They say the easiest way to beat the system is through emotionless investments. The irony is that there is no form of investment in which emotions are not involved.
If you were part of the Bitcoin community, then you are not unfamiliar with price predictions from zero to hundreds of millions of dollars. While very few of these predictions are supported by technical analysis, most of them are just assumptions driven by people’s feelings at different times.
As cryptocurrencies become more commonplace with each passing day, companies as large as Tesla jump on the Bitcoin train and invest billions of dollars. The bulls are running, 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 shrink.
So what if I told you that there is an indicator that actually predicted this decline in the price of bitcoin? In fact, that he actually predicted the races that took place before? And that one could predict one to come?
As a technical analyst, I strongly believe that the wicks in the charts always take into account the reality that happens on the ground. Now, obviously, no indicator can be used completely alone to complete an analysis. But it can always be added to your arsenal while you make a final judgment.
In the case of bitcoin, that arsenal can include almost anything. Say, the mining power of the Bitcoin network or the lack of value of our current financial system. But the indicator I’m talking about here is the stock-flow ratio. Now, before we continue to discuss the stock-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 extracting Bitcoin is basically the journey of finding a key to a particular lock. Or, you might say, it’s the process of finding a solution to a very complex mathematical problem. A problem so complex that many try to fail before someone finds the right answer. In other words, it can be like finding a needle in a haystack.
Learn more about extracting Bitcoin through Bitcoin Magazine guide here.
So the question arises: Why do people mine Bitcoin in the first place? The answer is actually quite simple: for their benefit. Every time a miner successfully extracts bitcoin or, referring to our analogy above, every time they find the solution to this complex problem, the miners receive a reward. The reward is that they will write the next block in the Bitcoin blockchain and will be rewarded with a certain number of bitcoin (known as a “grant”) and transaction fees.
The Bitcoin extraction process is beneficial for both the miners and the Bitcoin blockchain as a whole. Keep the Bitcoin spinning.
What is Bitcoin halving?
Now that we’ve talked about Bitcoin mining, we need to talk about one of the most phenomenal concepts in Bitcoin: halving.
As mentioned above, 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 earlier, in 2012, it was 25 BTC, as described in the chart below.
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About once every four years, the Bitcoin block subsidy is halved. And because the new bitcoin offering created by this grant is continually declining, each half-life cycle is followed by a parabolic price rate. These rollovers include factors that reduce the price of bitcoin.
What is a stock-flow ratio?
A stock-flow ratio is an indicator that has been used in commodities for decades. But its Bitcoin application was created by Plan B in 2019.
As the name suggests, a stock-to-flow ratio practically measures the stock of a particular resource – that is, how much of it is currently available – in relation to the flow of the resource – 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 ratio.
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The relationship between a halving of Bitcoin and the stock-flow ratio can be clearly seen if you compare the two charts with each other. This is because every time Bitcoin halves, the flow (production) of bitcoin is reduced. As a result, the stock-flow ratio jumps. And, if you look at the bitcoin price, it follows almost like a tee.
What the stock-flow ratio says about the future price of Bitcoin
Going back to my starting point, the price of bitcoin today (at the time of writing) is about $ 57,000. People give different explanations for why. Some say that a certain investor put a good amount of money. Others say the price is affected by Elon Musk’s positive tweets and what not.
Of course, the fundamental analysis and, more importantly, the growing adoption of bitcoin play a huge role in the price of bitcoin. But the price of bitcoin can be predicted to some extent by the stock-flow ratio.
As you can see from the previous half-life cycle, the bitcoin price exceeded the stock-flow ratio before coming back down and averaging over the stock-flow ratio. Currently, the bitcoin stock-flow ratio indicates that Bitcoin should reach a price of $ 100,000 by the end of 2024. Given the historical exceedances, a conservative estimate of a bitcoin price of $ 150,000 at this time seems possible.
Too long; I did not read (TL; DR)
Bitcoin adoption is on the rise and reaches more traditional investors every day. And the price of bitcoin has risen significantly in recent months. However, there was an indicator that best predicted this race, and that indicator is the stock-flow ratio.
To understand the stock-flow ratio, it is important to know about the concepts of Bitcoin mining and halving. The stock-flow ratio is a ratio between bitcoin in circulation and bitcoin production (facilitated by mining). As Bitcoin production is halved, the stock-flow ratio is increased. The price of bitcoin follows the ratio almost to a tee.
Historically, the price exceeds the stock-flow ratio before falling and falling on average. So a bitcoin peak of about $ 150,000 over the next few years seems possible.
This is a guest post by Fahim Ahmadi. The views expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.