Bitcoin has had a massive 48 percent correction from its all-time high in the past, while the price is actually based on the stock-to-flow (STF) model. The assumption that BTC could see another rally after the impending halving is therefore not inappropriate, provided that it is a valid model.
BTC in line with the stock-to-flow model
The STF model was developed by the Dutch crypto analyst Plan B, which was intended to predict the course of the leading cryptocurrency based on its rarity. Investors prefer raw materials with a high STF ratio (the existing stock divided by the annual production) as they gradually become scarcer. For example, gold with a market cap of $ 8.4 trillion has a ratio of 62, while silver has only 22 due to its higher supply.
BTC’s STF ratio is currently 25, but will increase after the next halving in May 2020. For each block, the miner reward is reduced from 12.5 BTC to just 6.25 BTC. It is expected that the ratio will reach 50, which would bring the “digital gold” very close to the yellow metal. If you only look at the STF rate, Bitcoin can be perceived as more valuable than gold – and will therefore live up to its name “digital gold”.
However, Bitcoin’s STF model is not for everyone. The economist Alex Krüger called it “massively overrated” in early November. The importance of the supply side is suppressed by Krüger if the demand for Bitcoin is not taken into account. In his opinion, demand is the most important factor driving the BTC price. With the assertion that the model is “almost exclusively nonsense”, he has reinforced his criticism significantly.
Why Bitcoin is doing well
The value of Bitcoin is rather limited and moves based on sentiment, so Bitcoin goes through a cycle that consists of a bear market, an accumulation phase, a build-up market and a bull market. Bitcoin prices often bottom out in a bear market. Investors often quickly criticize the dominant cryptocurrency for the falling price.
In this context, many investors also tend to abuse the properties of Bitcoin by saying that it is not transparent and has no clarity about its structure. In fact, however, Bitcoin is part of an open source software that is supported by developers worldwide. The code can be viewed by anyone, which it calls the most transparent store of value.
Companies in the ecosystem are increasingly building better infrastructure to support users and investors during and after a downward trend. In 2018, a new line of service providers like Bakkt emerged, with many countries beginning to provide more regulatory clarity about cryptocurrencies as an asset class.
From a long-term to medium-term perspective, there are several basic catalysts for Bitcoin price, such as the upcoming halving of the block reward in May 2020. In the short term, however, volume and interest are expected to decrease and to rise on the major crypto exchanges will result in a deeper pullback.