

Because of this inherent scarcity, investors ranging from Mike Novogratz to Bill Miller believe bitcoin is the digital version of gold. It makes sense that with a limited supply of bitcoin available to investors, the cryptocurrency will only become more valuable the closer we get to the last bitcoin ever mined.

Jack Mallers also believes bitcoin is a form of digital gold, and in a recent interview with Insider, he cited the specific mathematical model that predicts bitcoin will one day be the “hardest” asset, and why it is. think this makes cryptocurrency an incredible investment. opportunity.

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Who is Jack Mallers?

Jack Mallers is a 28-year-old Illinois native who created the Strike payment platform, which uses the Lightning Network, a layer 2 bitcoin scaling solution, to improve speed, scale and the efficiency of the original blockchain.

Strike has enjoyed tremendous success in the five years since its founding. El Salvador, which made bitcoin an official currency last year, uses the Strike app to allow sellers to send and accept bitcoin. Twitter’s tipjar — which enables Twitter’s more than 200 million users to use bitcoin as payment — uses Strike’s plugin to send “tips” in bitcoins.

As Strike has grown, Mallers’ authority in the cryptocurrency industry has also grown. In fact, Twitter and the founder of Block Jack Dorsey cited him as an “incredible inspiration”.

Despite the


bear market

Mallers maintains an absolute belief in bitcoin and has previously said he believes the price of bitcoin could hit six figures as early as this year.

Mallers bases his optimism on the power of the stock-flow model. This pattern illustrates bitcoin’s scarcity relative to other assets and proves that bitcoin’s price increases have been directly linked to its increasing scarcity – and that future price appreciation is ahead.

What is stock-flow?

The stock-to-flow ratio measures the amount of an asset that exists in the world and compares it to the number of units of the asset that are created each year.

The model was started by Plan B, a pseudonymous Twitter user with over 1.5 million followers, as well as a background in law and finance. In a recent episode of SALT Crypto with Skybridge Capital’s Anthony Scaramucci – who described the model as the “most prescient” for bitcoin valuation – PlanB explained stock-to-flow.

“The stock-flow model basically says that if an asset is more scarce, then it should be more valuable,” PlanB said. “How do you quantify scarcity? There is a known measure, the stock-flow measure, the number of years it takes a reserve for a certain asset to replenish the existing reserve. The rarer an asset, the higher the stock-to-flow. flow ratio, the higher the value of this market should be.”

The stock-flow equation is simple: stock (or the total amount of asset available) divided by flow (the amount of asset produced annually). The resulting ratio determines the scarcity or abundance of the asset, and the higher the ratio, the more rare (and therefore valuable) the asset. Mallers would describe the stock-to-flow ratio of an asset as “hardness”, noting that “the harder an asset, the more valuable it becomes”.

Below are the stock-to-flow calculations for gold and bitcoin – which have high stock-to-flow ratios – and


zinc

which has a relatively lower stock-to-flow ratio and is therefore less valuable.

The world supply (stock) of gold is 244,000 metric tons and 3,560 metric tons are produced annually (flow). Its stock/flow ratio is therefore around 68.5:

244,000 total supply (in tons) / 3,560 total creation = 68.5 stock/flow ratio

The global supply (stock) of bitcoins is 18,920,000 and 328,500 new bitcoins are produced each year (flow). Its stock/flow ratio is therefore around 57.5:

18,920,000/328,500 = 57.5 stock to flow ratio

The world supply (stock) of zinc is 250 million metric tons and 13.8 million metric tons are produced annually (flow). Its stock/flow ratio is therefore around 18.1:

250/13.8 = 18.1 stock/flow ratio

What makes bitcoin’s stock-to-flow ratio worse are its halving events. A “halving” refers to when a bitcoin miner’s reward for creating a new block on the bitcoin blockchain – paid for in bitcoin – is halved. The bitcoin halving happens once every four years.

For example, in 2020, the reward a bitcoin miner got for mining a block of bitcoin was halved from 12.5 btc to 6.25 btc per new block. The next halving event will take place in 2024, when the reward will be reduced to 3,125 btc.

Those who believe in the stock-flow model point to the fact that shortly after each halving event, the price of bitcoin hits a new all-time high. After the 2016 halving, for example, bitcoin’s price jumped from $500 to $1,000 to $20,000. After the halving in 2020, the price dropped from $9,000 to around $30,000.

The next halving event is expected to occur in 2024, at which time global bitcoin production is expected to decline by 50%, making bitcoin a much more “difficult” asset under the stock-flow model.

When the halving takes place in 2024, bitcoin’s stock-flow would be

(current stock) 18,920,000 + (2 x 328,500) (two years of production) = 19,577,000

328,500 / 2 = 164,250 (half of production after halving)

19,577,000 / 164,250 = 119.19

This means that in two years, bitcoin will become more than twice as “hard” as it is now, and its stock-to-flow ratio will easily exceed that of gold.

Those who believe that the stock-flow model has a positive financial relationship with halving events would say that bitcoin’s halving in 2024 could drive the cryptocurrency to a new all-time high.

Bitcoin’s Slowdown Doesn’t Mean the Model Is Wrong

While the stock-flow model rose to prominence during the last bull run, it has since received a lot of criticism during the recent bear market.

Critics say that according to the model, bitcoin should be closer to the


market capitalization

of gold, because their stock-flow is similar. However, while gold’s market cap sits at $11.7 trillion, bitcoin’s is only $596 million, and the all-time high was $1.27 trillion at its peak. peak in 2021.

Additionally, given the current crypto winter, many are losing faith in the stock-flow model. According to PlanB’s predictions last year, bitcoin should have hit $100,000 per play in December 2021. Not only did it never reach that, but it ended December down 17% and ended 2021 around $47,700.

Since then, bitcoin has fallen further as the stock market slump in 2022 sent cryptocurrency prices plummeting. Bitcoin’s price is currently hovering around $30,000, and there are few signs that it will recover anytime soon.

Marcel Burger, the CIO of AMDAX Asset Management, told Insider about his issues with the model. “The stock-flow model was introduced as a model to predict the future price of bitcoin,” Burger said. “As the model is built on a linear regression, but it does not meet the assumptions required to do so, this model cannot produce reliable results.”

Although Burger said stock-flow is a flawed econometric model, he said it has some advantages.

“It is fair to assume that assets that become scarce over time tend to increase in price. As long as demand remains equal, but supply decreases, I expect prices to rise,” Burger said.

In his discussion with PlanB, Anthony Scaramucci expressed his continued confidence in the model despite criticism that it does not follow recent bitcoin price movements. “There’s an expression that Warren Buffet has that I’d rather be approximately right than precisely wrong,” Scaramucci said. “When you step back and look at it, you more or less do what you said.”

PlanB agreed, making it clear that its intention with the model was never to map day-to-day bitcoin price movements, but rather to provide a guide to potential bitcoin price over the long term.

“It’s a very principled and very intuitive thing that rare things are more valuable. It uses that same scarcity to add value to bitcoin,” PlanB told Scaramucci. “It wouldn’t be very usable for trading, but it would be a very rough compass for investors.”

For the Mallers, it is the underlying idea of ​​creating a store of value with high “hardness” that matters most. He is less interested in bitcoin’s day-to-day movements and much more focused on its long-term potential. And it is the “hardness” of bitcoin, as illustrated by the stock-flow model, that makes it a bitcoin follower.

“Bitcoin has reached a hardness never seen before in the history of our species, it has set a record for hardness in stock to sink,” Mallers said.



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