Posted 2 months ago | by Catoshi Nakamoto
One of the major value propositions that Bitcoin offers to investors is that it has a predictable monetary policy and development schedule, but if you’re watching Bitcoin’s price action on a day-to-day basis, “predictable” is probably the last word that would come to mind. Price can be extremely volatile, leaving many of us always guessing which way it will go. However, there are a few models that have been able to predict Bitcoin’s price over longer time frames with a shocking level of success.
Let’s get it.
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In this video I’m going to give an overview of the Bitcoin halvening cycle and stock to flow model, which has done an incredible job at tracking the price of Bitcoin.
Stock-to-flow was first introduced in a 2019 blog post from an anonymous Bitcoin researcher who calls himself Plan B. This model uses Bitcoin’s scarcity and scheduled issuance to give a rough estimate of where the price will be in the future. It’s pretty complex and involves some math, but on a surface level it’s not too difficult to understand. The stock to flow ratio is determined by figuring out the total amount of bitcoin currently in the market and dividing that by the amount that is scheduled to be produced.
With bitcoin, the production of the asset is extremely predictable, which makes this model very accurate. However, it has also been used for commodities like gold and silver, but they are more likely to see deviations because their rate of supply is not as predictable.
Bitcoin’s stock-to-flow ratio is also compounded by the halving, a mechanism that is triggered every four years on the network, cutting the production of BTC in half. Technically this happens every time that 210,000 blocks are mined, which works out to roughly four years.
The first Bitcoin halving took place in 2012, when the reward for mining a block on the Bitcoin network went from 50 BTC to 25 BTC. In 2016, a second halving event cut the rewards down to 12.5 BTC per block, and then on May 11th, 2020, just before our massive bull run kicked off, the reward or “flow” was reduced down to 6.25 BTC per block. The next halving is expected to happen sometime in early 2024, further reducing the production flow.
Numbers aside, the important thing to remember here is that the bitcoin bull cycles have traditionally been driven by the halving, which reduces the “flow” of new bitcoin into circulation, which in-turn makes the remaining supply – or “stock” – more valuable, assuming that a steady rate of demand continues.
In August of last year, Fidelity Digital Assets published an assessment of Plan B’s model and recognized that commodities with high stock-to-flow ratios have “historically served as superior stores of value.” The report also noted that Bitcoin’s stock-to-flow ratio will surpass that of gold after the next halving. I thought it was a good sign that Fidelity was very bullish on Bitcoin long term and even quoted Brian Kelly of BKCM when he said “Bitcoin is the most significant innovation in finance since the Medicis invented double-entry accounting.” And when it comes to money. Always trust the pizans.
Halvening cycles and available stock of Bitcoin might inform the S2F model. But there is an older model that is based on some seriously old school numbers. The Bitcoin Golden Bull Ratio. Bitcoin is STRONG LIKE BULL. That’s obvious. No other store of value asset in history has appreciated in value like bitcoin has in such a short period of time. The “Golden” portion of the Golden Bull Ratio get’s its name from the Golden Ratio (1.681) that has been around since ancient Greek mathematicians kept seeing it pop up in geometry over and over again.
The ratio was used so much the Greeks gave it the symbol Phi φ to simplify their equations. Hundreds of years later, mathematical Italian Leonardo Fibonacci started using it to make some numbers that he named after himself. These numbers came to be known as the Fibonacci sequence and they’ve become so important to science and finance that day traders will trade using Fibonacci retracement sequences, or Fibs for short. So you take two mathematical concepts and apply them to an algorithm based monetary system like Bitcoin and you start to see some pretty astounding results. If you line up the variants of the 350 Day EMA as ribbons on a graph, you’ll notice that Bitcoin has been tracking between them it’s entire life. In fact the Golden Bull Ratio has it’s on page on Trading View.
A majority of the price predictions to come out stock to flow, including my own, and have been based on analysis of the stock to flow model. Plan B’s price target for the end of the year was a range between 100K and 288K, and with the price action that we have seen throughout the history of bitcoin, this is still a possibility. At this point, 288K is probably out of reach for this year, but we have seen the price of bitcoin double or even triple across very short timeframes before. Earlier this year, we watched the price jump from the low 30 thousands to the high 50 thousands in just one month.
Back in February, around the time that Bitcoin had nearly doubled in price from the previous month, Plan B conducted a survey on Twitter, asking his followers if they believed Bitcoin would end up closer to 288K or 100K, and a large majority of his followers chose 100K. For a minute there, it looked like bitcoin was really going to exceed expectations, until the bull run was put on hold by a series of suspicious events that spread fear throughout the markets and pushed prices down to levels we never thought we’d see again.
Just like other commodities, the price of bitcoin can also be influenced by outside forces like tweets, regulation or larger macro factors, but the stock-to-flow model has still been surprisingly accurate, even in the face of black swan events that disrupted global trade. Sure, bitcoin has seen huge sell-offs during times of market uncertainty, which caused it to deviate from the stock-to-flow projections, but in most cases we have seen this asset quickly correct and return to the path that was predicted by Plan B.
We are currently in one of those times where the actual price of bitcoin has strayed pretty far from the stock-to-flow projection, but we have also been facing unprecedented manipulation in the markets over the past several months. We have seen a massive FUD campaign where governments, media, institutions and muskrats all seem to agree that bitcoin is bad for some reason or another.
We have also seen whales taking advantage of this uncertainty to shake out retail investors with large sell orders. Meanwhile, these very same whales, the institutions, are negotiating with regulators to offer their own crypto services and products. These whales aren’t just accumulating, they’re shifting their business models to accommodate this new technology. When institutions are telling you one thing and doing another, that’s a good sign there’s some manipulation or misdirection taking place, and in this case it’s probably both.
It’s certainly a problem that whales can use their money and influence to move the price of bitcoin, but they do this with every asset in every market globally, at least with bitcoin they can’t manipulate the issuance or the supply. This is why the stock-to-flow model is so resilient in the face of changing and volatile markets. I personally feel that it is a solid model that we have to get a good idea of what’s happening in the markets. It’s just been too accurate in the past for me to deny, but historical data works…until it doesn’t. Even Plan B, the model’s creator, has been having some doubts himself, and has said the price activity in the upcoming weeks and months will make or break his stock-to-flow thesis.
Plan B said that bitcoin’s price has not deviated this far from his projections since January of 2019. You can easily see that the price was far below the projected path on the stock-to-flow chart at the beginning of 2019. That’s where the green dots dip far under the target for a significant length of time. However, you can also clearly see that the price immediately rallied and returned to equilibrium with the stock-to-flow model after that selloff. Could we be seeing a similar situation playing out again? Where the price of bitcoin will shock everyone and race to catch up with the stock-to-flow projections?
Truly it’s impossible to know, especially with all the manipulation that we have seen in these markets, but with the fundamentals as strong as they are, I have a hard time believing that we are headed into another crypto winter.
But that’s all I got, be blessed. BitBoy Out!