They say that 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 have ever been part of the Bitcoin community, you are unaware of price predictions ranging from zero to hundreds of millions of dollars. Although 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 are becoming more popular with each passing day, companies as big as Tesla are getting on the Bitcoin train and investing billions of dollars. The bulls are running, pouring huge amounts of capital into bitcoin. But if you want to be successful, not just in bitcoins, but in any form of investment, the first rule is to zoom out.
So, what would happen if I said that there is an indicator that really predicted this bitcoin price run? In fact, did he really foresee the races that took place previously? And what can one predict that is yet to come?
As a technical analyst, I firmly believe that the graphics tricks always take into account the reality that is happening 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 when making a final judgment.
In the case of bitcoin, this arsenal can include almost anything. Say, the mining power of the Bitcoin network or the futility of our current financial system. But the indicator I’m talking about here is the stock / flow ratio. Now, before continuing to discuss the stock / flow ratio, we need to first understand the Bitcoin mining mechanism and cut the mining subsidy in half.
What is Bitcoin mining?
The Bitcoin mining process is basically the journey to find the key to a particular lock. Or, you can say, it is the process of finding a solution to a very complex mathematical problem. Such a complex problem that many try and fail before someone gives 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 the question arises: Why do people explore Bitcoin in the first place? The answer is really quite simple: for your own benefit. Every time a miner successfully extracts bitcoin or, referring to our analogy above, every time he finds the solution to that complex problem, miners receive a reward. The payoff is that they write the next block on the Bitcoin blockchain and are rewarded with a certain number of bitcoins (known as a “subsidy”) and transaction fees.
The Bitcoin mining process is beneficial to both miners and the Bitcoin blockchain as a whole. They keep the Bitcoin wheel spinning.
What is Bitcoin halving?
Now that we have discussed Bitcoin mining, we need to talk about one of Bitcoin’s most phenomenal concepts: the halving.
As mentioned above, miners are rewarded whenever they succeed. Today, the subsidy is 6.25 BTC. Four years ago, in 2016, the block’s subsidy was 12.5 BTC. And, four years earlier, in 2012, there were 25 BTC, as shown in the graph below.
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Every four years, the Bitcoin subsidy blocks in half. And as the new bitcoin offering created through this subsidy is continually shrinking, each halving cycle is followed by a parabolic price run. These races are taking into account the reduced supply in the price of bitcoin.
What is a stock-flow relationship?
The stock / flow ratio is an indicator that has been used in commodities for decades. But its application to Bitcoin originated from Plan B in 2019.
As the name suggests, a stock / flow ratio basically measures the stock of a given resource – that is, how much of it is currently available in circulation – in relation to the flow of the resource – that is, 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 reduction in half affects this proportion tremendously.
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The relationship between Bitcoin’s halving and the stock / flow ratio can be seen clearly if you compare the two graphs. This is because every time bitcoin is cut in half, the flow (production) of bitcoin is reduced. As a result, the stock / flow ratio increases. And, if you look at the price of bitcoin, it almost goes to a tee.
What the stock / flow ratio says about the future price of Bitcoin
Going back to my original point, the price of bitcoin today (at the time this book was written) is around $ 57,000. People are giving different explanations as to why. Some say that a certain investor has put in a fair amount of money. Others say the price is affected by Elon Musk’s positive tweets and whatnot.
Of course, fundamental analysis and, most importantly, the growing adoption of bitcoin play important roles 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 in the previous halving cycle, the price of bitcoin exceeded the stock / flow ratio before going back down and averaging over the stock / flow ratio. Currently, the bitcoin stock / flow ratio indicates that bitcoin is expected to reach a price of $ 100,000 by the end of 2024. Considering historical overtaking, a conservative estimate of a bitcoin price of $ 150,000 at this point seems possible.
Too long; I didn’t read (TL; DR)
Bitcoin adoption is growing and reaching more mainstream investors with each passing day. And the price of bitcoin has increased significantly in recent months. However, there was an indicator that best predicted this execution, and that indicator is the stock / flow ratio.
To understand the stock / flow ratio, it is important to know the concepts of Bitcoin mining and halving. The ratio of inventory to flow is a proportion of bitcoin in circulation for bitcoin production (facilitating through mining). As Bitcoin production is cut in half, 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 reaching the average. Therefore, a bitcoin spike of around $ 150,000 in the coming 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.