Controversy Surrounds Bitcoin Power Law as Criticism Intensifies

The Bitcoin power law has sparked significant controversy, attracting staunch defenders and vocal critics alike.

The Bitcoin power law, a mathematical model suggesting ongoing price growth for Bitcoin, has faced harsh scrutiny. Critics argue that it is “deeply flawed” and liken it to a mere “horoscope” rather than a reliable projection tool for cryptocurrency pricing.

Adrian Morris, a consultant and Bitcoin supporter, asserts that the power law’s credibility has been exaggerated by its proponents.

Conversely, Giovanni Santostasi, the researcher who uncovered the power law’s application to Bitcoin, believes its existence is evident for all to see.

This model utilizes a “log-log” scale to chart Bitcoin’s historical prices against time, plotting these points to illustrate a pattern over time.

Proponents like Santostasi and mathematician Fred Krueger argue that the power law indicates that Bitcoin’s price is poised for steady growth into the foreseeable future.

Power laws are observable phenomena across various domains in nature, including:

• The growth of animal features, such as teeth and claws
• The distribution of wealth, often described by the Pareto principle
• Seismic activity, including the intensity of earthquakes and tornadoes

According to Santostasi, the power law applies not just to Bitcoin’s price but to other metrics related to Bitcoin, such as the network’s hashrate and the growth rate of Bitcoin wallet addresses.

Statistics Versus Physics in Bitcoin Analysis

Morris maintains a skeptical view, claiming that Santostasi’s approach relies too heavily on fitting mathematical models to complex human systems.

He asserts that analyzing Bitcoin falls under the realm of statistics rather than physics, which seeks to understand matter and energy.

“This is a magic trick, and [Santostasi] is performing a sleight of hand,” Morris argues, further stating:

“He’s putting a statistics bunny into the hat, and then he’s pulling a physics bunny back out of it.”

In response, Santostasi contends that despite human involvement, Bitcoin can still be treated as a physical system with inherent constraints, such as the limits of human interaction and information transfer.

Crucially, Santostasi points out that various elements of Bitcoin’s infrastructure, including its difficulty adjustment algorithm and the energy consumption of mining operations, can be analyzed through a physical lens.

He references Geoffrey West’s work in his book Scale as influential for those unconvinced by the relevance of power laws in human systems.

Furthermore, he emphasizes that studying Bitcoin’s data aligns with disciplines known as “social physics” or “econophysics,” which employ mathematical tools to analyze social networks and behaviors.

As such, Santostasi asserts that Bitcoin’s price trajectory since its inception aligns with a power law, making it a potent predictive tool for future price behavior.

Morris Describes Power Law as a “Horoscope”

Another key critique from Morris is that the power law exploits “hindsight bias” and encompasses such a broad range of data that it fails to provide meaningful future predictions.

He characterizes the power law as akin to a “horoscope,” suggesting it offers vague forecasts devoid of true predictive value.

“Under the power law, the price of Bitcoin in 2045 might be $200,000. It could also be $10 million. That’s not very predictive,” he claims.

Morris warns against misrepresenting the model’s variability as a measure of predictability.

“The power law is just looking back in time with a hindsight bias and using mathematics to confirm that bias,” he says.

Timothy Peterson, a Bitcoin advocate and network economist, echoed similar concerns in a recent post, stating that neither the power law nor the Never Look Back (NLB) metric should be considered reliable models for predictions since they derive from historical data.

Potential Disproof of the Bitcoin Power Law

Santostasi acknowledges that, like all power laws, the Bitcoin power law is not infallible and could be disproven if significant and sustained price movements deviate from the current trend line.

He notes that for disproof to occur, Bitcoin’s price would need to stabilize around a much lower threshold, such as $30,000, for a significant period.

“People will see with their own eyes if this doesn’t work anymore,” he asserts, adding that any considerable deviation from the expected trend would serve as empirical evidence against the model.

Similarly, he suggests that a phenomenon like “hyperbitcoinization,” wherein Bitcoin could be widely adopted as a primary currency, leading to a rapid price surge, would also challenge the validity of the power law.