Bitcoin’s recent drop in price, which saw the company drop a quarter of its value after hitting an all-time high, could just be the midway dip of a new record rally if the market patterns of 2013 and 2017 repeat.
This is the view of a number of prominent cryptocurrency analysts who adhere to a “stock-to-flow” model dictated by Bitcoin’s built-in scarcity.
The model is based on the relationship between existing bitcoin inventories and the annual production rate of new bitcoins through digital mining. A “halving” event occurs roughly every four years that reduces the rewards for mining the cryptocurrency by 50 percent. After the first halving in 2012, Bitcoin price rose from around $ 11 to $ 1,100 before falling again. On the second halving in 2016, the price of Bitcoin rose from $ 500 to $ 20,000 before falling again.
The last halving event took place in May 2020, right at the start of the last price rally. Since then, it has risen from under $ 10,000 to the new all-time high of $ 64,863 it hit this month. After briefly falling below $ 48,000, it has rebounded slightly to $ 55,000 at the time of writing.
This recent decline appears to be similar in scope and timing to other drops seen after the 2012 and 2016 halves.
(Twitter / PlanB)
One of the most vocal proponents of the stock-to-flow model is the Netherlands-based analyst ‘PlanB’, whose latest projections suggest that Bitcoin is still trading at just a fraction of its next big high.
A chart plotting the value of Bitcoin over time on a logarithmic scale (with its value increasing in 10x increments) shows that the cryptocurrency has largely followed a linear course since its introduction in 2009.
In its original stock-to-flow model from March 2019, PlanB stated that irregularities were due to various external forces – as the market crash triggered by the pandemic in early 2020 shows – but that ultimately the fixed supply of Bitcoin was the main driver of price is movements in the long run.
“Other factors also affect price – regulation, hacks, and other news – so it’s not 100 percent (and not all points are on the line),” he wrote. “However, the dominant driving factor seems to be scarcity.”
Dr. Saifedean Ammous, economist and author of The Bitcoin Standard, also noted similarities between the recent price drop and previous rallies after the halving.
“More than two years after this model was released, the price continues to track the model’s predictions with amazing precision,” he tweeted in response to the recent decline.
Another analyst noted, “This is starting to get scary.”
After Bitcoin’s price fell in March 2020, when it briefly fell below USD 5,000, PlanB stood by the model and its forecast that the cryptocurrency will reach USD 100,000 sometime in 2021.
A month after the 2020 crash, he went a step further and released a revised version of this stock-to-flow model that got Bitcoin’s trajectory on track for $ 288,000.
In a market report by the cryptocurrency exchange Luno, the stock-to-flow model was cited shortly afterwards, in which it says: “Based on the historical data of Bitcoin, it can be lucrative to accumulate more Bitcoin now.”
At the time, a bitcoin was only worth $ 7,000.
Konstantin Anissimov, Executive Director at the London-based cryptocurrency exchange CEX.IO, praised the accuracy of the model and its obvious ability to predict future prices in yet another illustration of the cryptocurrency industry.
“The stock-to-flow model foresaw the future price development of Bitcoin as a direct result of the supply shock after each halving extremely accurately,” he told The Independent.
“Based on this fundamental indicator, the scarcity of Bitcoin has a strong correlation with the value of the network. With the cryptocurrency production rate plummeting to 328,500 new tokens per year last August, such a significant decrease had a serious impact on prices. “
The final halving event is expected to happen sometime in 2040. At this point, all 21 million bitcoins will be mined.
The estimates for the value of Bitcoin by then are between 0 and 100 trillion US dollars in terms of total market capitalization – and are thus at the level of the global real estate market.
Whatever the ultimate peak of Bitcoin, there is another pattern that has appeared error-free in every halving cycle so far: every record high was followed by a record crash.