Bitcoin’s Long-Term Power Law Growth: Projections to $1 Million

• My 'briefing notes' summarize the content of podcast episodes; they do not necessarily reflect my own views.
• They contain (1) a summary of podcast content, (2) potential information gaps, and (3) some speculative views on wider implications.
• Pay attention to broadcast dates (I often summarize older episodes)
• Some episodes I summarize may be sponsored: don't trust, verify, if the information you are looking for is to be used for decision-making.
• I am personaly really skeptical of power law price predictions, so have added some personal comments/cautions in the briefing note.

Summary

The October 17, 2024 episode of The Bitcoin Layer podcast features astrophysicist Stephen Perrenod challenging the common belief that Bitcoin follows an exponential growth path. Instead, Bitcoin has adhered to a power law growth model since its inception, offering a more stable and predictable long-term trajectory. According to this model, Bitcoin could reach $1 million by 2040, rivaling gold’s market capitalization. The podcast explores the implications of this model, the role of Bitcoin’s market cycles, and the decreasing volatility as Bitcoin matures.

Take-Home Messages

1. Bitcoin’s growth follows a power law model, not exponential, making it more stable over the long term.
2. The projected price of Bitcoin could reach $1 million by 2040, according to long-term power law trends.
3. Bitcoin’s longevity increases its dominance, with the Lindy effect suggesting it will continue to outperform other digital assets.
4. Volatility is expected to decrease as Bitcoin matures, providing more predictable market conditions.
5. Bitcoin is likely to rival gold in market cap, with estimates projecting a $60 trillion market by 2040.

Overview

Nik Bhatia hosts Stephen Perrenod on the October 17, 2024 episode of The Bitcoin Layer. Perrenod explains that Bitcoin’s price growth has never been exponential, contrary to popular belief. Instead, Bitcoin has followed a power law path, meaning its price has increased in relation to time raised to a power. This trajectory is slower but more stable than exponential growth, providing a more reliable foundation for long-term price predictions. As Bitcoin continues to mature, this model suggests decreasing volatility and a steady progression in value.

A Tangent: Power laws appear frequently in nature and society because they describe relationships where small occurrences are extremely common, but large events are rare. In systems like wealth distribution and plate tectonics, a few elements (e.g., wealthiest individuals or largest earthquakes) dominate, while the majority hold only a small share. This pattern reflects the uneven, self-reinforcing dynamics that naturally emerge in complex systems over time.

Perrenod projects that by 2040, Bitcoin could reach a price of $1 million. The power law model shows that Bitcoin’s price doubles for every doubling of its age, which offers a clear mathematical framework for these long-term forecasts. This projection aligns with Bitcoin’s potential to rival gold, another store of value that has long been used in global markets. Perrenod emphasizes the importance of understanding the difference between power law and exponential growth, as it affects investment decisions and market predictions.

The discussion also touches on the Lindy effect, which suggests that Bitcoin’s continued existence increases the likelihood of its long-term survival. As Bitcoin outlasts other digital assets, its dominance becomes more certain, solidifying its role in financial markets. This long-term outlook is attractive to institutional investors looking for stable, high-value assets with decreasing volatility.

Caveat: I personally don't trust the power law models being shared on the internet because they are super sensitive to model structure and starting conditions (I spent a lot of time during my PhD on complexity theory and power laws; my own power law model, which I also don't trust, actually has $1-million range for Bitcoin price around 2032!). But now, back to the content of the podcast discussion...

Lastly, the podcast delves into the periodic market bubbles that occur within Bitcoin’s price cycles. While these bubbles may cause short-term fluctuations, they are part of a broader, predictable pattern under the power law model. Investors who understand this pattern can better navigate Bitcoin’s market dynamics and capitalize on long-term growth.

Stakeholder Perspectives

• Institutional Investors: They view Bitcoin’s stability under the power law model as an opportunity for portfolio diversification and long-term growth.
• Retail Investors: Clearer insights into Bitcoin’s long-term price growth help mitigate short-term market fears, offering a more stable framework for individual investments.
• Regulators: Policymakers must consider Bitcoin’s growing role in global finance, ensuring that regulations do not stifle its potential as a long-term store of value.
• Bitcoin Miners: Adjustments to mining difficulty and block time offer miners opportunities to align their operations with long-term price trends.

Implications

For policymakers, understanding Bitcoin’s power law growth is essential to crafting regulations that allow for innovation without risking financial instability. Investors can benefit from the predictability offered by this model, as it reduces volatility over time, making Bitcoin a more attractive asset for long-term holdings. The decreasing volatility also means that miners and other market participants can plan more strategically.

As Bitcoin approaches $1 million, its role as a store of value will likely grow, positioning it alongside or even surpassing gold. The broader financial system will need to adapt to Bitcoin’s increasing market cap and influence on global asset portfolios. The alignment of long-term market trends with predictable growth models provides confidence in Bitcoin’s future, but also requires stakeholders to stay informed about potential risks and market shifts.

Future Outlook

Over the next two decades, Bitcoin’s price is projected to continue its upward trajectory, adhering to the power law model. This suggests that Bitcoin could reach a price of $1 million by 2040, giving it a market cap on par with or exceeding that of gold. As volatility decreases, Bitcoin is expected to attract further institutional investment, establishing itself as a global store of value.

However, challenges remain. The potential for periodic bubbles, while manageable, still presents risks for those unfamiliar with the broader price trends. Moreover, as Bitcoin’s market grows, regulatory pressures may increase, necessitating policies that balance innovation with market stability. The key will be for stakeholders to recognize Bitcoin’s long-term potential while managing short-term fluctuations.

Information Gaps

1. How can the financial industry better differentiate between exponential and power law models when evaluating Bitcoin's long-term price trends? Clarifying this distinction will help reduce investor misconceptions and lead to more accurate financial products and strategies, improving market stability.
2. What are the primary drivers behind Bitcoin's periodic price bubbles, and how do these align with the power law model? Understanding the root causes of price bubbles will help investors and institutions mitigate risks during speculative periods while leveraging the broader long-term trend.
3. To what extent does Bitcoin's historical longevity affect its projected future dominance in digital assets? Investigating the implications of Bitcoin’s longevity will provide deeper insights into its potential as a dominant store of value, guiding institutional and individual investment strategies.
4. How do changes in Bitcoin’s mining difficulty affect long-term price stability under the power law model? This question is critical for understanding how internal network dynamics, such as mining difficulty adjustments, influence the broader market over time.
5. What are the key indicators that could signal the onset of hyperbitcoinization, and how would this affect global financial markets? Hyperbitcoinization represents a possible future scenario in which Bitcoin becomes the dominant global currency. Identifying early signals will help stakeholders prepare for this potential shift.

Broader Implications

A second caveat: These broader implications below logically flow from the podcast discussion but depend critically on the assumption that the power law relationship is correct, something I personally am not at all convinced of. For now, treat power law price projections as Bitcoin entertainment - don't bet the farm on them being correct!

Decreasing Market Volatility

With Bitcoin’s long-term trajectory adhering to a power law, its volatility is expected to decrease over time. This shift would make Bitcoin more attractive to conservative investors, such as pension funds and sovereign wealth funds. A less volatile Bitcoin could also improve its standing as a global financial asset, further driving demand.

Institutional Investment Surge

The power law model provides a stable foundation for Bitcoin’s long-term price forecasts, which is critical for institutional investors. As these investors increasingly view Bitcoin as a reliable store of value, demand for Bitcoin-related financial products, such as ETFs and derivatives, will surge. This influx of institutional capital could accelerate Bitcoin’s path toward mass adoption.

Technological and Economic Resilience

Bitcoin’s technological robustness, combined with its predictable growth, positions it as a resilient asset amid global economic uncertainty. As countries face inflationary pressures and currency devaluation, Bitcoin could serve as a hedge, fostering its use as a reserve asset by both corporations and nation-states. This growing strategic reserve role might shift global financial dynamics.