They say the easiest way to beat the system is to invest without emotion. The irony, however, is that there is no investment of any kind that does not involve emotions.
If you are part of the Bitcoin community, you are no stranger to price predictions ranging from zero to hundreds of millions of dollars. While very few of these predictions are supported by technical analysis, most of them are merely guesses driven by people’s feelings at different times.
As cryptocurrencies become more mainstream by the day, companies as big as Tesla are jumping on the Bitcoin train and investing billions of dollars. The bulls run in and pour 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 there is an indicator that actually predicted this bitcoin price run? In fact, that it predicted the runs that happened before? And that it can predict one to come?
As a technical analyst, I firmly believe that the fuses in the charts always take into account the reality that happens on the ground. Obviously, no indicator can be used completely on its own to complete an analysis. But it can always be added to your arsenal while making final judgment.
In the case of bitcoin, that arsenal can include almost anything. Imagine 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 proceed to discuss the stock-to-flow ratio, let’s first understand the mechanism of Bitcoin mining and the halving of mining subsidies.
What is Bitcoin Mining?
The process of Bitcoin mining is basically the journey of finding a key for a particular lock. Or, you could say, it is the process of finding a solution to a very complex math problem. A problem so complex that many try and fail before anyone comes up with the right answer. In other words, it could be like finding a needle in a haystack.
Read more about Bitcoin mining at Bitcoin Magazine’s guide here.
So then the question arises, why do people mine Bitcoin in the first place? The answer is actually quite simple: for their own benefit. Every 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 are rewarded with a certain amount of bitcoin (known as a “subsidy”) and transaction fees.
The process of Bitcoin mining is beneficial for both the miners and the Bitcoin blockchain as a whole. They keep the Bitcoin wheel rolling.
What is Bitcoin’s Halving?
Now that we’ve discussed Bitcoin mining, we have 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 cuts in half. And as the new supply of bitcoin created by this grant is constantly diminishing, 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 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 made famous by Plan B in 2019.
As the name suggests, a stock-to-flow ratio basically measures the stock of a particular resource – that is, how much of it is currently in circulation – versus the flow of the resource – that is, how much of it is produced. By definition, as you can see, the indicator is intrinsically based on the supply and demand mechanism. Therefore, the halving has a huge impact on this ratio.
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The relationship between a Bitcoin Halving and the stock-to-flow ratio can be clearly seen when you compare the two graphs. That’s because every time Bitcoin Halving occurs, the flow (production) of bitcoin is reduced. As a result, the stock-to-flow ratio jumps. And when you look at the bitcoin price, it almost tracks to a tee.
What does the Stock-to-Flow ratio say about Bitcoin’s future price?
Going back to my original point, today’s bitcoin price (at the time of writing) is around $ 57,000. People give different explanations as to why. Some say that a particular investor has put in a good chunk of money. Others say the price is affected by the positive tweets from Elon Musk and all.
Of course, fundamental analysis and, more importantly, the growing adoption of bitcoin plays a big role in bitcoin price. But bitcoin price can be predicted to some extent by the stock-to-flow ratio.
As you can see from the previous halving cycle, bitcoin price exceeded the stock-to-flow ratio before falling again, 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. Given the historical overshoots, a conservative estimate of a bitcoin price of $ 150,000 seems possible at this point.
Too long; Not Read (TL; DR)
Bitcoin adoption is growing, reaching more mainstream investors by the day. And the bitcoin price has risen significantly in recent months. However, there is 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 the concepts of Bitcoin mining and the halving process. The stock-to-flow ratio is a ratio between bitcoin in circulation and bitcoin production (facilitating through mining). As Bitcoin production is reduced by the halving, the stock-to-flow ratio is increased. Bitcoin price tracks its ratio almost to a tee.
Historically, the price has exceeded the stock-to-flow ratio before going down and off the average. So a bitcoin spike of about $ 150,000 in the next few years seems possible.
This is a guest post from Fahim Ahmadi. The views expressed are their own views and do not necessarily reflect those of BTC Inc or Bitcoin Magazine