Price of bitcoin at 100,000? That’s what the Stock-to-Flow says.
Passed Halving unscathed? I hope so!
At this point the questions we ask about the future of bitcoin are many, all legitimate and no obvious answers, indeed! Because predicting the trend of bitcoins is perhaps impossible, there are too many variables starting from what will be the role of the Miners, to finish at the degree of adoption, increasingly necessary.
I asked myself then if there is an indicator that allows or has allowed to trace the value of the price during these years, a reliable track that preserves a historical record and maybe make us imagine the future of the price of BTC, linked to production, its scarcity and the adoption index.
Yes, it exists!
It is a “simple” graph, which is called stock to flow.
Let’s see it in detail, but not before having reviewed the main aspects of Halving and its implications in terms of scarcity and rarity per bitcoin.
The event we have witnessed in recent weeks is certainly not an isolated event. In its recent history bitcoin has already suffered three Halving, reducing the prize (and therefore the minting, per mined block), to today’s 6.25 BTC.
The Bitcoin network has been generating blocks continuously since January 3, 2009 and the reward for mining was initially 50 bitcoins (BTC) :-).
Each subsequent block had the same mining reward but starting from the 210,000 block the Halving or “halving”, cuts in half the value of the reward that is distributed to miners.
In other words, from the 210,000 block on, the reward is halved to 25 BTC, then from the 420,000 block (new Halving) the reward increases to 12.5 BTC; and so on, until today.
Since blocks are generated every 10 minutes, “halved events” occur every 35,000 hours: almost every 4 years.
These events will continue to occur, will be cyclical and will repeat until the miners’ reward reaches 0 BTC, which will happen exactly after the 33rd halving (Halving), over a period of time that will last 132 years.
The last Bitcoin extracted, will be delivered to us by the algorithm in the year 2140, and exactly when a total of 21 million BTC will have been minted.
From that moment on Bitcoin will become really “deflationary”: “print”, “mint” and “extract” new coins will no longer be possible.
STOCK to FLOW
Stock-to-flow ratios are used to estimate the current stock of a commodity (total amount currently available) compared to the new production flow (amount extracted in that specific year).
The “stock-to-flow” is a number that shows how many years, at the current production rate, are needed to reach the current stock of raw material produced. The higher the number, the higher the price.
Stock-to-Flow, therefore considers bitcoin as a raw material, conditioned by scarcity.
Exactly like gold, bitcoin is considered a “reserve of value” and although its behavior is still completely unpredictable, given its recent history and the impossibility to compare long-term data, the supply just like gold, provides an expensive and growing process of extraction, necessary to extract the last 3 million BTC remaining in the algorithm.
The supply rate, given the recent and expected future halving, keeps the value constantly low, giving bitcoin the nickname of digital gold, scarce even to exist.
The stock-to-flow ratios are therefore used to evaluate the current stock of a commodity, compared to the flow of new production.
WHAT DOES THE CHART TELL US
With the matter in hand, we now begin to analyze the chart and observe that the price has continued to stay, for better or worse, in the wake of the Stock to Flow ratio.
The different color gradient, indicates the number of days missing to the next Halving, as indicated on the Y axis (to the right of the graph).
It’s useless to make predictions, but check instead, evaluating both the past behaviour and the tendency to “follow”, of the Stock-to-flow line, and then reflexively imagine what will happen in the near future.
Note that in the remote past and in the recent past, the trend has been in line with the S-t-F, even during the 2017 bubble, and although the trend has in some brief phases deviated, the trend line has remained incredibly in “wake”.
The stock-to-flow is simply the amount that people are willing to pay to create a new unit of a commodity (for example, the cost of extracting an ounce of gold), compared to the purchase price of a unit from someone else’s stock.
Stock is therefore not a magic metric. It simply tends to be useful for the analysis of prices, especially of precious metals because the metals that are expensive to produce are also produced at lower volume (a bit ‘like gold, but also – for those who understood how it works – bitcoin).
So beware, the StF alone does not make the price is what it is, but rather it is the real world supply and demand that determine both the price and the ‘trend of the StF
Anyway, it never hurts to dream
— PlanB🔴 (@100trillionUSD) May 31, 2020
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Independent researcher and consultant, crypto activist.