The stock-to-flow model may be invalidated as the price of Bitcoin loses $ 30,000

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As the price of Bitcoin (BTC) continues to struggle around the $ 30,000 mark, the widely accepted stock-to-flow (S2F) model for valuing Bitcoin, invented by Twitter user and investor Dutch anonymous Plan B, is now the furthest from its estimates. .

The pattern was popularized by the Twitter pseudonym over two years ago in March 2019 and in the midst of a minor bullish until the first quarter of 2019. It is considered one of the leading quantitative assessments of the very first currency. rare digital. The model assumes that the scarcity of certain assets or commodities determines its price.

The S2F model is an attempt to price Bitcoin in a manner similar to rare commodities, such as gold, silver, etc. The essence of it is that assets like Bitcoin, Gold, and Silver only have limited supply injections within a certain amount of time when compared to commodities like Oil, Copper and steel, where the flow of supply is higher and considered theoretically unlimited.

Since Bitcoin has a maximum supply limited to 21 million tokens and given the process of mining time and energy, there are only a certain number of new Bitcoins that can enter circulation in a certain time lapse. Premium cryptocurrency fits perfectly into this model, so far. Johnny Lyu, CEO of KuCoin Global, a cryptocurrency exchange, told Cointelegraph:

The creator of the model tried to predict the continued surge in the price of Bitcoin based on its rare gold-like nature in that it also has a high stock-to-flow ratio. Therefore, the assumption is: As the stock of Bitcoins increases, its price will also increase.

He went on to say that such patterns are usually built on historical data and that while certain periodic trends can help identify the general direction of the market, specific trends can often be difficult to follow ahead of time.

Deviation of the S2F model to a record level

According to the S2F model, the price of BTC is supposed to be $ 88,531 on July 20, almost three times the current price. In fact, earlier this year, PlanB suggested that Bitcoin could hit $ 450,000 by the end of this year at best and $ 135,000 at worst. Additionally, the model predicts that Bitcoin is expected to have hit its long-awaited $ 1 million mark by July 2025.

However, in a PlanB Twitter poll on June 21, 41% of respondents believed Bitcoin would stay below $ 100,000 this year.

This is compared to the 16% who believed the same in March when Bitcoin traded hands at $ 55,000. PlanB went on to say that Bitcoin prices deviating from the S2F pattern even make it a little uncomfortable.

The model, as the name suggests, uses the stock-to-flow ratio to value Bitcoin. This ratio is defined by the current number of Bitcoin in circulation at any given time and the inflow of newly mined Bitcoin. As the chart depicting the model shows, historically Bitcoin has plotted the price estimates fairly accurately most of the time.

As Lex Moskovski, chief investment officer of Moskovski Capital pointed out, the negative S2F deviation of the ratio between the market price of Bitcoin and the S2F ratio is now the highest it has ever been in the history of the token. He went on to say that for supporters of the S2F model, now is the perfect time to buy Bitcoin, as this price drop could be seen as an unexpected drop.

Lennix Lai, director of financial markets at the OKEx cryptocurrency exchange, spoke with Cointelegraph about the limitations of the S2F model, saying:

Despite its limited predictions, the S2F model had limited power over bitcoin price prediction, as it assumes that Bitcoin production will be limited. While its simplicity makes the concept easier to understand, PlanB launched the Bitcoin S2F model in 2019. Demand back then is a different story from today, in which demand has a direct influence on its intrinsic value. The dynamics of demand and adoption have changed.

One of the major changes over the past year for Bitcoin and the cryptocurrency markets as a whole is the high rate of institutional and retail adoption which has increased significantly since March 2019. Another important factor in this dynamic demand and adoption is the COVID-19 pandemic. that has plagued the world for over 19 months now. Lai expanded on this, saying:

The pandemic has likely accelerated adoption as well, as the supply of USD has swelled massively over the past year. Investors are looking for alternative assets in which to put their money to protect against the inevitable inflation. We also see daily analyzes from well-respected companies and institutions predicting that Bitcoin is undervalued, the Musk Effect is an ambush to the market.

The Musk Effect, combined with a variety of other factors, such as the mainstream popularity of non-fungible tokens (NFTs), has played a significant role in raising awareness of cryptocurrencies and blockchain technology in general.

Lyu also touched on this changing scenario in the cryptocurrency market, stating: Emerging projects and altcoins in the market with diverse application scenarios will distract investors and diversify their existing investment portfolios, thus constantly fluctuating the Bitcoin market. This change is evident in the fact that, since the start of this year, Bitcoin’s dominance as the top cryptocurrency has grown from over 60% to its current 46.3%, which means an altcoin sector in full swing. growth.

In a recent example of the change in demand and adoption dynamics since the inception of the S2F model, the Grayscale Bitcoin Trust Fund (GBTC) recently underwent several stock unlocks in July, the largest of which took place on the 18th. July. This expiration further increased the continued decline. pressure on Bitcoin, pushing it down further to around $ 30,500 on July 19, from nearly $ 32,200 on July 18 before expiration. In the past, when the S2F model first spread, there was no institutional demand that could have a big impact on the market in a short period of time.

The adoption rate model could be more precise

While the S2F model is one of the more well-known quantitative models that predicts the price of Bitcoin in the short term (less than five years), there are several other models that are often used to assess its price potential. Daniele Bernardi, founder of the PHI Token project and CEO of Diaman Partners Ltd., a fintech asset management company, explored some of these models in a recent article. Bernardi assessed the shortcomings of the S2F model, telling Cointelegraph:

It is not enough to consider scarcity to predict the fair value price of an asset, because of course it must be supported by demand. My mom can draw art, but if no one wants to buy them, the value is zero despite the scarcity.

Instead, Bernardi prefers the adoption rate model, which he explores in his article. He said that, under this model, the fair price for Bitcoin can be around $ 60,000, but not more. This estimate is based on actual Bitcoin users and the wallets created.

He went on to explain the likelihood of the PlanBs S2F model coming to fruition this year: Of course anything can happen, but from my perspective there is less than 20% probability, based on the Monte Carlo simulations. , that the Bitcoin price will reach a value greater than $ 100,000 in 2021.

Related: Predicting the Price of Bitcoin Using Quantitative Models, Part 3

That said, it’s important to remember that Bitcoin was trading hands at $ 18,000 for a few days during the March 2017 bull run and jumped straight to $ 64,000 in March 2021.

There are not many assets in the financial markets that have recorded gains at these levels in such a short period of time. Bernardi explained the impact of this growth:

We have to consider that only after six months where the price of Bitcoin has reached a value above $ 30,000, we are tempted to consider Bitcoin undervalued, but this is not the case; it’s fair in the average fair value price, based on our adoption rate model.

Fair value or not, Bitcoin appears to be in a period of turbulence, most often faced with downward pressure on the token since the black Wednesday lightning crash n May. However, positive institutional news continues to flow. More recently, Grayscale CEO Michael Sonnenshein said that Grayscale is 100% committed to turning GBTC into a Bitcoin exchange-traded fund.

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