4 Bullish Long-Term Indicators
1 May, 2020
Many of my readers have been asking me the same question recently: Is now a good time to buy bitcoin? In accordance with the philosophy of this blog “investment based on analysis”, today we are going to introduce 4 indicators to take into consideration in the long run, that will help you in the process of making up your mind about bitcoin investing.
These indicators are:
the Stock-to-Flow ratio (#SF)
the 200 Weekly Moving Average (#200WMA)
the Ribbon of Exponential Moving Averages (#EMARibbon)
1. Stock-to-Flow Ratio
As you may already know, to date, the monetary system is based on paper money that was taken off the gold standard by President Nixon in the 70s. From that moment onwards banks are no longer required to maintain a gold reserve equivalent to the money they lend in dollars. They are only required to keep a fraction of what they lend, introducing a significant risk in the financial system. This fact enables central banks to print as much money as they wish (because it doesn’t need to be backed by gold!), with the sole purpose of generating a controlled inflation that ideally should not go beyond 2%.
Since the subprime crisis in 2008 that caused a terrible impact to the economy, money-printing has reached extraordinary highs BUUUUT the same has not happened with the salaries of workers, and bubbles have been created in the stock market, real estate and high-end sectors.
One could argue that central banks have not achieved their mission to help the average person by giving money to banks hoping this will create economic wealth and cascade down to reach all segments of society. Instead the rich have gotten richer and the poor have gotten poorer. But we need to ask ourselves: Whose fault is this? Rich people´s fault? Or is the economic system the one falling apart? According to Austrian Monetary Theory, money-printing is, per se, unsustainable long term. This theory advocates for a monetary policy without government intervention, avoiding out-of-control money-printing that, in their words, would inevitably end up in bigger and bigger bubbles, leading to a final burst and the need to reset the whole economic model.
As a consequence, we can state that nowadays fiduciary money (FIAT), such as euro, dollar, yuan etc. can be printed indefinitely. Applying the law of supply and demand, this leads to a currency devaluation long term (too much of something decreases its value). However, bitcoin plays a substantial role in this battle between Keynesian economics and Austrian economics given its limited supply*, as opposed to the unlimited supply of FIAT. Therefore, bitcoin has a property that FIAT doesn´t, and that is: SCARCITY.
* there cannot be more than 21 million bitcoins as per the code
“As a thought experiment, imagine there was a base metal as scarce as gold but with the following properties: - boring grey in colour - not a good conductor of electricity - not particularly strong, but not ductile or easily malleable either - not useful for any practical or ornamental purpose and one special, magical property: - can be transported over a communications channel” Satoshi Nakamoto
The Stock-to-Flow (SF) ratio measures how scarce an asset is by evaluating the current stock of a commodity (total amount currently available) against the flow of new production (amount mined that specific year).
This ratio is very often used to value metals like gold, silver, palladium and platinum. The higher the ratio, the scarcer the asset is and more valuable it becomes. In the below table we include SFs of a number of metals, observing that gold is the one with the highest SF.
If we calculate bitcoin´s SF ratio for the future months and years*, we obtain the chart below. We can see that the SF ratio (blue) and the price of bitcoin (in red) are clearly correlated, bitcoin price tends to follow the SF value. The SF ratio will increase above 60k dollars due to the halving event of May 2020, so this model clearly shows a future bullish scenario.
*We can do this because bitcoin generation rate is known in the future
2. The 4-Year Cycle linked to the Halvings
In December 2017 the crypto bubble burst. At that point, the queen of crypto, bitcoin, reached a price of 20,000 dollars to then experience a fall in price of 85% to the level of 3,100 dollars.
This may seem unprecedented, but the truth is that it’s not the first time that it happens, and WHAT IS MORE IMPORTANT, the background trend in longer periods of time has always been upwards. In the below chart we can see that bitcoin price-action has been rising since 2010 in cycles of approximately 4 years. These cycles happen to be closely related to the bitcoin halving events (vertical lines). Meaning, we´ve previously experienced booms followed by busts of 85% in 4-year cycles, forming a constant upward trending line when we zoom out in the logarithmic chart. So, by looking at the past it is expected that the third bitcoin halving of May 2020 kick startec the fourth bull market for bitcoin.
3. 200 Weekly Moving Average
Applying technical analysis on the bitcoin weekly timeframe, we see that, as it occurs with other assets, the 200 weekly moving average (that is the average price of bitcoin per week in the last 200 weeks, represented on the chart with the red line) has acted as a key support in early 2019 and march 2020, indicating once again, the beginning of the bull market like it happened in mid-2015 (see chart).
4. The Ribbon of Exponential Moving Averages
And last but not least, we will analyze the EMA Ribbon indicator or, in other words, the exponential moving averages in the last 20, 25, 30, 35, 40, 45, 50, 55 and 89 weeks respectively. Using this indicator, we observe that when bitcoin is above the Ribbon the trend is upwards and when bitcoin is below the Ribbon the trend turns downwards. The exciting news is that from mid-2019 we enjoy an upwards trend on top of the Ribbon.
Watch out! In march 2020 bitcoin experienced a big sell off and recovery after a few days. However, we need to be cautious when using this indicator and take into consideration that one indicator alone should not be enough to buy an asset but rather a comprehensive basket of reliable indicators will allow you to make the best informed decisions.
After analyzing four of the most important indicators in trading and investing, we can conclude that the trend is bullish long term for bitcoin with a high degree of certainty. Therefore, we could very likely be at the very beginning of a new BULL MARKET. So, to the question ¿Is now a good time to buy bitcoin? We would say: it depends. Depends on the timeframe, and your personal objective. What you should be aware of is that we are dealing with a very volatile asset, with extreme daily booms and busts that can reach the two digits and make you buy/sell in the worst moment moved by FUD (fear, uncertainty and doubt).
As we always say, never invest more than you can afford to lose AND study the asset that you are purchasing to make sure what you are getting into is as solid as it can be.
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