Transcription
Today's video is going to be a lesson on perspective, time horizons, and understanding where we actually are, not just emotionally, but structurally within Bitcoin's long-term growth story.
When most people look at Bitcoin right now, they're anchored to the short-term price chart. And I get it. If we zoom in and look at the recent price action, we can clearly see that after that sharp drop, price is now starting to consolidate again. But structurally, we're still trading well below trend. And crucially, we're well below the 200 day moving average.
Now, the 200 day moving average is one of those key technical and psychological thresholds that separates bull markets from bare markets in most investors' minds. It's widely watched and widely respected. And because of that, it tends to become a sort of self-fulfilling line in the sand. When prices above it, sentiment improves, and when prices below it, confidence tends to disappear pretty quickly. And I'm sure you've all noticed that.
So, if you're expecting a fast V-shaped recovery back above the 200 day moving average here, I think it's important to be realistic. That's probably not what's going to happen in the immediate short term. Markets rarely move in straight lines, and Bitcoin is no exception, especially after sharp moves like this. It tends to spend time chopping around, frustrating both the bulls and the bears before it decides its next large trend.
Now, for most people, this is where their analysis stops. Price is below the 200 day, momentum looks weak, and suddenly the narrative shifts to the cycle is over, or this time is different, or maybe Bitcoin's done. But this is exactly where perspective matters. So, let's put our emotions to the side because when we zoom out far enough, this entire move barely even registers.
So, if we zoom out here and look at Bitcoin's entire price history, what feels like a major draw down in the moment is nothing more than a small blip in a much larger long-term growth trend. And that's why I want to spend this video focusing less on short-term noise and more on structural growth and how to actually frame Bitcoin as a long-term asset, which is something I believe not enough people are focusing on.
Now, the chart most people are familiar with is Bitcoin's price plotted on a logarithmic scale with time plotted on a standard linear scale. And this is the classic long-term Bitcoin chart that you see everywhere. And the reason people like this chart so much is because it makes Bitcoin's exponential growth far more digestible. On a linear price scale, Bitcoin's early years are almost invisible, and the recent years look absolutely absurd. But on a logarithmic price scale, each percentage move is treated equally, which gives us a much more honest representation of the long-term growth.
Now, one of the most useful things we could do on this chart is draw a logarithmic regression curve through it. And this regression accounts for Bitcoin's diminishing returns over time and gives us a smooth curved trajectory that represents its long-term growth path. And this is already far more useful than looking at price alone because it removes a lot of the emotional noise. But we can actually take this one step further.
Instead of plotting price on a logarithmic scale and time on a linear scale, we can also put time on a logarithmic scale. And this is where things start to look pretty different. Now, this type of chart looks a bit weirder, right? And it's much less common, and I probably bet that most casual investors haven't seen this one before. But what it does is allows us to transform Bitcoin's long-term growth into something that can be approximated by just a straight line. And that straight line is what's commonly referred to as a power law.
This is where a lot of people get completely stuck when it comes to understanding Bitcoin's crazy price appreciation as an asset. People look at the price history and just assume it's random, speculative, or just purely hype driven. But if you understand power laws, Bitcoin's behavior starts to make a lot more sense.
Now, if you don't have a background in mathematics, then this might all seem like Fugazi to you. But actually, there's a lot of things in nature that follow power law distributions. Now, most things that we encounter in everyday life follow what's called a normal distribution. And this is the classic bell curve where most observations cluster around an average and extreme outcomes are very rare. Human intelligence or IQ is a good example. Human height is another and for these most people fall somewhere in the middle and the probability of extreme outliers drops off very quickly.
But not everything in nature follows a normal distribution. In fact, many complex systems follow power law distributions instead. And a power law describes a system that is in a critical state, meaning it's sitting right on the boundary between order and chaos. And these systems are highly efficient, highly adaptive, and capable of producing extreme outcomes far more than a normal distribution would predict. And there are plenty of examples of this in nature, such as earthquakes, forest fires, river networks, or even the distribution of stars in galaxies all follow power relationships.
And interestingly, so do many human-created systems. The Pareto principle in economics where a small percentage of participants capture a large percentage of the outcomes is a power law. Venture capital returns also follows a power law where a tiny number of investments generate the majority of returns. And Bitcoin also fits squarely into this category. Its price behavior does not follow a neat bell curve. Instead, it follows a heavy tail distribution, meaning extreme events are far more common than traditional financial models would suggest. And this is why Bitcoin experiences violent draw downs and explosive rallies. They're not anomalies. They're features of a system governed by a power law.
And it's not just price. The growth of the Bitcoin ecosystem itself follows power laws. The number of users, the number of addresses, the total computational power or hash rate of the miners securing the network all scale in predictable power law fashion. And as adoption increases, the value of the network increases nonlinearly. And this is similar to how cities become disproportionately more productive and wealthier as their populations grow.
And current estimates suggest that Bitcoin adoption today is roughly equivalent to the internet in the late 1990s, around 1997, if we're going to put a year on it. And that doesn't mean Bitcoin will follow the exact same path, but it does give you an idea of how early we are in the broader adoption curve.
Now, bringing this back to the main point of the video, power law models aren't about precise price predictions. They're about framing reality. And depending on the assumptions that you make, you can draw different power law lines. Some are more conservative and some are more aggressive. The base case power law model I'm using here today currently implies a fair value of around $112,000. And relative to that, Bitcoin is currently trading at a 22% discount today. And if we want to be more conservative and look at the bare case power law scenario, that fair value drops to around $94,000. And in that case, Bitcoin is only about 7% below fair value today.
But what's important here is not the exact number, but the context. If you look at the bare case power law line, historically, Bitcoin spends a large portion of its life trading well above it. That means the market often runs far hotter than even the conservative long-term growth models would suggest. So, the fact that we're currently trading very close to this conservative fair value line really puts things into perspective. It tells you that structurally, Bitcoin is not that expensive relative to its long-term growth trajectory whatsoever.
And when we project this power law forward, the implications become even clearer. Under the base case scenario, the fair value for Bitcoin in 2030 is around $400,000. And under an extreme bare case, it's still roughly $330,000. And extend that out to 2035 and the base case puts Bitcoin at around $1.4 million with the bare case still coming in at around $1.2 million.
Now, you might look at these numbers and think they're wacky. But if I showed you this power law 10 years ago in 2015 when it was trading at $400 and told you that in 10 years' time, Bitcoin would be worth about $112,000, you'd have probably had the same reaction. So, what seems like normal prices now will seem absurdly cheap in about 10 years' time. And again, these aren't promises, but they are grounded mathematical extrapolations that are based on long-term adoption and network growth.
But charts like this to me aren't about projecting crazy price targets. They actually serve as a purpose to keep you grounded. They're not here to help you understand where we are in the cycle, but rather where we could be realistically in 5 or 10 years' time. And for investing, 5 or 10 years is not a long time at all. Even if you're in your 60s and you feel like you've missed the boat, a 5-year time horizon is still completely achievable. The problem is not age. The problem is perspective. And if you're someone that's more similar to my age, well, a 5 to 10 year time horizon is a mere blip in your entire investing career.
Now, there's one particularly useful way to apply a power law framework practically, especially if you're building a long-term position rather than trying to trade short-term price swings, and that's by using a draw down chart. Now, this indicator here takes the power law fair value line and measures how far price is below it at any given time. So instead of focusing on absolute price, it focuses on the deviation from the long-term trend.
And when price is far below the power law line, the chart shifts into deep red colors. These represent periods where Bitcoin is trading at a significant discount relative to its long-term growth trend. It doesn't matter whether you believe in the bare case, base case, or the more bullish power law model. If you believe Bitcoin adoption will continue to grow over time, then these are the deep draw down zones that represent the most asymmetric long-term opportunities.
This chart really doesn't care about what happens in the next month, the next 6 months, or even the next year. What it captures is the long-term mispricing relative to the adoption-driven growth. And historically, buying Bitcoin when this chart is flashing deep red has coincided with some of the best long-term entry points. And buying more aggressively as it moves deeper into the red has consistently rewarded patience.
And right now we're sitting in the orange zone which corresponds to that roughly 22% draw down from the power law fair value that we discussed earlier. So does that mean the price can't go lower? Well, of course not. We've seen plenty of periods where Bitcoin has moved into deep red territory during the prolonged bare markets. But if that happens, what it really means is that the long-term risk-reward becomes increasingly asymmetric in your favor. And that's the key takeaway.
If you're trading short-term, this chart won't help you that much. It won't tell you where the bottom is, whether it's tomorrow or next week. But if you're investing with a 5-year plus time horizon, then this is one of the most powerful tools that you can use to keep your emotions in check and make rational decisions when sentiment is at its worst.
Every major draw down in Bitcoin's history has felt catastrophic in the moment. But with enough time, they all fade into insignificance. December 2015, 10 years ago, is a perfect example. Bitcoin was around $400 and sentiment was dead. And yet, structurally, it was one of the best long-term opportunities imaginable. And the people who did well here weren't smarter or faster. They just understood time.
One of my favorite quotes is that most investors massively overestimate what can happen in the next few months and massively underestimate what can happen over the next 5 to 10 years. So if you can learn to think in years instead of weeks, cycles instead of candles and structure instead of sentiment, you can put yourself in the very small minority of participants and those are the ones who tend to be rewarded in the end.
Anyway, I hope you found this useful and if nothing else, I hope it helps you zoom out and reset your expectations and remind you that time and perspective are the edges most people refuse to use. Anyway, I'll catch you all in the next one.