What do we see in this chart?
First of all, the monthly bitcoin price in black bars.
The 3 vertical purple lines are the halvings.
The blue rectangles represent the time period 1 year before the halving to 1 year after the halving.
The orange rectangles represent approximately the 2 years in between as the cycle between halvings is not exactly 4 years. This is when prices go to their extremes. Here, tops and bottoms are made.
The blue horizontal line shows the theoretical bitcoin value of $55,000 according to the 'Stock to flow' model after the next halving.
Below, the green and red lines, hovering around a light grey mean value of 1, is the S2F multiple, indicating the extent to which the price is above or below the theoretical S2F value of bitcoin.
In June 2011, at the top of the first bull market, we had a S2F multiple of 12.42. In December 2012, not the low in the chart by the way, we had a S2F multiple low value of 0.08. Then, November 2013, another top at a S2F multiple of 7.82. Followed by a S2F multiple low of 0.14 in September 2016, again not the low in price. In December 2017 we topped at a monthly close of $13,900 for a S2F multiple of 3.62. There were 2 lows of 0.50 in both November 2018 and February 2019. Please note that we have not touched the lower support line for the S2F multiple - for all you bears out there.
Perhaps, it's easier to see in a table.
As the S2F values are only calculated per month, only the monthly chart gives an accurate picture.
In the chart we can clearly see a converging pattern in the S2F multiple indicator (the grey converging triangle in the chart) which obviously means that prices are moving more and more towards their theoretical mean.
However, we all remember the 2017 December high, just short of $20,000, when the S2F value for bitcoin was $3700, creating a S2F multiple of 5.4 How is that possible? Well, as the values in the chart are calculated on the monthly close, a daily chart will give a more volatile S2F multiple. In fact, when I divide 5.4 by 3.62 I get a factor 1.5 higher value of the S2F multiple for a daily value as compared with the monthly ones. Remember that factor 1.5
Why is this happening?
As clearly explained in the 'The Bitcoin Standard' by Saifedean Ammous (recommended reading by the way), the hardness of money is determined by the 'Stock to Flow' ratio. This is a term that comes from the commodities world and measures the amount of a good present, divided by the amount that is created every year.
Essential to being a hard currency is that the amount of inflow is very low vis à vis the existing stock. Obviously, with many more halvings to come, the inflow of bitcoin will be lower than any other monetary asset.
Currently, silver has a S2F ratio of 22, gold of 62 and bitcoin of 25. At the next halving in 2020, the S2F value of bitcoin will double to 50, already close to gold, and most likely in 2022, bitcoin will overtake gold and become the hardest currency on earth.
The genius of PlanB, a Dutch quant who prefers to remain anonymous, but we do know he works for a major investment firm in the Netherlands, is that he developed a formula that translates the S2F value into a price. Unfortunately, I cannot explain the mathematics behind this. But if you're interested you can find his reasoning in this article: https://medium.com/@100trillionUSD/modeling-bitcoins-value-with-scarcity-91fa0fc03e25
Of course, we are not there yet; and, for the moment, price is not only determined by supply as demand is still increasing and can only increase more, especially when more institutional investors get involved.
Nonetheless, I feel the above is a guiding principle to keep in mind. One year after the next halving in May 2021, the downsloping resistance line in the S2F multiple indicator will be at approximately a value of 2 on the monthly chart, meaning that a S2F value of maybe (2 x 1.5=) 3 on the daily could already indicate a top. That would then still be in the vicinity of $200,000 assuming the S2F value will have increased to approximately $60,000 one year after the halving.
To be continued.