Should I Buy Bitcoin now? Stock-to-Flow, Halving and Moving Averages

4 Bullish Long-Term Indicators

1 May, 2020

Analysis of 4 long-term bullish indicators. The Stock-to-Flow ratio, the 4-Year Cycle linked to Halvings, the 200 weekly moving average and the EMA Ribbon of exponential moving averages
Should I Buy Bitcoin now? Stock-to-Flow, Halving and Moving Averages | The Bitcoin Tale Blog

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:

  1. the Stock-to-Flow ratio (#SF)

  2. the 4-Year Cycle of #bitcoin linked to the #halving events

  3. the 200 Weekly Moving Average (#200WMA)

  4. 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 channelSatoshi 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.

Should I Buy Bitcoin now? Stock-to-Flow, Halving and Moving Averages | The Bitcoin Tale Blog
The Stock-to-Flow ratio measures how scarce an asset is | The Bitcoin Tale Blog

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

Should I Buy Bitcoin now? Stock-to-Flow, Halving and Moving Averages | The Bitcoin Tale Blog
The Bitcoin Stock-to-Flow ratio | The Bitcoin Tale Blog

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.

Should I Buy Bitcoin now? Stock-to-Flow, Halving and Moving Averages | The Bitcoin Tale Blog
The 4-Year Cycle of Bitcoin linked to the Halvings | The Bitcoin Tale Blog

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).