Timothy Peterson | Can Island Alternative Advisors
The 4 factors which determine cryptocurrency’s value
Timothy Peterson is the Founder of and Portfolio Manager for Cane Island Alternative Advisors, which manages global macro investment strategy. He’s an emerging expert on cryptocurrency investment and valuation. We recently sat down with Timothy, who will be speaking at our Digital Asset Strategies Summit (Oct. 16 – 17 – Dallas), as he shared with us his forecast for bitcoin.
Digital Asset Strategies Summit: Can you discuss how Metcalfe’s law explains 90+% of price moves of all cryptos?
Timothy Peterson: Metcalfe’s law explains 70-90% of long-term price moves for bitcoin, ethereum, and several others depending on the period examined. It also explains price movements of other peer-to-peer digital assets such as Facebook, Tencent, Paypal, Twitter, and Square. Short term prices are driven by many factors, including “noise”. For periods longer than 60 days, number of users (sometimes called MAUs) are the single greatest determinant of price. For bitcoin in particular, we used 60-day periods since 2011, and exclude periods where documented price manipulation occurred (2013-14 and 2017).
Digital Asset Strategies Summit: Can you explain the various methodologies you use to forecast the price of bitcoin?
Timothy Peterson: Any cryptocurrency’s value is determined by four factors: the number of coins available, the number of wallets or addresses, transaction activity, and a decay factor that represents diminishing marginal returns. It is not driven by things like electrical consumption, google searches, or correlation with other asset classes. Metcalfe believed that growth in users was met with an opposing force which he termed “affinity” and he correctly surmised that affinity declines over time. We have all experienced declining affinity in the form of spam email or annoying Facebook posts. For bitcoin, we have ten years of data with which to forecast user growth. Ascertaining Metcalfe’s affinity value involves some mathematical gymnastics, but it is essentially a logistic decay function.
Digital Asset Strategies Summit: What do you consider the 3 necessary items necessary for bitcoin to survive/thrive?
Timothy Peterson: First, there needs to be a true custody solution for cryptocurrencies. Custody is all about procedures that guarantee the safekeeping of assets. No institutional investor will dive into cryptocurrency until there is a custody solution, and that means far more than just cybersecurity. Custody will also permit true shorting of the currency, which will mitigate some of the volatility.
Second, exchanges need to be regulated with the same degree of oversight as developed economy commodity and equity exchanges. Exchanges today are rife with conflict of interest, inadequate client protections, and weak or nonexistent cybersecurity, disaster recovery, and business continuity plans.
Third, the future of bitcoin does not lie in millions of people buying pizza or cars with bitcoin. Bitcoin’s true value, even today, is as a neutral currency that serves as a place to park capital away from geopolitical risk and monetary system risk. Secondly, it serves as an intermediary currency between the 180+ sovereign currencies and 1000+ cryptocurrencies. It serves as a “digital dollar” between retail investors in much the same way as Ripple does for banks.
Digital Asset Strategies Summit: In April you have stated that you believe “bitcoin, and most other cryptocurrencies, will reach equilibrium value later this year. After that, it should resume a relatively steady upward trend as it has in past years, perhaps earning as much as 60% per year for the next couple of years.” Is this still your forecast?
Timothy Peterson: Yes, we stand by that forecast. That forecast is based on the long-term sustainable growth rate in users, diminishing marginal returns, the rate at which bitcoins are mined, and the rate at which bitcoins are irretrievably lost. Our forecasts come with large variations, so even if we say bitcoin’s value should be $4,000 by December 2018, the range is anywhere from $1,500 to $7,500. Bitcoin’s price is manipulated constantly, so it could be higher, but that is not supported by fundamentals.
Digital Asset Strategies Summit: Thanks Timothy. We look forward to hearing more of your thoughts at the Digital Asset Strategies Summit October 16 – 17 in Dallas.