Bitcoin surpassed its highest ever price on December 1, and while BTC is showing ever stronger fundamentals amid growing institutional demand, extreme scarcity is proving to be driving value and price
In almost all economic models, scarcity of an asset is what primarily drives the value of that particular asset. In other words, the more scarce a commodity becomes, the more attractive it becomes, thus prompting an increase in value and price.
We are facing a remarkable market situation with Bitcoin (BTC) today in which BTC is becoming an extremely scarce commodity on a global scale and with a worldwide impact. This phenomenon only increases with time due to the deflationary financial policy that Bitcoin has, reducing its new stock flow each four years by “halving” the amount of new BTCs being minted.
Very few Bitcoins are up for sale on exchanges compared with other periods in BTC’s 11-year history. As demand for Bitcoin continues to rise, propelled by the market entry of PayPal and other major payment processors as well as growing demand from institutional players and hedge funds, the buying pressure reaches new highs, and in effect, Bitcoin’s price continues to increase.
Bitcoin breached All-Time High
Powered by these above mentioned factors and maturing fundamentals, Bitcoin just hit a historic All-Time High on December 1 as price reached $19,888 on the world’s largest exchange Binance. Despite being rejected just shy under $20,000, the strong comeback that Bitcoin made from its Thanksgiving dip to breaching its own record in price today is frankly a strong testimony that these price levels are likely only the beginning for Bitcoin.
Compared to the market during the last bull run in 2017-18, there are much stronger hands now. With fewer sellers, and more holders choosing to move their BTC off exchanges into cold storage or software wallets, there is a supply crunch resulting in a price boom.
Stock-to-Flow model predicts BTC above $100k in 2021
An interesting model to predict the past, current and future state of Bitcoin’s value and price is the Stock-to-Flow (S2F) Ratio for Bitcoin, famously coined by Plan B (https://twitter.com/100trillionUSD).
In simple terms, the Stock-to-Flow model defines the ratio of the current stock of a commodity, in this case circulating Bitcoin supply, and the flow of new production, namely newly mined Bitcoins. Or in other words, given Bitcoin’s deflationary model of minting less BTC each four years through its “halving” process, scarcity drives the value of Bitcoin.
It is important to note that historically, Bitcoin’s price has followed the S2F Ratio relatively accurately, and that the model predicts that by May 2021, Bitcoin’s price is predicted to surpass $100,000.
Given the current uptick in demand and growing interest among the world’s most recognized institutional investors, powered by Bitcoin’s scarce nature, it is becoming increasingly likely that S2F has a lot of merit regarding its future predictions. However, only time will tell if the Stock-to-Flow Ratio will hold the test of time.
Director of Communications and Marketing at Klever.io
If you are interested to learn more about the Stock-to-Flow Ratio for Bitcoin, I highly recommend Plan B’s Medium article on the model by clicking the button below.
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*Disclaimer: This article is not financial advice.