Bitcoin has seen a significant amount of interest over the past few months. It’s set a new all-time high of $41,940 at the beginning of January and more than doubled in value in just over a month. Large financial institutions such as Paypal, MicroStrategy, and Grayscale are finally beginning to adopt Bitcoin.
However, Bitcoin is an incredibly volatile asset and it’s not uncommon to see 20%+ price swings in a matter of hours. All this demand has led to a gradual increase in retail appetite for Bitcoin and a considerable amount of speculation on its future price.
There are many technical indicators, and market trends that can be analyzed to attempt to predict the price of Bitcoin. Here are 5 indicators that we think are relatively easy to understand and have a quantifiable impact on Bitcoin’s price.
Stock To Flow Model
The stock to flow ratio is another common metric used to estimate the price of bitcoin. Simply put, the stock to flow ratio is a way to measure how much the quantity of something increases over time, against how much of it currently exists.
Bitcoin has a fixed supply rate, which halves every 4 years. Currently, miners are rewarded with 6.25 Bitcoin for being the first to solve a complex hashing puzzle. This reward is cut in half every 4 years until around 2140 at which point no new Bitcoins will ever be produced.
This is what makes Bitcoin so scarce, and as such the stock to flow model attempts to predict the price of Bitcoin based on this fact. The chart below shows the price of Bitcoin over time, with the stock to flow line using a 365-day moving average to smooth out the changes due to the halving events.
Bitcoin continues to follow this predicted pattern, with estimations of a $100,000 Bitcoin by mid-2021, and a $1,000,000 Bitcoin by 2026. Whether or not Bitcoin continues to follow this trend, only time will tell.
The above chart shows the search interest on Google, relative to the highest point on the chart for the past 5 years. We can see the current levels of interest peaking at around 75% of the peak interest levels we saw towards the end of 2017.
You can’t derive much about the price of Bitcoin from this chart alone, but it is interesting to compare the two. We’ve extracted and appropriately scaled the above trend to Bitcoin’s price over the last 5 years onto the chart you see below. Bitcoin’s price is plotted in blue, with the Google trend relative interest plotted in orange.
Relative Strength Index (RSI)
The RSI is a momentum-based indicator that aims to measure the magnitude of recent price changes to determine if a particular asset is overbought or oversold.
The typical range of values lies between 30 and 70. Anything below 30 indicates the asset is oversold or undervalued, above 70 indicates it’s overbought or overvalued.
Below you can see a plot of Bitcoin’s price against its RSI indicator. Note that the Bitcoin plot is on a logarithmic scale to better illustrate the price differences.
Historically, whenever Bitcoin’s RSI has peaked above 70 it hasn’t lasted long and has led to large dips in price. Currently, Bitcoin is doing it’s best to break this trend, are we going to see a large correction soon? Who knows, but it’s another important metric which any investor should be aware of.
The US Dollar Index (DXY) represents the relative strength of the US Dollar across the world. The DXY compares the value of the US Dollar against the following 6 foreign currencies: the Euro, Japenese Yen, British Pound Sterling, Canadian Dollar, Swedish Krona, and Swiss Frank.
Bitcoin is, by its very nature, a deflationary asset. There’s a fixed supply of 21 million coins. This relative scarcity means its value is likely to increase over time.
The US Federal Reserve has printed around 9 trillion USD since September 2019. Roughly 20% of all US Dollars currently in circulation were printed in 2020!
Bitcoin is in the middle of a strong bull market right now and it’s becoming an increasingly popular hedge against inflation. Coronavirus has resulted in rampant money printing across the globe. While this has driven down the value of many nation’s domestic currencies, it has had a positive effect on the price of Bitcoin.
Number Of Tweets
Twitter has around 330 million users, and there are roughly 500 million tweets sent every day¹. Similar to Google Trends, we can’t derive much price information directly from this metric. It is, however, another interesting comparison to gauge levels of interest. How much this can affect the price depends on many other factors.
Betting On Bitcoin
This is just a small collection of many interesting metrics and statistics out there that have some correlation to the price of Bitcoin. If you want to invest, you should be well aware of the risks involved.
Bitcoin is an incredibly volatile asset
In our opinion, there’s still the potential for significant profits to be made by investing in Bitcoin and other cryptocurrencies. Though, as with any investment, it’s critical that you do the appropriate research yourself beforehand!