Implications

First implication

The first implication is that similar price cycles (re-accumulation periods followed by spikes) will continue to occur in future, a prediction that is in line with that of the S2F Model. Additionally, every major opportunist entry/exit period was accompanied by massive volatility, a period during which the respective S2F ratios were major outliers in the S2F Model.

Figure 4: The 5% highest volatility days (positive and negative) are gathered around 3 major periods.

Therefore, it seems likely that the price will continue to exceed the “normal” predicted price by the S2F Model during the next opportunist entry periods, if conditions remain constant.

Figure 5: The highest volatility days’ S2F ratios coincide with the most extremes S2F Model’s outliers

Second implication

The second implication is that future price cycles rely on opportunists converting to hodlers after each cycle. If the cycles were constituted only of flat re-accumulation phases with periodic spikes, the average price would remain rather flat (like “ECG” diagrams). So how does it increase “step-wise”, as demonstrated by the S2F Model? After each cycle, some opportunists convert to being hodlers, which increases the pool of long-term market participants. These participants, hodlers, are responsible for holding up the price at higher levels during the following re-accumulation phase: the next “step” in the S2F Model.

Third implication

The third, and most interesting implication, is that Bitcoin’s halving is not priced in, the reality is much more nuanced. Hodlers are aware of future halvings and have an idea how much Bitcoin “should” be worth. However, it is not priced accordingly, as hodlers lack the necessary resources to do so: “I wish I had 1/6.15/21/100 bitcoins, unfortunately I can’t afford to buy as many”. The total aggregated value of resources willing to seriously evaluate and invest long-term in Bitcoin are dwarfed by the value they estimate Bitcoin has. This fact hinders the market to price Bitcoin correspondingly to the value its participants estimate it has. Thus, paradoxically, the fact that Bitcoin’s price continues to rise over time, is simply partly due to the lack of resources at each point of time. Opportunists, who were first attracted by growing volatility and who remain in the market for the long term after the halving, are responsible for the significant long-term price increases. Therefore, one can say that halvings are helping the market to price Bitcoin more “efficiently” by attracting additional resources into Bitcoin’s pricing.

Consequently, one can assume that Bitcoin will have the possibility to be “correctly” valued, as soon as the resources available to value it, exceeds the value hodlers attribute to it. When this condition is met, we can assume that future halvings will be priced in, thus breaking the S2F Model (stepwise sharp increases will be smoothed). A factor to accelerate this process is the opportunists’ learning curve (and that of the general public), as it will influence how fast the critical valuation will be reached. Obviously, Hodlers realizing they overvalued Bitcoin (unrealistic expectations, regulations, etc) or the pool of potential opportunists drying out, will also break the S2F Model and Bitcoin’s continuous cyclical price increase.

Conclusion

The Hodler’s Game model shows that Bitcoin’s price, which is deemed by many to be “irrational”, is in fact the result of rational behavior. This rationality offers a certain predictability as to how future price cycles will look like. One important condition for it to hold true, is the market participant dynamics to stay constant: Opportunists entering the market in waves with a small portion staying for the long term with Hodlers supporting the price level during longer time periods.