What Is A Crypto Price Model? Simple Explanation & Real Examples
A crypto price model is a system that uses algorithms and statistical methods to forecast future cryptocurrency prices by analyzing historical data, including on-chain metrics, price history, and market sentiment. These models are not conclusive in their findings. However, models are effective in discerning trends and general market direction, especially over the longer term. Plan B’s Stock-to-Flow (S2F) model is a good example. However, it is crucial to understand that models are not absolutes.
Why Crypto Price Models Exist
This is important to understand, especially as some individuals tend to place too much weight on price models, ultimately treating them as absolute, definitive indicators. As with any analysis, whether it be on-chain or technical, confluence is always required to establish a credible investment thesis. Even in such a case, the outcome is not guaranteed. Price models exist as individual indicators that require additional data to establish a high likelihood, rather than a specific outcome or price.
Everyone Is Rethinking Their Crypto End Game
A lot has happened in the crypto markets over the past few months. Bitcoin went all the way down to $29K, then all the way back past the previous all-time high to $69K. Currently, BTC is trading just below the $50K zone, and many alts are not doing so well, with some exceptions, of course. Many were expecting a yearly close for BTC at around $100K, which at this point, looks unlikely but not impossible.
I am sure many are busy reevaluating their strategies as the year draws to a close. I am, however, not changing anything; rather, I am extending my time horizon. The reason is that there will always be a valid reason to readjust one’s portfolio or strategy. Constantly changing a strategy is actually a strategy for failure. It is important to remember that crypto price models are frameworks used as estimation tools. They cannot precisely predict market movements due to volatility and uncertainty.
It is similar to an investor who buys an altcoin that doesn’t move for several months and then decides to sell it just prior to the coin’s explosive run. He repeats this behavior and ultimately misses out on all the significant moves, making zero gains. Minor deviations need to be considered, especially regarding long-term models. It’s more a case of years than weeks or months.
Models Are Not Precise & Will Never Be (Crypto Market Reality)
I know there is a lot of hate and mocking unfolding on Crypto Twitter right now, which is why I don’t really pay much attention to it or take part. Plan B is now being attacked because his floor model failed. It is important to note that the S2F model remains fully valid and has not been compromised. Personally, I do not view models as absolutes. Anyone looking to a model to predict price on the day, or even for the week, for that matter, is not being very realistic. Models reveal averages and general price direction. Models deviate from the projected path but, over time, are seen to have followed it.
Looking at the S2F model above, it is clear that on numerous occasions the price has overshot and underperformed the model, but at some point down the line, it has returned to the mean. If the case being made by many at the moment were accurate, this model would have failed a long time ago, but we can see that, over time, that is definitely not the case. I suppose at some point, the model will fail as the data and fundamentals fed into the formula become outdated. I do, however, believe that Plan B will obviously recalculate and update the model as the market matures.
This is how models work. Readers who have owned or managed a business know that targets are projected based on past performance, sales, and/or price increases. I have often experienced how a strong start to a month can put you above the benchmark, only to drop you below it later. Similarly, the month can kick off well below the benchmark and later surge to exceed the projection.
The takeaway here is that, regardless of what happens day to day, the projected target is usually attained, or at least very close to it. This is a monthly “model,” and day-to-day movements are not precise. Consider, then, a model that projects over multi-year time frames. Do you not consider that, even on a monthly basis, the value will both underperform and overshoot?
Welcome To Reality (Crypto Market Reality Check)
We all want to see great gains, and it gets very exciting when you begin to consider that you can actually predict those gains. To a large extent, this is true, but models also require “grace”. Models are not clocks, expected to be right on time. However, they are more like seasons that identify a “period” of certain behavior. If you choose to take a very legalistic view of price models, you will end up rather disappointed. Willy Woo is basically confirming what I have just outlined in the following tweet.
This model does a look back on previous times that #bitcoin had similar on-chain demand. We’re currently trading at a decent discount. It’s a model for investors, not traders who can easily be liquidated well before the model plays out.
This is how markets operate. Another view to consider is that a lot of focus has recently been placed on Plan B’s models. His followers on Twitter recently surged past 1.5 million. There are, however, individuals out there who would love to see these models discredited. That being said, there have been occasions in the past that have been thorns in the sides of these models, and yet they have prevailed.
Final Thoughts
I think a significantly longer time frame is required before everyone starts screaming, “The model is broken.” An entire 4-year cycle is most likely needed as evidence that a model has indeed failed. In all fairness, the S2F model requires more time before a verdict can be made.