Bitcoin’s recent price crash, which saw it lose a quarter of its value after hitting an all-time high, could be just the “midway dip” in a new record-breaking rally if market patterns from 2013 and 2017 are repeated.
This is the view of a number of prominent cryptocurrency analysts, who adhere to a “stock-to-flow” model dictated by bitcoin’s inbuilt scarcity.
The model is based on the relationship between the existing stockpiles of bitcoin and the yearly production rate of new bitcoins through digital mining. Roughly every four years, a “halving” event occurs that reduces the rewards for mining the cryptocurrency by 50 per cent. After the first halving in 2012, bitcoin’s price rose from around $11 to $1,100 before falling back down. The second halving in 2016 saw bitcoin’s price rise from $500 to $20,000 before dipping again.
The most recent halving event took place in May 2020, right at the beginning of the latest price rally. It has since risen from below $10,000 to the new all-time high of $64,863 that it hit this month. After briefly falling below $48,000, it has since recovered slightly to $55,000 at the time of writing.
This latest dip appears to be similar in scale and timing to other dips experienced following the 2012 and 2016 halvings.
Bears wreak havoc in the crypto market and major coins bleed out in the lower and higher timeframes. Bitcoin (BTC) is on a downtrend with a 9% correction over the past day and 20.9% in the 7-day chart. With a market cap below $1 trillion for the first since February, the price action seems to favor the pessimists.
However, analyst William Clemente has pointed towards the current funding rate for BTC futures across all exchanges. At the time of writing, this metrics stands at 0.03%. As the chart below shows, every time BTC’s futures funding rate reached these levels, the price was able to gain momentum and run hot towards new highs. The analyst said:
Some Silver Lining: Greed has been flushed out of the bitcoin market. These resets in funding rates have been a good gauge of market sentiment. Usually when the market is the most hesitant to go long is the best time to go long in bull markets. We are very close to a bottom.
A high number of leverage positions and its subsequent liquidation during last week is one of the reasons for BTC’s price action. However, in the past months, Bitcoin has been forming a pattern. As Clemente also pointed out, the cryptocurrency trends downwards towards the end of the month only to resume its rally.
Two other metrics indicate possible appreciation in BTC’s price. First, the Spent Output Profit Ratio (SOPR), metric used to measure Bitcoin holders’ profits and losses. Now, as Clemente said and shows in the chart below, the SPOR is approaching its reset mark close to 1.
Bitcoin Electronic Money (Image: MaxPixel)
As the bull market extends and retail investors take action, it becomes more likely for BTC’s SOPR to drop below 1 and offer “great buy opportunities”. Clemente said:
Currently, SOPR is approaching the full reset mark, meaning price has either reached, or is very closing to reaching, the bottom of the current correction.
But perhaps, the most bullish metric is Bitcoin miner’s Net Position Change, a metric used to measure the amount of buying and selling pressure for this sector. Since the start of April, miners have stopped selling their supply and have begun on an accumulation trend. Much different than the 2016 and 2017 bull market, as the analyst said:
Throughout the 2016/2017 bull market, miners consistently sold. This is a key differentiating factor between that cycle and the current one, possibly made possible by newly matured Bitcoin borrowing/lending platforms.
Bitcoin Bears Could Continue Their Assault
On the other hand, trader Bob Loukas claims yesterday’s crypto crash has been the first since March 2020, when the “Black Thursday” took BTC below $4,000. Therefore, he believes something has been broken in the market’s structure ending the rally that took Bitcoin to the current levels.
In the short and medium-term, investors should take gains and rotate their position for maximum profit, according to Loukas. The next phase could be comprised of consolidation and lower levels in May. However, the trader highlighted that everything remains as a possibility and not a prediction, he added the following:
For those worried about an end to the bull market already, I say, VERY MUCH doubt that. This bull market has been coming light a freight train and I’ve yet to see anything close to resembling the type of high (top) you expect before a crash.
Bitcoin fell below $50,000 on Friday. The pioneer cryptocurrency is currently trading at around $49,405 at 11:10 GMT. Within the last 24 hours, the coin lost 8.9%, a massive loss to traders and investors.
However, stock-to-flow models creator, PlanB, has said that he’s relieved that the coin has lost over 22% in just a week. Saying that Bitcoin is still acting “like clockwork” with regards to their price predictions.
“I Am Sort Of Relieved,” Says PlanB
In a tweet on Friday, analyst PlanB noted that the price dip to under $48,000 has sent BTC below it’s target laid out by his stock-to-flow model. Due to this, Bitcoin is no longer “front-running” stock-to-flow.
After the benchmark cryptocurrency traded above its required level, the quant analyst had suggested that the price movement of the coin was becoming inorganic.
“I am sort of relieved btc price is now under s2f model value again,” he wrote in a conversation with “The Bitcoin Standard” author Saifedean Ammous, who called PlanB’s predictions “astonishing.”
“For a moment I thought that people were front running the model and that the supercycle had started. Now we are back to normal .. like clockwork,” PlanB added.
The stock-to-flow and stock-to-flow (S2F) cross-asset (S2FX), variously call for an average BTC/USD price of $100,000 or $288,000 between now and 2024. This is the supercycle being expected.
PlanB said he believed Bitcoin would not stop at $100,000, which it should hit this year.
“Bitcoiners are often too bullish in the bull market, and too bearish in the bear market! I don’t think we supercycle this time either,” podcast host Stephan Livera, responded to Ammous.
Sentiment And Market Indications
Immediately the market dipped below $50k, notorious gold bug and crypto-skeptic, Peter Schiiff, was also quick to comment on the market action, poking fun at Bitcoin proponent Anthony Pompliano. He tweeted:
“Now that Bitcoin is back below $50k I think it’s time for @APompliano to tweet out $1k milestones on the way down the way he did on the way up.”
Bitcoin is holding well above the critical support at $47,000. Trading at $50.067 with 1.6% in the 1-hour chart and sideways movement in the 24-hour chart, BTC seems to be on a path to recovery on the lower timeframes. As many in the crypto space have said, this bull-run will be defined by its quick bounce backs and consolidations periods.
Trader Josh Rager compared BTC’s past price action with the current price performance. For Rager is a normal part of a bull-run for BTC to trend below its 100 days Exponential Moving Average (EMA). During 2017, the cryptocurrency saw at least 3 drops below this metric.
The trader believes investors should be “concerned” if the price breaks below its 200D EMA. In contrast, BTC never trends below this metric while on bullish price action.
During the weekend, the trader expects a bounce if BTC drops to the mid-$40,000. Currently, the 10W EMA is converging with the weekly support level, as Rager explained. This could serve as a good entry point for a long position in both BTC and altcoins, as the trader said:
The bottom could be in, but if Bitcoin bounces and then goes down to lower $40ks. Would love to buy in that area both $BTC and alts. As long as price holds there we could see some major rallies over the next few months as BTC slowly uptrends.
In the meantime, some side movement could be Bitcoin’s new normal for the short term. Lex Moskovski, CIO at Moskovski Capital, believes the recent crash “cooled off” BTC’s major overheating indicators.
As seen below, Moskovski compares 2017 bull run metrics with the current market and determined that Bitcoin is around 44% from potentially reaching a peak on its upside trend. On the contrary, there could be even more upside momentum after this week’s crash. Moskovski said:
Bitcoin has cooled off a bit and according to the major overheating indicators has even more upside now.
What Could Break Bitcoin’s Market Structure?
Economist and trader Alex Krüger provided further arguments for a long-term BTC bullish case. As Krüger said, this cryptocurrency has seen massive adoption with macro-economic conditions that benefit it. Since 2020, the thesis of Bitcoin as a store of value has gained a lot of strength among institutional investors.
Krüger laid out two possible scenarios. In one, “major catalysts” re-heat the market, and BTC’s price pushes into a new discovery period. The economist said:
The first half of this dump was expected, not so the second, which was news-driven. Shit happens. But nothing major has changed aside of a healthy cleansing. When expecting a range good to avoid getting bullish on breakouts, or risk getting head chopped off.
In the second scenario, the U.S. Government and its Secretary of Treasury Janet Yellen launch new regulations for crypto and digital assets. Krüger expects any “draconian” rules to negatively impact the market.
NatWest, the UK retail bank, has announced it will not engage with business customers who accept payment in bitcoin or other cryptocurrencies. It follows recent announcements from HSBC that it won’t allow transfers from digital wallets and won’t enable customers to buy shares in companies associated with cryptocurrencies, such as Coinbase or MicroStrategy.
The feeling from both banks is that cryptocurrencies are high risk and therefore justify a cautious approach, though they note that their stance could change if and when regulation evolves.
Interestingly, this is not a view shared by institutions across the Atlantic. Both Morgan Stanley and Goldman Sachs are now offering their wealth management clients the opportunity to invest in bitcoin. Indeed, the initial uptake has been strong, with Morgan Stanley alone drawing in nearly US$30 million (£22 million) of investment in two weeks.
Why the caution?
The cautious approach of NatWest and HSBC stems from the 2012 recommendations of the Financial Action Task Force, a G7 initiative geared towards defeating money laundering. These recommendations mandate each member state to implement measures requiring their banks to scrutinise customers’ transactions for the purposes of money laundering and terrorist financing.
Under recommendation one, the anti-money laundering framework is to be applied on the basis of perceived risk. In other words, if a transaction or business activity is perceived to be more risky than usual, it needs closer scrutiny by the bank to ensure compliance with the framework.
This increases the strain on bank resources to verify that a transaction or business activity is safe to continue, but they also face large fines for non-compliance where there are deficiencies in their implementation of the framework or if things go wrong.
NatWest and HSBC are no strangers to being under the spotlight for compliance issues. HSBC was fined US$1.9 billion by US authorities in 2012, while NatWest faces charges over significant compliance breaches in the UK. While these charges relate to traditional money-laundering compliance breaches, perhaps it goes some way to explaining the caution of the two banks.
Banks view digital currencies as risky because they have the potential to be used for money laundering, they are targets for fraud and scams, and their value can be extremely unstable in the short-term. Indeed, the UK’s Financial Conduct Authority has warned that those investing and dealing with cryptocurrency are at risk of losing all their funds. Rather than face the enhanced burden of investigating businesses and individuals dealing with these assets, it is easier for banks to avoid the risk and not engage with them.
This situation is not unique to cryptocurrencies. For instance, it has long been a byproduct of the anti-money laundering requirements that banks have refused to offer financial services to charities operating in high-risk jurisdictions. The banking sector accepts this reality, particularly given that charities tend to be relatively low-value customers.
The wrong approach?
On the face of it, banks are perfectly entitled not top offer financial services to businesses transacting in digital currencies. As well as anti-money laundering, banks are bound by anti-fraud measures and consumer protection. Fradulent crypto transactions are both difficult to spot and impossible to reverse, so the risks of engaging are high, at least until the market establishes itself and the business case to engage is stronger.
Of course, this is not to say that they have necessarily made the right call. The fact that the leading US banks have taken a different approach suggests that they think the potential rewards are worthy of the compliance burden. In defence of cryptocurrencies, they are both more traceable than cash, and used less for money laundering.
And while it is true that there is a risk of significant losses with cryptocurrency investments, there is also clear potential for big gains. Banks are profit-making businesses: the returns from crypto investments in recent months – notwithstanding the big sell-off in the past couple of days – plus the very bullish forecasts, ought to prompt them to at least speculate in the area, regulatory burden aside.
We could simplistically blame the UK banks for either being too cautious or not doing enough to help these businesses, but it overlooks the bigger design flaw in the anti-money laundering framework. Compliance measures are a significant drain on a bank’s resources where a transaction or business is considered high-risk. Banks and their workers also face criminal sanctions, including large fines, where they fail to properly implement the rules, which is particularly troublesome when it is almost impossible for a bank to identify what a suspicious crypto transaction looks like.
Without a guaranteed high return for the bank, it is easier to de-risk and not engage with these businesses. This represents a missed opportunity for banks, and a potentially unnecessary stifling of legitimate business growth for companies wishing to deal with cryptocurrencies.
Banks are portrayed as the public villain, but the bigger problem is at a much higher level. It is a political and legal issue which requires the attention and intervention of lawmakers to address the fact it is much easier for banks to de-risk than to comply with the rules and help these businesses grow.
Bitcoin is now reeling after a rejection prevented further highs around the time Coinbase Global went live on the Nasdaq. The same stock market has also been booming alongside crypto – both markets gone parabolic against a common denominator: the dollar.
The greenback’s “exponential decay” is poised to continue, further benefiting crypto and equities. However, some short term abatement of hyperinflation could bring pause to the bull market.
When nearly every stock or crypto chart denominated in the same asset USD $ is parabolic, you’re looking at an exponential decay of the denominator. In the short term, there is a risk that they crash the market in order to abate some of the effects of the ongoing hyperinflation.
— Jess Martini 🍸 (@btcty) April 20, 2021
USD Inflation Drop Goes Parabolic Against Bitcoin, Stock Market
Flash back to around 14 months ago, before Black Thursday rocked finance and to when the pandemic first began. The stock market and cryptocurrencies were decimated by the panic that ensued.
But as a result of governments flooding the money supply with more money than ever before, both markets went ballistic. A bull market broke out in both stocks and cryptocurrencies, bringing all major indices to new all-times, and Bitcoin breaking all previous records.
The stock market and crypto are doing well for completely different economic factors and are such different asset classes, the real reason for the sudden parity is due to the dollar.
Exponential Decay To Continue, According To Dollar Currency Index
The dollar is in trouble – there’s no doubt about it. It’s value against other top world currencies according to the DXY has fallen. Against Bitcoin and stocks, the drop has gone parabolic.
Zooming out on the DXY could suggest that the worst is yet to come for the greenback. A massive symmetrical triangle has formed, similar in shape as the one Bitcoin broke upward from to start the bull market.
Except before Bitcoin consolidated, the previous trend was up. In the dollar, the prevailing trend has been down, and that’s where things could still be headed if “exponential decay” continues as expected.
A fall of such magnitude as the measure rule would project, could take the top currency in the world down to historic lows. And with USD as the base currency at which all other assets are measured, price action could get a little wild.
If that happens, even if somehow a strategy rolls out to prevent against short-term inflation and the dollar gets some air, fiat is dying a fast death at the hands of Bitcoin.
Technical factors in Bitcoin and stocks also point to correction enough to where the dollar gets some immediate relief. But after that, it is right back to destruction of the global reserve currency.
Having a lot of your net worth in Bitcoin can be a rollercoaster as the price of Bitcoin is so volatile. One day you’re up 20%, the next day you’re down 25%. I have bought and sold regularly in the past, very often at the wrong times, and found the whole business very stressful.
These days I mostly just Hodl, and so far that has worked well. One of the reasons I changed strategy was Stock to Flow, and that’s what I’d like to talk about today.
Like the infamous alchemists of old, most people in crypto are looking for shortcuts to wealth. Finding the cheap coins before they rise in value, looking for the trends in price, particularly the dips, etc. I’m just the same, and over the years I’ve been doing crypto I have had a particular eye out for predictions – mathematical models – of the future Bitcoin price so that I would know what was coming down the line. The thing is, with Bitcoin, such predictions may be possible and practical. While the value of most assets is at the whim of the market, and their supply can respond to changes in demand, Bitcoin is different. Its entire supply is defined in code – we know there will only ever be 21 million, and we know more are created every 10 minutes, and so on. Therefore it seems credible that its price could be predicted in the future.
I have looked into various models and many of them seem to have some value for predicting price and/or market peaks, for example:
All of these have some value but none appeared to me to be both precise enough and easy to read.
Instead the model I always return to is Stock-to-Flow. This was introduced to the community by a Dutch trader known as ‘Plan B’ (aka ‘100TrillionUSD’) through an article on Medium early in 2019: Modeling Bitcoin Value with Scarcity. It caused quite a stir with its bold claims. Firstly, that Bitcoin price could be accurately modelled into the future. Secondly, fundamentally, it was all about the rate of creation of new Bitcoins. In particular, because the rate of creation drops in half every 4 years (in events known as ‘halvings’) it was able to match and predict the four year boom-bust cycles that Bitcoin is prone to. For the details, it’s well worth reading through the article.
I have now been following this model for two years and have repeatedly found that it works, the match between prediction and reality is good enough to inform my view of the market and the way that prices are going – and that’s a very reassuring feeling. It is a logarithmic model so with its wide error bars (1 and 2 standard deviations) you have to accept that the Bitcoin price can still vary hard and fast and be within the broad range of the model. However, it always seems to get the long term trends correct. Personally I check it about once a day, and usually find it has the price about right and well within 1 standard deviation. I take note, however, if the price starts tending out of the 1sd range – something that happened at the height of the Covid panic, and a couple of times since. However, the bitcoin price has always returned to the model, and I have relaxed.
Bitcoin daily stock-to-flow and price (Image:s2f.hamal.nl)
Hodling while watching the S2F chart has worked well for me over the last year or two, and in particular has helped me to be steady through the various downturns. However, it’s worth noting two things on the S2F charts. Firstly the good news is that Bitcoin will hit a peak this summer and it will be at least $100k. Secondly the bad news is that the period approaching a peak is very volatile, and after each previous post-halving peak there has been a big crash.
In other words the real price goes above the prediction at a peak and drops below it in the months following:
Bitcoin all time price (Image: s2f.hamal.nl)
Therefore I will be looking to ‘reduce my exposure’ as the price passes $90k. That doesn’t necessarily mean I’ll sell any Bitcoin, as it has been hard to come by, but I will at least cancel the Bitcoin loans I have taken out and then hunker down for a likely tumultuous following year or so.
So that’s Bitcoin stock-to-flow (S2F) in a nutshell. I can’t tell you how you should use it, but it has worked well for me, both psychologically and financially in guiding my trades.
Before I go, for completeness, I’ll just touch on Bitcoin S2FX. A year after Plan B announced the original S2F model he introduced a refined version called Stock-to-Flow Cross Asset (S2FX); for the details see here. The new model is more attractive in a number of ways, for example giving more justification for the application of S2F theory, and also predicting a high this summer for Bitcoin near $300k. However, I find the theory less convincing and by eye I don’t think its price predictions are quite as close to real prices as the original model. Take a look, though, it may work for you. Of course it does rather muddy the waters: if Bitcoin hits $200k this summer then it could be S2FX being correct, and the value will keep going up, or it could be S2F is correct, and it’s just about to crash. But then investing in Bitcoin has never been boring!
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