13
The crypto market has been correlated to the price of Bitcoin given its status as progenitor and the market capitalisation bestowed upon it from inception. In recent weeks, the price action for the crypto world has been down and of course, every one feels miserable. Even @PlanB who wrote out the Stock-to-Flow (S2F) model has of late, asked if his his S2F model will be invalidated this time around?
This was what @PlanB said:
Even for me it is always a bit uneasy when bitcoin price is at the lower bound of the stock-to-flow model. Will it hold (like Mar 2019 when I published S2F, or Mar 2020 Covid, or Sep 2020 with BTC stuck at $10K) and is this another buying opportunity? Or will S2F be invalidated?
(https://twitter.com/100trillionUSD/status/1407620265475989506?s=20)
For those of us who have been following through with this model, we understand it to be how the growth of Bitcoin will take in terms of this particular wave.
What is this Stock-to-Flow (S2F) model, exactly? Explain it like I’m 5, please.
S2F has been referenced as a metric indicating new supply of an asset (typically, a fixed supply, with scarcity of sorts), relative to the new supply that is created. The ratio that you commonly see across times when this model is applied for assets like gold, palladium, etc. is an expression of the number of years essentially, it will take for the supply to double based on the current rate of production of that asset (https://river.com/learn/bitcoin-and-the-stock-to-flow-s2f-model/).
In that sense, of course, you CANNOT apply this to Ethereum given that it has supply cap.
This is where the fun begins. Let’s take a look at it from the perspective of gold before we get into Bitcoin, which in turn will lead to the other altcoins mooning at some point shortly.
GOLD
At the current price of about USD1,800 per ounce, many gold mining companies will be profitable with their operations and it makes sense for them to continue mining gold. If the inflation logic holds (that is a BIG if), then gold has the potential to soar in value to say, $8,000, hypothetically. This will also mean that it will make sense for you to invest ahead in not just gold, but gold mining stocks. However, by increasing the supply of gold by mining more, the price will eventually settle down at some point. This regulation of supply has an equilibrium settling effect on the spot price of gold. Will gold rise crazily in price? Well, it may be difficult in the long term to do so because new supply can be increased to meet new demand and prevent prices from mooning like in the crypto world.
Enter the Bitcoin
Now, this is where Bitcoin comes in with this investment narrative - 21 MILLION that will ever be mined. Already, 18 million have been mined and adding to that issue, the halving effect takes place once every 4 years, which reduces the amount of Bitcoin being created. With a price appreciation, we will see more mining companies setting up shop to try to do a grab of this scarce asset. However, because of the level of difficulty imputed, the rate of new supply typically remains consistent and we cannot adjust the rate of new supply to meet up with demand.
Bring the entire concept of #HODLING into the picture (where people buy and hold without ever trading the asset), and you have a “gold” rush of the crypto age.
Price increases will be exponentially held!
Our take on where this will land in the coming weeks and months
We have seen the boom and busts of the price of Bitcoin and the relative assets in the crypto space and people are wondering if the end of the coin has come, given all the banning from China, the tweets from Elon Musk and the cynics all putting death crosses and wishes for those who are invested.
The truth of the matter is, the evolution has started as much as the revolution has taken off.
We cannot deny how it works, and as blockchain technologies continue to grow, with banks entering into the space, using Ethereum to issue digital assets, one can only surmise that this adoption will snowball further and further. What we need to do is to position ourselves by getting in early. And while this does not constitute investment advice, and that you should do your own research and due diligence, you need to pay attention more to where the altcoins will land than the Bitcoin price.
Bitcoin is and will remain the key narrative in this space until perhaps all the coins have been mined and it is parked alongside gold as another asset class. But with 3 million coins left and many years more before they all get mined, once needs to step into finding out what are the key projects in cryptocurrencies that will take off. Especially those that will hollow out financial institutions, or present new ways of realising revenue model streams.
Don’t stand on the sidelines and wait as more and more institutional money comes pouring into this space.
Yours,
Chief Editor,
BBA Market Perspectives
