Bitcoin’s Dominance
“Sound money is money that gains in value slightly over time, meaning that holding onto it is likely to offer an increase in purchasing power”
— Saifedean Ammous, The Bitcoin Standard
This chart outlines the previous 2 Bitcoin post-halving bull market cycles and the current one in a stock-to-flow model.
What is the Bitcoin Halving?
The Bitcoin Halving is the process of halving the rewards of mining bitcoin after each set of 210,000 blocks is mined. Which occurs about very ~4 years.
What is a Stock to flow model
Stock to flow ratios are used to evaluate the current stock of a commodity (total amount currently available) against the flow of new production (amount mined that specific year).
As we can see in the chart, the red line is the cycle phase we are presently in (post 3rd halving).
To figure out where we are today, we must take into account a few things.
The laws of diminishing returns. As BTC’s market cap gets bigger and bigger, it’s much harder to move the price higher. We can see BTC’s meteoric rise in price after the first halving in 2012 (yellow line). Then again in 2017 (orange line), but with lower returns.
Post 3rd halving (the blue line) we can see a very similar trend to 2017. After the collapse in BTC’s price this past May, we began to underperform the 2017 rally. What is unique to this rally (which began in 2020), is the institutional adoption along with massive amounts of leverage in the system. Both unseen in the previous 2 cycles.
Leverage is what appeared to be the cause of the cascading liquidation event in May and also what likely propelled bitcoin to ATHs past 60k so quickly. Remember, leverage works both ways.
On the flip side, continued institutional demand could be the reason for BTC’s resilience after such a deep correction.
This infamous chart created by PlanB shows the price of bitcoin in a linear stock-to-flow model. Even after the huge correction, this backtested chart holds true to the S2F pricing levels of bitcoin. This is a great chart to reference when debating short-term price levels.
This chart shows the price of bitcoin vs long term bitcoin holder wallets supply. Experienced holders sell on the way up so they can buy back on the way down as we see in this chart. Dump on retail, then buy retails liquidations!
This cycle may turn out to be much longer than the others (which lasted on average 518 days) because of institutional demand and leverage. Sitting at around $40k (this article has been edited — now bitcoin sits at ~$37k) as of today, Bitcoin appears to want to continue its trend upward. With a fresh bullish news cycle, and a favorable macro environment we could finally see BTC cross $100k later this year/early 2022.
