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What The Stock-To-Flow Model Says About Bitcoin’s Future Price

The stock-to-flow model, which accounts for the availability and production of an asset, can help predict the future bitcoin price.

They say that the simplest way to beat the system is through emotionless investing. The irony, however, is that there is no form of investing in which emotions are not involved.

If you have been part of the Bitcoin community, then you are not unfamiliar to price predictions ranging from zero to hundreds of millions of dollars. While very few of these predictions are backed by technical analysis, most of them are just guesses driven by people’s feelings at different times.

As cryptocurrencies are becoming more mainstream with every passing day, companies as big as Tesla are jumping in on the Bitcoin train and investing billions of dollars. The bulls are running in, pouring massive amounts of capital into bitcoin. But if you want to be successful, not just in bitcoin but in any form of investment, the first rule is to zoom out.

So, what if I told you that there is an indicator that had actually predicted this bitcoin price run? As a matter of fact, that it had actually predicted the runs that have happened previously? And that it might predict one that is yet to come?

As a technical analyst, I am a firm believer that the wicks in the charts always take into account the reality that is happening on the ground. Now, obviously, no indicator can be used completely on its own to conclude an analysis. But it can always be added in your arsenal while making a final judgment.

In the case of bitcoin, that arsenal can include almost anything. Say, the Bitcoin network’s mining power or the worthlessness of our current financial system. But the indicator that I am talking about here is the stock-to-flow ratio. Now, before I go on to discuss the stock-to-flow ratio, we need to first understand the mechanism of Bitcoin mining and the mining subsidy halving.

What Is Bitcoin Mining?

The process of Bitcoin mining is basically the journey of finding a key to a certain lock. Or, you can say, it is the process of finding a solution to a very complex mathematical problem. A problem so complex that many try and fail before someone comes up with the correct answer. In other words, it can be like finding a needle in a haystack.

Learn more about Bitcoin mining through Bitcoin Magazine’s guide here.

So, then the question arises: Why do people mine Bitcoin in the first place? The answer is actually pretty simple: for their own benefit. Every single time a miner successfully mines bitcoin or, referring to our analogy above, every time they find the solution to that complex problem, the miners get a reward. The reward is that they get to write the next block in the Bitcoin blockchain and they get rewarded with a certain number of bitcoin (known as a “subsidy”) and transaction fees.

The process of Bitcoin mining is beneficial both to the miners and the Bitcoin blockchain as a whole. They keep the Bitcoin wheel rolling.

What Is The Bitcoin Halving?

Now that we have discussed Bitcoin mining, we need to talk about one of the most phenomenal concepts in Bitcoin: the halving.

As mentioned above, the miners get rewarded every time they are successful. Today, the subsidy is 6.25 BTC. Four years ago, in 2016, the block subsidy was 12.5 BTC. And, four years before that, in 2012, it was 25 BTC, as depicted in the graph below.

Source

About every four years, the Bitcoin block subsidy halves. And because the new supply of bitcoin created through this subsidy is continuously reducing, every halving cycle is followed by a parabolic price run. These runs are factoring the reduced supply into the bitcoin price.

What Is A Stock-To-Flow Ratio?

A stock-to-flow ratio is an indicator that has been used in commodities for decades. But its application to Bitcoin was famously originated by Plan B in 2019.

As the name suggests, a stock-to-flow ratio basically measures the stock of a certain resource — i.e., how much of it is available currently in circulation — against the flow of the resource — i.e., how much of it is being produced. As you can see by definition, the indicator is intrinsically based on the supply and demand mechanism. That is why the halving affects this ratio tremendously.

Source

The relationship between a Bitcoin Halving and the stock-to-flow ratio can be seen clearly if you compare the two charts against each other. That is because every time Bitcoin Halving occurs, the flow (production) of bitcoin is reduced. As a result, the stock-to-flow ratio jumps. And, if you look at the bitcoin price, it almost follows to a tee.

What Does The Stock-To-Flow Ratio Say About Bitcoin’s Future Price

Coming back to my original point, the bitcoin price today (at the time of this writing) is around $57,000. People are giving different explanations for why. Some say a certain investor has put in a good chunk of money. Others say the price is affected by Elon Musk’s positive tweets and whatnot.

Of course, the fundamental analysis and, more importantly, bitcoin’s growing adoption play huge roles in the bitcoin price. But the bitcoin price can be predicted to some extent by the stock-to-flow ratio.

As you can see from the previous Halving cycle, the bitcoin price overshot through the stock-to-flow ratio before coming back down and averaging along the stock-to-flow ratio. Currently, the bitcoin stock-to-flow ratio indicates that bitcoin should hit a price of $100,000 by the end of 2024. Considering the historic overshoots, a conservative estimate of a bitcoin price of $150,000 at this time seems possible.

Too Long; Didn’t Read (TL;DR)

Bitcoin’s adoption is growing and reaching more mainstream investors with every passing day. And the bitcoin price has increased significantly over the last couple of months. However, there has been one indicator that best predicted this run, and that indicator is the stock-to-flow ratio.

To understand the stock-to-flow ratio, it is important to know about the concepts of Bitcoin mining and the Halving. The stock-to-flow ratio is a ratio of bitcoin in circulation to bitcoin production (facilitating through mining). Since Bitcoin production is reduced by the Halving, the stock-to-flow ratio is increased. The bitcoin price follows the ratio almost to a tee.

Historically, the price overshoots the stock-to-flow ratio before coming down and averaging out. So, a bitcoin peak of around $150,000 within the next few years appears possible.

This is a guest post by Fahim Ahmadi. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

Source: Bitcoin magazine

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Crypto News Updates

Why Bitcoin Is One Of The Most Undervalued Assets In 2021

According to Bloomberg, bitcoin’s 9 million percent price rise makes it the best performing asset of the last decade. But what if I told you that even in 2021, Bitcoin is still one of the most undervalued assets there is?

If you are one of those people who has thought of putting money into bitcoin, but just could not pull the trigger, then you are not alone. 

The crypto community today is flooded with people who, unfortunately, do not understand the fundamentals lying behind these digital assets. And because bitcoin has amassed a significant following of these “weak hands,” institutions and principal investors may become more cautious when it comes to putting money into bitcoin. 

When they see that people do not agree on basic questions like “What gives Bitcoin its value?” and “How does Bitcoin derive its worth?,” it creates uncertainty, and they could become reluctant to go all in.

Photo by André McKenzie on Unplash

The question of the value of bitcoin is very general and multifaceted. There are two ways to explain this. One is the traditional way, which describes bitcoin’s value in terms of the power that goes into mining. 

But here I want to touch the other side of the coin. The side that is not discussed as often. And that has to do with our current financial system. 

Elon Musk has already said that cryptocurrencies will be the media of exchange on Mars. But even if we stick to Earth, Bitcoin is a disruptor. It has all the ingredients that are required to let it go on and become the future “currency” of the world. 

While our financial system is failing us, Bitcoin is providing solutions to all the problems we are facing in our monetary system. In essence, Bitcoin’s value really comes from the worthlessness of our current financial system..

The Evolution Of The Monetary System

After the barter system, historically, gold has always been used as a medium of exchange. But because gold is not portable, as time passed, we established the currency system. We decided that we would print papers and assign value to them so that every piece of paper would be backed by a certain amount of gold.

As such, we could print currency only if we had an equivalent amount of gold in reserve. In this way, we established a portable exchange system with gold still being the actual medium.

As the sphere of influence of the United States grew bigger, slowly the monetary system evolved in a way that all the currencies in the world were fixated to the dollar. But the dollar was still backed by gold. So, at its core, it was still the same thing.

The biggest blow to our financial system came when, in 1971, U.S. President Richard Nixon announced that the United States dollar was no longer going to be backed by gold. It is as if he pulled the rug from under the financial system. All of a sudden, every currency in the world was no longer backed by anything. 

Were they even currencies anymore? Or just pieces of paper? Regardless, this gave rise to our current financial system, the fiat monetary system.

The Fiat Financial System

So, our current fiat monetary system is not backed by anything. This is a problem on so many different levels.

In the case of Bitcoin, at least, its value can be explained in terms of the mining power contributed to the network. But here, there is no actual explanation really. The only reason that a piece of paper has value is because the government enforces it.

Photo by Annie Spratt on Unplash

Now, because the fiat system is not backed by anything, this means that there is no real limit on the amount of money that the Federal Reserve can print.

When you keep printing currency (as we have seen during the COVID-19 pandemic response), it is as if you are robbing people of their money. The more you increase the supply of the money, the more it takes from the purchasing power of money that was already in circulation. This leads to inflation. So now, people have to pay more of their money to get the same thing, and that is due to no fault of their own.

Another huge problem with our current financial system is that it is being regulated by the central bank. The central bank is the actual authority behind the transactions. 

When you see all of these people, and hell, even countries, get sanctioned, they lose access to their money. Have you ever thought about that? Have you realized that in the current financial system, people do not really own their money?

So, you can work for sixty years, earn a decent amount of savings — but at any point, the central bank can decide that, for one reason or the other, you are no longer eligible for the benefits of your years of hard work. I’m not saying that this will happen, all I am saying is that there is definitely a possibility that it can happen.

Bitcoin: A Solution?

Now that we understand the monetary system, the next question is: How does Bitcoin solve any of these problems?

Let’s go first to the inflation rate. Unlike the unlimited printing of fiat currency, the total supply of bitcoin is capped at 21million. Bitcoin has a reducing rate of inflation, and as soon as the last bitcoin is mined in 2140, the rate of inflation will reach zero. You would no longer be able to create a bitcoin. So, that pretty much takes care of the inflation problem.

Next is the question of the third-party authority. When you transfer money in the current system, it is the banks that actually perform this transfer. They literally update numbers within the two accounts involved in the transfer, subtracting an amount from one and adding it to another. Yes, it is this simple. But then the question remains, how can you do business with people without any authority actually actioning those transactions?

This is where the beauty of Bitcoin comes into play! Bitcoin is a peer-to-peer network. When you do a certain transaction on Bitcoin, the blockchain is updated by all of your peers. It means everyone is an authority in the Bitcoin blockchain. So, if everyone is an authority, that means, technically, no one is the single authority. That is why we never have to worry about central bank regulations when it comes to Bitcoin.

To boil it down, on one side, we have a financial system, which is leading to an insane amount of inflation. A system which is backed by nothing. A system that is completely controlled by a central authority. On the other side, you have a system that has almost no inflation, a peer-to-peer network that has no central authority, and the cherry on the top is that the fees are significantly less in Bitcoin when compared to our current fiat system. 

Too Long, Didn’t Read (TLDR)

Bitcoin was the best performing asset of the last decade. However, unfortunately, due to the presence of “weak hands” in the crypto community, institutions and principal investors still tend to be more cautious when it comes to investing in bitcoin. They do not really understand how bitcoin is valued. The value of bitcoin actually comes from the worthlessness of our current financial system. The current financial system is doomed to collapse. The currencies of the world are pegged to the dollar and the dollar is not tied to anything. As a result, there is really no limit to the amount of money that the Federal Reserve can print. This is like robbing the people of their money. It reduces purchasing power of the money that was already in circulation and as a result, causes inflation. 

Adding to this, a third party like a central bank has the actual control of your money. So, in our current financial system, your money is not really yours. Therefore, the system is bound to crash sooner or later. The solution is something that has no inflation. The answer is a peer-to-peer network without any third party. The answer is Bitcoin. And once Bitcoin starts taking over as a currency, its value will rise tremendously. That’s why it’s still one of the most undervalued assets of our time.

This is a guest post by Fahim Ahmadi. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

The post Why Bitcoin Is One Of The Most Undervalued Assets In 2021 appeared first on Bitcoin Magazine.

Source: Bitcoin magazine