Every 4 years the Bitcoin mining reward is reduced by half, and according to the stock to flow model which was developed by a pseudononymous Twitter user, this event renders the supply of Bitcoins in the world to become more scarce. This financial model has proven to be one of the more accurate ones in recent time since it values Bitcoin based on the current supply relative to the amount of new coins being mined. The next reward halving is set for May of 2020, in which the model predicts a seemingly outrageous relative price for Bitcoin. My question is, can technical analysis provide any realistic clues toward the validity of this premise?

Models Don't Drive Markets?

As an investor and short term market timer, I am a strong believer in technical analysis, after all, I am a Chartered Market Technician. The main premise of TA basically views price, volume and sentiment information as a simplified reflection of the much more complex fundamentals of a financial market. Whether it is a stock, or Bitcoin, the forces that determine the actual price of an asset are the same: greed and fear.

That is why in this article, without getting into all the intellectual details of the stock and flow model, I am going to share some technical reasons why I believe the current price action of Bitcoin loosely supports the outrageous price that the stock to flow model is pointing to as a result of the next halving event.

In case you don’t know, the model says that Bitcoin will be around 55K after May of next year. Yes, it is very hard to believe, but back in 2013, Bitcoin at 1K was also very hard to believe.

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Is Bitcoin 55K Plausible?

What the stock and flow model appears to prove is that the price of Bitcoin is mostly affected by its scarcity, very similar to physical Gold. It is expensive to mine new coins in terms of electricity, and in twenty years, all the coins that can possibly exist, will be online which is 21 million.

Halving the mining reward reduces the rate of new coins coming online because there is less incentive. As technological demand continues to rise, there will be less new coins available. And don’t forget, there are more and more institutional players getting into the game and accumulating what is available now.

It all seems to make sense, especially when you compare it to markets like Gold and Silver which can also be evaluated in terms of the stock to flow model. Currently the SF of Gold is 62 and after the next Bitcoin halving, its SF will be 52, not much different from Gold. And when this number is used to calculate the valuation of Bitcoin after the next halving, the resulting price is 55K. Google it.

Bitcoin: Weekly Wave Count And Price Projections.
Bitcoin may be at the beginning of 3 of (3).

Just like you I am very leery of such an outrageous prediction, after all it is just a theoretical model. So I looked at Bitcoin from the well known Elliott Wave perspective to see how the 55K price point relates to the current price structure. And here is what I found:

  1. Wave (1) is defined by the 100 lows to the 20K area all time high. Precise numbers do not really matter at this magnitude.
  2. The Wave (2) bottom was established by Jan of 2019. Which means the move from 3150 to 14K is subwave 1 of (3).
  3. The low of subwave 2 has been completed as a result of the recent short squeeze from the 7300 area.
  4. 23071, 35250 and 54975 are proportional inflection points relative to Wave (1). (100%, 1.618, 2.618 respectively).
  5. IF we are in the beginning of subwave 3 of (3), 23071 is a reasonable multi month target.
  6. Based on these proportions, it is reasonable to anticipate Wave (3) to complete around the 35250 area.
Less Optimistic Than Stock To Flow?

So based on the current wave count and price proportions relative to the first broad impulse wave from 100 to 20K, 55K around May of 2020 seems extremely optimistic.

Keep in mind, IF subwave 5 of (3) extends (which is possible) then the 54975 comes into play. It’s just that this inflection point is more reasonable for a broader Wave (5) rather than (3).

This wave count is just one possibility out of many, and in no way can be considered precise. What is reliable though are two things: (a) the trend is CLEARLY BULLISH, and (b) 23K and 35K are proportionally within reason and can be referenced for long term targets.

The other thing to always keep in mind is that price does NOT move in a straight line. Corrective structures can be dramatic at times, and can stretch for prolonged periods. Wave (2) stretched out for an entire YEAR, while subwave 2 has lingered for 5 months.

Also realize if there is any kind of major fundamental change, it can completely change these possibilities. For example, Henry on our podcast mentioned that the Bitcoin mining community is considering getting to together to increase the total supply of Bitcoin beyond the 21 million expected. That will CHANGE things A LOT, and certainly not in a bullish way.

So I want you to come away with an idea of what more realistic price targets look like from the perspective of classic technical analysis. Although ANYTHING can happen, and stock to flow could be right, SENTIMENT usually determines the price of a financial market. And sentiment is ANYTHING but rational.

Questions and comments welcome.

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