Ripple (XRP) Model Price

11 нояб. 2021 г.

An article titled Bitcoin Stock-to-Flow Model was published in March 2019 by "PlanB" with mathematical model used to calculate Bitcoin model price during the time. We know that Ripple has a strong correlation with Bitcoin. But does this correlation have a definite rule?

In this study, we examine the relationship between bitcoin's stock-to-flow ratio and the ripple(XRP) price.

The Halving and the stock-to-flow ratio
Stock-to-flow is defined as a relationship between production and current stock that is out there.
SF = stock / flow

The term "halving" as it relates to Bitcoin has to do with how many Bitcoin tokens are found in a newly created block. Back in 2009, when Bitcoin launched, each block contained 50 BTC, but this amount was set to be reduced by 50% every 210,000 blocks (about 4 years). Today, there have been three halving events, and a block now only contains 6.25 BTC. When the next halving occurs, a block will only contain 3.125 BTC. Halving events will continue until the reward for minors reaches 0 BTC.

With each halving, the stock-to-flow ratio increased and Bitcoin experienced a huge bull market that absolutely crushed its previous all-time high. But what exactly does this affect the price of Ripple?

Price Model
I have used Bitcoin's stock-to-flow ratio and Ripple's price data from April 1, 2014 to November 3, 2021 (Daily Close-Price) as the statistical population.
Then I used linear regression to determine the relationship between the natural logarithm of the Ripple price and the natural logarithm of the Bitcoin's stock-to-flow (BSF).
You can see the results in the image below:


Basic Equation : ln(Model Price) = 3.2977 * ln(BSF) - 12.13

The high R-Squared value (R2 = 0.83) indicates a large positive linear association.

Then I "winsorized" the statistical data to limit extreme values to reduce the effect of possibly spurious outliers (This process affected less than 4.5% of the total price data).


ln(Model Price) = 3.3297 * ln(BSF) - 12.214

If we raise the both sides of the equation to the power of e, we will have:

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Final Equation:
■ Model Price = Exp(- 12.214) * BSF ^ 3.3297
Where BSF is Bitcoin's stock-to-flow
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If we put current Bitcoin's stock-to-flow value (54.2) into this equation we get value of 2.95USD. This is the price which is indicated by the model.

There is a power law relationship between the market price and Bitcoin's stock-to-flow (BSF). Power laws are interesting because they reveal an underlying regularity in the properties of seemingly random complex systems.

I plotted XRP model price (black) over time on the chart.

Estimating the range of price movements
I also used several bands to estimate the range of price movements and used the residual standard deviation to determine the equation for those bands.

Residual STDEV = 0.82188
ln(First-Upper-Band) = 3.3297 * ln(BSF) - 12.214 + Residual STDEV =>
ln(First-Upper-Band) = 3.3297 * ln(BSF) – 11.392 =>
■ First-Upper-Band = Exp(-11.392) * BSF ^ 3.3297

In the same way:
■ First-Lower-Band = Exp(-13.036) * BSF ^ 3.3297

I also used twice the residual standard deviation to define two extra bands:
■ Second-Upper-Band = Exp(-10.570) * BSF ^ 3.3297
■ Second-Lower-Band = Exp(-13.858) * BSF ^ 3.3297

These bands can be used to determine overbought and oversold levels.

Estimating of the future price movements
Because we know that every four years the stock-to-flow ratio, or current circulation relative to new supply, doubles, this metric can be plotted into the future.
At the time of the next halving event, Bitcoins will be produced at a rate of 450 BTC / day. There will be around 19,900,000 coins in circulation by August 2025

It is estimated that during first year of Bitcoin (2009) Satoshi Nakamoto (Bitcoin creator) mined around 1 million Bitcoins and did not move them until today. It can be debated if those coins might be lost or Satoshi is just waiting still to sell them but the fact is that they are not moving at all ever since. We simply decrease stock amount for 1 million BTC so stock to flow value would be:
BSF = (19,900,000 – 1.000.000) / (450 * 365) =115.07

Thus, Bitcoin's stock-to-flow will increase to around 115 until AUG 2025. If we put this number in the equation:
Model Price = Exp(- 12.214) * 114 ^ 3.3297 = 36.06$

Ripple has a fixed supply rate. In AUG 2025, the total number of coins in circulation will be about 56,000,000,000. According to the equation, Ripple's market cap will reach $2 trillion.

Note that these studies have been conducted only to better understand price movements and are not a financial advice.