Over an extended period, every long-term valuation model for Bitcoin has eventually been challenged, yet the most compelling narrative this cycle has centered around the power law model.
Historically, Bitcoin has tended to exceed this model during bull markets and fall short of it during bear markets. However, in the current cycle, the price has generally stayed close to the model’s predicted path.
The Bitcoin power law framework offers a mathematical perspective on long-term price trends, indicating that Bitcoin’s historical performance adheres to a power law distribution when viewed on a log scale. This suggests a correlation between time and price, although the model is contingent on past observations.
In theory, it is a retrospective model that doesn’t assure future predictive reliability, especially considering the unpredictable nature of financial markets. Nevertheless, it is useful for grasping long-term structural trends.
Currently, Bitcoin is trading significantly below the model at under $90,000. The power law value approximates $118,000, which means the current price is about 32% lower than the model. This marks the most significant deviation since the yen carry trade unwind in August 2024, which resulted in a 35% deviation from the trend line and took three months to recover.
From a broader perspective, Bitcoin has closely tracked the model for the majority of this cycle, contrasting with previous cycles where it oscillated more dramatically above and below the line.
In the last cycle, the stock-to-flow framework created by anonymous analyst Plan B was the most notable model, positing that scarcity directly influences value. This model has been deemed invalid since January 2021, and based on current Glassnode data, it would suggest a price of approximately $1.3 million per Bitcoin today.
The essential question now is whether Bitcoin will mean revert towards the power law trend or dip lower, thereby calling into question the validity of yet another longstanding model.
