Onchain Analysis: Understanding Stock-to-Flow and Miner Capitulation
Today, we are going to summarize two onchain metrics, which can help us better understand what will happen in the future in the crypto world.
Stock to Flow
Stock-to-flow ratio is a concept borrowed from the field of commodities, particularly precious metals like gold and silver. It refers to the ratio of the existing supply (stock) of a commodity to the annual production (flow) of that commodity. In simpler terms, it measures how much of a given asset is already in circulation compared to how much new supply is entering the market each year. Mathematically, the stock-to-flow ratio is calculated by dividing the total existing stock by the annual production.
For example, in the context of Bitcoin, the stock represents the total number of Bitcoins in circulation, while the flow represents the new Bitcoins mined each year. The ratio is calculated by dividing the total number of Bitcoins in circulation by the number of new Bitcoins mined in a year.
It is therefore, the Stock-to-Flow (S2F) model, a popular concept in the world of cryptocurrencies, especially Bitcoin. It is often used to analyze and predict the future price of Bitcoin based on its scarcity and issuance rate. The S2F model is rooted in the idea that assets with a limited supply, like gold and Bitcoin, tend to have higher value over time due to their scarcity.
The Stock-to-Flow value is a ratio that compares the existing supply (stock) of an asset to the annual production (flow) of that asset. In the case of Bitcoin, the stock is the total number of Bitcoins already in circulation, and the flow is the rate at which new Bitcoins are created through the process of mining. This ratio is used to understand the relative scarcity of an asset and is often seen as an indicator of its potential value.
The S2F model was popularized by an anonymous analyst known as “PlanB” in March 2019, who applied it to Bitcoin. The model suggests that as Bitcoin’s issuance rate decreases over time (due to the halving events that reduce the reward miners receive), its S2F value increases, making it more akin to precious metals like gold. According to the model, this increasing scarcity should lead to higher prices in the future.
It’s important to note that while the S2F model has gained popularity and has been surprisingly accurate in predicting Bitcoin’s price movements in the past, it is not without criticism. Critics argue that it oversimplifies the complexities of the cryptocurrency market and that other factors, such as market sentiment, adoption, and regulatory changes, also play a significant role in determining price.
In the historical context, halvings represent an opportunity to understand how Stock to Flow works. The following graph shows the past and possible future of bitcoin. Who knows what will happen? Nobody, but the graph is a continuation model of its past. Since 2010 to 2030. 20 years chart.
The capitulation of the miners is the second and last onchain analysis, which I write today for you, readers.
The importance is very high, in relation to the possible investment in bitcoin. Read it carefully.
Definition: Start by explaining what miner capitulation is and why it’s an important concept in the cryptocurrency space. Emphasize that it occurs when miners are no longer able to cover their operational costs, leading them to either scale back or entirely shut down their mining activities.
Causes: Explore the various factors that can trigger miner capitulation. These may include a sudden drop in the price of the cryptocurrency being mined, increased competition among miners, rising energy costs, or changes in the network’s difficulty level. Market volatility can also play a significant role.
Impact on Network Security: Discuss the implications of miner capitulation for the security and stability of the blockchain network. When a significant number of miners capitulate, the network’s hashrate (computational power) decreases, making it more vulnerable to attacks like 51% attacks. This can erode trust in the network.
Market Effects: Explain how miner capitulation can impact the broader cryptocurrency market. A sudden influx of mined coins being sold off by struggling miners can put additional selling pressure on the market, potentially leading to further price declines.
Historical Examples: Provide real-world examples of miner capitulation events in cryptocurrency history, such as the one that occurred after the 2017 Bitcoin price peak. Discuss how these events unfolded and their consequences.
Mitigation and Recovery: Discuss strategies that miners and cryptocurrency networks can employ to mitigate the risks associated with miner capitulation. This might include changes to mining algorithms, subsidy structures, or network upgrade proposals.
Investor Implications: Explain how miner capitulation can affect cryptocurrency investors and traders. When miners capitulate, it can be a sign of prolonged bearish market conditions, which may influence investment decisions.
Current Status: Provide insights into the current status of mining operations for the cryptocurrency in question. Analyze whether there are any signs of miner capitulation or recovery, and how this might impact the market.
In the following graph we will find the mining capitulation, and the bitcoin halvings, to date. What do you think will happen at the next halving…?
Remember that this is not a purchase recommendation. Consult with your trusted financial advisor. Good luck with your investment decisions.