They say the easiest way to overcome the system is by investing without emotions. The irony, however, is that there is no way to invest in that emotions are not involved.
If you’ve been part of the Bitcoin community, you’re not unfamiliar with price predictions ranging from zero to hundreds of millions of dollars. While few of these predictions are backed up by technical analysis, most are assumptions guided by people’s feelings at different times.
As cryptocurrencies become more commonplace, companies as large as Tesla are jumping on the Bitcoin train and investing billions of dollars. Bulls are running, pouring large amounts of capital into Bitcoin. But if you want to succeed, not just in bitcoin, but in any form of investment, the first rule is to stay away.
So what if I told you that there is an indicator that had really predicted this price of bitcoin? In fact, who had really predicted the races that have passed before? And who could predict one yet to come?
As a technical analyst, I firmly believe that the wicks on chart 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 to your arsenal while a final judgment is made.
In the case of bitcoin, this arsenal can include almost anything. For example, 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 we continue to discuss the relationship between stock and flow, we must first understand the mechanism of Bitcoin mining and the halving of the mining subsidy.
What is Bitcoin mining?
The Bitcoin mining process is basically the journey of finding a key to a particular blockchain. Or, it can be said, it is the process of finding a solution to a very complex mathematical problem. Such a complex problem that many try to fail before someone comes up with the right answer. In other words, it can be like finding a needle in a haystack.
Learn more about Bitcoin mining Bitcoin Magazine guide here.
Then the question arises: why do people extract Bitcoin in the first place? The answer is quite simple: for your own benefit. Every time a miner successfully extracts bitcoin or, referring to our previous analogy, every time he finds the solution to this complex problem, the miners get a reward. The reward is that they manage to write the next block in the Bitcoin blockchain and are rewarded with a certain number of bitcoins (known as a “grant”) and transaction fees.
The Bitcoin mining process is beneficial for both the miners and the Bitcoin blockchain as a whole. They keep the Bitcoin wheel rolling.
What halves Bitcoin?
Now that we’ve debated Bitcoin mining, we need to talk about one of the most phenomenal concepts of Bitcoin: halving it.
As mentioned above, miners receive reward every time they succeed. Today, the grant is 6.25 BTC. Four years ago, in 2016, the block subsidy was 12.5 BTC. And, four years earlier, in 2012 they were 25 BTC, as shown in the chart below.
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About every four years, the Bitcoin block subsidy is halved. And as the new supply of bitcoins created through this subsidy is continually reduced, each cycle in half is followed by a parabolic price. These tests are taking into account the reduction in supply in the price of bitcoin.
What is a ratio between stock and flow?
The existence-flow ratio is an indicator that has been used in commodities for decades. But its application to Bitcoin originated famously for Plan B in 2019.
As its name suggests, an existence-flow relationship basically measures the stock of a given resource (i.e., the amount currently available) against the flow of the resource, that is, the amount that is occurring. . As can be seen by definition, the indicator is intrinsically based on the supply and demand mechanism. That’s why halving it greatly affects that proportion.
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The relationship between the halving of Bitcoin and the stock-to-flow ratio can be clearly seen if the two graphs are compared. This is because every time there is a halving of Bitcoin, the flow (production) of bitcoin is reduced. As a result, the existence-flow relationship jumps. And, if we look at the price of bitcoin, it almost gets to a starting point.
What does the stock-to-flow ratio say about the future price of Bitcoin
Going back to my original point, the price of bitcoin today (at the time of writing) is around $ 57,000. People give different explanations of why. Some say that a certain investor has invested a good amount of money. Others say the price is affected by Elon Musk’s positive tweets and nothing.
Of course, fundamental analysis and, most importantly, the growing adoption of Bitcoin play an important role in the price of bitcoin. But the price of bitcoin can be predicted to some extent by the ratio of stock to flow.
As can be seen in the previous cycle of halving, the price of bitcoin was exceeded through the stock-to-flow ratio before falling again and averaging over the stock-to-flow ratio. . Currently, the stock and flow ratio of bitcoins indicates that bitcoin should reach a price of $ 100,000 by the end of 2024. Given the historical overruns, it seems possible to keep a conservative estimate of a price of $ 150,000 in this moment.
Too long; I have not read (TL; DR)
Bitcoin adoption is growing and reaching more conventional investors with each passing day. And the price of bitcoin has risen significantly in the last two months. However, there has been one indicator that best predicted this operation, and that indicator is the stock-flow ratio.
To understand the existence-flow relationship, it is important to know the concepts of Bitcoin mining and halving. The existence-flow ratio is a proportion of bitcoins in circulation and production of bitcoins (facilitating mining). As Bitcoin production is halved, the stock-to-flow ratio increases. The price of bitcoin follows the ratio almost to a tee.
Historically, the price exceeds the stock-flow ratio before going down and averaging. Therefore, a bitcoin peak of about $ 150,000 seems possible in the coming years.
This is a guest post by Fahim Ahmadi. The views expressed are wholly their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.