Plan B - Well Plan A. Linear thinking.

Let's start with inflation;

I recently wrote an article on Inflation - here's a little extra info to follow on from that.


This seems insane!!! And it is!!!

Stimulus - hype, FOMO, institutional adoption and so on.

What does this mean in terms of the charts?

Well some good news and some bad news - first of all, many people have now hears about Stock - to - flow made popular by a guy called plan B. Truth is, this technique has been around for a while and has been used in other instruments such as GOLD for quite some time.

S2F
A stock-to-flow ratio means the currently available stock circulating in the market relative to the newly flowing stock being added to circulation each year. Because we know that every four years the stock-to-flow ratio, or current circulation relative to new supply, doubles, this metric can be plotted into the future.


So although it's great "in theory" it relies on the parabolic growth - Pi top or whatever other linear logic you want to to continue. (yes insert here intentional).

However, whilst stimulus checks are being printed like there is no tomorrow, as price rises for Bitcoin you have to shift focus and think of the market like a stock. When Apple or Microsoft, Google, Tesla where at a market cap of $100m to get to 200m was pretty simple. Each time it doubled, the longer it took to the next phase. Now for Amazon to double from over $1 Trillion market cap to $2 Trillion Dollars; some pretty extraordinary events need to occur.

So whilst it is not impossible - you will sometimes need major corrections in the moves up, this is actually healthy for the market. Or like any model, too much of a good thing is actually detrimental to the whole thing.


The Halving
To understand why Bitcoin can work in the shorter term along this scale it has everything to do with the verifiable finite limit to its quantity it is important to understand the mechanism built into its code, this is known as the Halving.

For every 210,000 blocks that are mined, or about every four years as we currently stand, the reward given to miners for processing Bitcoin transactions is reduced in half.

This means that Bitcoin is a synthetic form of inflation because a reward of Bitcoin given to a miner adds new Bitcoin into circulation.

Clever, hey.

The rate of this inflation is cut in half every four years and this will continue until all 21 million Bitcoin is released to the market. Currently, there are 18.5 million Bitcoins in circulation, or about 88.4% of Bitcoin’s total supply.

With gold, there is a somewhat steady rate of new gold mined from the earth each year, which keeps its rate of inflation relatively consistent. Now for a S2F model, you can quantify a demand which is what the model is built upon. But with things like alts in the crypto sphere - the problem will become the flow of money. I talked about this in another recent article.

With Bitcoin, each halving increases the assets stock-to-flow ratio. A stock-to-flow ratio means the currently available stock circulating in the market relative to the newly flowing stock being added to circulation each year. So if demand drops for any number of reasons; from bankers adding fees - limiting purchase power. governments around the world tightening up or restricting flow, through to taxation events or heightened regulation. (we CANNOT, ignore these factors).

Since Bitcoin’s inception, its price has followed extremely close to its growing stock-to-flow ratio. Each halving Bitcoin has experienced a massive bull market that has absolutely crushed its previous all-time high. But as Mark Cuban said "everyone is a genius in a bull market".

Bitcoin’s price increase can also be attributed to its stock-to-flow ratio and deflation. Should Bitcoin continue on this trajectory as it has in the past, investors are looking at significant upside in both the near and long-term future.

Theoretically, this price could rise to at least $100,000 sometime in 2021 based on the stock-to-flow model shown above. However, you have to watch for the pitfall of a large Elliott monthly move back down from 3-4 on a larger scale than the drop from the previous ATH.


Some investment firms have made Bitcoin price predictions based on these fundamental analysis and scarcity models. In a leaked CitiFX Technicals analysis Tom Fitzpatrick, the managing director at US Citibank, called for a $318,000 Bitcoin sometime in 2021. Think back of the Amazon stock doubling model - I can't see us going from 61k current level to 318k within the next 50 days.

Live on Bloomberg, the Chief Investment Officer of Guggenheim Global called for a $400,000 Bitcoin based on their “fundamental work.” Like I said, it's not going to be easy.

Anyways - enjoy the weekend!

Disclaimer
This idea does not constitute as financial advice. It is for educational purposes only, our principle trader has over 20 years’ experience in stocks, ETF’s, and Forex. Hence each trade setup might have different hold times, entry or exit conditions, and will vary from the post/idea shared here. You can use the information from this post to make your own trading plan for the instrument discussed. Trading carries a risk; a high percentage of retail traders lose money. Please keep this in mind when entering any trade. Stay safe.