The end of the Stock-to-flow model?

We have been talking for months about a market that is in a distribution and lateral development stage. The sharp fall from the November 2021 highs is still weighing on investors.

But it seems that the discourse of distribution and sideways price development is running out of steam, amid a scenario of progressively decreasing trading volume and volatility.

All these ingredients are part of a dangerous cocktail, which, if ingested by the market, could take us well beyond the current support levels.

The market could be enter in a down pase

That is the reality we may face in the near future if we do not see a considerable change from the current scenario. We have seen repeatedly how the price crashed into resistance levels that it was completely unable to overcome and after several attempts, it has given in.

The daily chart of Bitcoin, offers a good illustration of this

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The double top figure at the all-time highs I think is hardly debatable, and shows an inflection point in the market as we will see later.

Given the importance of the situation, we are going to focus our analysis almost exclusively on bitcoin, because it continues to be an excellent indicator of which direction the market is going to take.

Technical figure of resolution about to close

Another aspect to consider is the vision that the behavior of the price in recent months can give us, taking as a reference two important price points

  1. The July 2021 low, which positioned bitcoin below 30,000, a fact that caused a major shift in market bias.
  2. The all-time high reached in November 2021, close to 70,000, which produced strong selling pressure that ended at the end of January 2022.

These two levels allow us to project guidelines to evaluate price behavior. These guidelines are of enormous importance, given the weight that these two moments have in the bitcoin price history.

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This is a technical figure that forces the price to resolve and often causes a major move in a particular direction. The pressure wedge formed by these levels has an apex that forces that outcome, and the fact of seeing a reduction in volatility also coincides with the characteristics of this figure.

Unfortunately what we are seeing at the moment is a break of the support guideline. The perforation of this level and its subsequent confirmation would give many possibilities to test the level of 30,000 USD, the rebound zone of July 2021.

Could this be a favorable area for new investment capital to enter, and is this really what the market is waiting for?

It could be perfectly possible. At this point it is hard to believe that those who stopped the previous fall at USD 30,000 would let the price fall this time, for several reasons:

  1. The first, is that from a fundamental point of view, I believe bitcoin has increased in value since then, and more importantly in potential. We cannot see any setbacks in the adoption process or the appearance of major obstacles that would lead us to believe that this will not happen, on the contrary.
  2. The second is that investors who have seen bitcoin go from USD 30,000 to almost USD 70,000 in a matter of months, I think they understand that this is a movement that, given the previous scenario, can happen again, and therefore turns this situation into a new business opportunity.
  3. The third concerns the group of holders who still own bitcoin and who defended it then, and who will surely defend it again, taking into account the situation generated by the two previous points.

This hypothesis clearly positions the 30,000 USD area as the next stop, but we still have a long way to go and the market still has a lot to say.

Undoubtedly the upheaval in the FIAT markets is part of this scenario and we will also see how it evolves. It is no coincidence that this move comes in the same week that the Federal Reserve takes the decision to raise interest rates by 50 basis points and initiates a divestment program to lighten its balance sheet.

The key is in the long term

Given the dimension and amplitude that this movement is taking, it is necessary to recover a little perspective and go to the long term, so let’s go to the weekly chart that has a little surprise for us

As these are charts that cover a long period of time, and taking into account the extreme volatility of this market, it is very convenient to use logarithmic notation to appreciate proportionally the relevance of each of the price movements.

In this case, Bitcoin offers us a chart with a clear uptrend and with a very significant event

The minimum zone present in the chart coincides with the halving process.

This fact is what gave rise to what is known as the stock-to-flow theory, which basically means that since we are dealing with a deflationary asset that suffers an event that accentuates the deflation in a given period of time, and that is also assumed to have a growing demand, this causes a clearly upward price trend in the long term, forming a technical channel within which the price moves.

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This theory has been exactly true… so far. In the graph we can see two very significant details, and that they occur correlatively is the worrying thing:

  • We can see the double top in the area of the highs we have discussed, in a relatively short period of time
  • Within an environment of reduced volatility there is a test of the lower zone of this channel

Is this the end of the stock-to-flow model?

We don’t know, but we can certainly affirm that this is the moment when this model has been most compromised. However, it is no less true that the current zone is the best to see a price rebound with the proper consistency, influenced by its relevance.

What we can say is that we are in a very important dilemma for the market, with two different scenarios:

  • Perpetuate the current model by generating a new reference low. much more relevant than the previous ones due to the larger size of the market
  • Perforate the support zone, invalidate the current model and move on to establish new guidelines and rules of behavior

Does this mean the beginning of the end for the cryptoasset market?

NOT AT ALL, it would simply mean that we are facing a change of behavioral model, which might seem relatively logical if we understand and examine the evolution of the investor profile and the typology of the cryptoasset market. It is not the same market as it was 5 years ago, nor is the perception of it the same. Why should it follow the same rules and reasoning?

But… this only affects bitcoin!

It’s not true either, and so far it hasn’t. In fact, we can overlay the total market capitalization data on our stock-to-flow chart and we can appreciate that the correlation is practically perfect, so as of today, the market is very much tied to this pattern

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We are facing a very complex moment and market

Don’t let this discourage you. All markets go through cycles and evolve and mature. Crypto assets are no exception. But if despite this, this is a difficulty, you can always go to duly regulated collective investment entities that have professionals capable of beating the market, as we have been doing at BELOBABA in recent months.

Never forget that strong hands think and conceive the market differently

If the market changes, we will adapt and find the best way to enjoy the spectacular returns it offers.

Conclusion: bitcoin under strict surveillance

The fate of the market will be marked, even more strongly than usual, by bitcoin. So we must be very attentive to the evolution of the price.

We have seen many data of relevance in the long term, but it is clear that in the short term we can see important movements that should not make us lose sight of the importance of the moment and the possibility of a change in the market model

Not in vain, indicators such as our Crypto Oscillator, which measures the market’s distance from its all-time high, is at 50 points, an area of extreme overselling, and therefore, gives us a very high chance of a rebound

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This data must be considered as one more piece of data, but it is very important to remember that it is based on statistics, a statistic based on the current model that clearly marks the minimum zone

Only the future has the answer, and we still don’t have the crystal ball, but I hope that this post has helped the reader to have a more global idea of what is happening in the market, without this naturally being interpreted as an investment advice