The following is a guest post by Rajagopal Menon, the Vice President of WazirX.
Come the bull market, cometh the models to predict the price of Bitcoin. In the last bull market in 2021, the Stock-to-Flow (S2F) model was the flavour of the season. This model, created by Plan B, assessed asset scarcity by comparing stock to annual production. Applied to Bitcoin, the S2F model emphasised its ‘digital gold’ potential and provided scarcity-based, long-term price forecasts. However, the S2F model faded in the crypto winter in 2022.
But fear not, in the current bull run, there’s a new model in town – the Power Law Model, claiming to predict the price of Bitcoin with remarkable accuracy.
Understanding Power Laws
In a world seemingly filled with chaos and randomness, scientists have uncovered hidden patterns and relationships known as power laws. These laws provide a framework for understanding how different phenomena interact, revealing consistent mathematical patterns that govern various aspects of our universe.
Power Laws in Everyday Life
Power laws are fascinating mathematical relationships that appear in numerous phenomena, offering insights into the underlying simplicity of complex systems. They describe how two quantities relate to each other, with a change in one quantity leading to a proportional change in the other. This relationship spans different scales, from the microcosmic to the cosmic, influencing biology, society, technology, and natural phenomena.
The Size Limits of Animals
Galileo’s square-cube law is a classic example of a power law in nature, explaining how an animal’s size affects its strength. As animals grow larger, their volume and weight increase much faster than their strength. This law sets natural limits, explaining why larger animals have thicker bones and why the largest animals are found in aquatic environments where buoyancy offsets weight.
Metabolic Rates
Max Kleber’s research on metabolic rates further demonstrates the applicability of power laws. It reveals that an organism’s metabolic rate scales to the ¾ power of its mass, indicating that larger animals are more energy-efficient. This principle significantly impacts understanding species’ lifecycles, growth rates, and sustainability.
Natural Phenomena and Human Activities
Power laws govern diverse phenomena, from the distribution of earthquake magnitudes to the frequency of words in a language. They explain why we observe a small number of significant events…
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