They say the simplest way to beat the system is through emotionless investments. The irony, however, is that there is no form of investment in which emotions are not involved.
If you were part of the Bitcoin community, you are not unfamiliar with price forecasts ranging from zero to hundreds of millions of dollars. Although very few of these predictions are backed up by technical analysis, most of them are just guesses driven by people’s feelings at different times.
As cryptocurrencies become more mainstream with each passing day, companies as large as Tesla jump on the Bitcoin bandwagon and invest billions of dollars. The bulls are running in and pouring massive capital into bitcoin. But if you want to be successful, not only in bitcoin, but also in any form of investment, the first rule is to zoom out.
Now imagine that there is an indicator that predicted this bitcoin price run? In fact, that it predicted the runs that happened before? And that it can predict one that is yet to come?
As a technical analyst, I firmly believe that the leaks in the maps always take into account the reality that is taking place on the ground. Now, of course, no indication on its own can be used at all to complete an analysis. But it can always be added to your arsenal while you make a final verdict.
In the case of bitcoin, that arsenal can include almost anything. Suppose, the mining power of the Bitcoin network or the worthlessness of our current financial system. But the indicator I’m talking about here is the stock-to-flow ratio. Before I discuss the stock-to-flow ratio, we must first understand the mechanism of Bitcoin mining and the halving of the mining subsidy.
What is Bitcoin Mining?
The process of Bitcoin mining is basically the journey to find a key to a certain lock. Or, you might say, this is the process of finding a solution to a very complex mathematical problem. A problem that is so complicated that many try and fail before someone comes up with the right answer. In other words, it can be like finding a needle in a haystack.
Read more about Bitcoin mining by Bitcoin Magazine se guide here.
The question therefore arises: why do people exploit Bitcoin in the first place? The answer is actually pretty simple: to their own advantage. Every time a miner successfully exploits bitcoin or, as we refer to above, the miners can get a reward every time they find the solution to the complicated problem. The reward is that they have to write the next block in the Bitcoin blockchain and they are rewarded with a certain number of bitcoin (known as a ‘subsidy’) and transaction fees.
The mining process is beneficial to the miners and the Bitcoin blockchain as a whole. They keep the Bitcoin wheel rolling.
What is the Bitcoin halving?
Now that we’ve discussed Bitcoin mining, we need to talk about one of the most phenomenal concepts in Bitcoin: the halving.
As mentioned above, the miners are 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 shown in the chart below.
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About every four years, the Bitcoin block subsidy halves. And because the new offer bitcoin that is constantly reduced by this subsidy, each halving cycle is followed by a parabolic price run. These runs take into account the reduced supply in the bitcoin price.
What is a relationship between inventory and flow?
A stock-to-flow ratio is an indicator that has been used in commodities for decades. But its application to Bitcoin was made famous by Plan B in 2019.
As the name implies, a stock-to-flow ratio basically measures the stock of a certain source – ie how much of it is currently available – against the flow of the source – that is, how much of it is produced. As you can see by definition, the indicator is intrinsically based on the supply and demand mechanism. Therefore, the halving greatly affects this relationship.
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The relationship between a Bitcoin Halving and the stock-to-flow ratio can be clearly seen if you compare the two cards with each other. This 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 up to a tee.
What does the stock-to-flow ratio say about the future price of Bitcoin
Coming back to my original point, the bitcoin price today (at the time of this writing) is around $ 57,000. People give different explanations why. Some believe that a certain investor has invested a large amount of money. Others say the price is influenced by positive tweets from Elon Musk and whatnot.
The fundamental analysis and, more importantly, the growing adoption of bitcoin obviously play a big role 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 exceeded the stock-to-flow ratio before falling back to an average of the stock-to-flow ratio. Currently, the share-to-flow ratio bitcoin indicates that bitcoin should reach a price of $ 100,000 by the end of 2024. Given the historical surplus, this seems to be a conservative estimate of a $ 150,000 bitcoin price at the moment.
Too long; Did not read (TL; DR)
The adoption of Bitcoin is increasing and reaching more mainstream investors every day. And the bitcoin price has risen significantly over the past few months. However, there was one indicator that best predicted this run, and the indicator is the stock-to-flow ratio.
To understand the stock-to-flow ratio, it is important to have knowledge of the concepts of Bitcoin Mining and the Halving. The stock-to-flow ratio is a ratio of bitcoin in circulation to bitcoin production (facilitated by mining). As Bitcoin production is reduced by the Halving, the stock-to-flow ratio is increased. The bitcoin price follows the ratio almost to a tea.
Historically, the price has exceeded the share-to-flow ratio before falling and reaching an average point. A Bitcoin peak of around $ 150,000 within the next few years therefore appears to be 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.