Use 5 Simple Charts To Understand Where BTC Goes Next

Today, Bitcoin hit the historic milestone of $50,000.

Of course, while the celebration is certainly in order, it left many wondering, “what next?”

Well, rather than merely speculate, we can use data to answer that question! Specifically, 5 financial charts that are simple to read and understand.

Financial predictive models are a graphical way of displaying different investment thesis, and while some do remain valid long-term, it’s important to keep in mind that they are constructed by looking back at what the price has done in the past, and this might not reflect what it will do in the future, as there are so many factors that might come into play.

However, I still like to follow several models and indicators as I feel they give me a better sense of the current scenario.

THE STOCK TO FLOW MODEL

The stock-to-flow model for Bitcoin was popularised by Twitter user @planb and is all about modeling Bitcoin’s value with scarcity. Our very own Checkmate has his own take on S2F, which you can view here: https://checkonchain.com/

Essentially, S2F models, and the ratios they track, measure how good (valued) an asset is for “holding” vs how good it is for trading. Store of value vs. liquidity.

This model treats Bitcoin as being comparable to commodities such as gold, silver, or platinum. These are known as ‘store of value’ commodities because they retain value over long time frames due to their relative scarcity. It is difficult to significantly increase their supply i.e. the process of searching for gold and then mining it is expensive and takes time. Bitcoin is similar because it is also scarce. In fact, it is the first-ever scarce digital object to exist. There are a limited number of coins in existence and it will take a lot of electricity and computing effort to mine the 3 million outstanding coins still to be mined, therefore the supply rate is consistently low.

Stock-to-flow ratios are used to evaluate the current stock of a commodity (total amount currently available) against the flow of new production (amount mined that specific year).

For store of value (SoV) commodities like gold, platinum, or silver, a high ratio indicates that they are mostly not consumed in industrial applications. Instead, the majority is stored as a monetary hedge, thus driving up the stock-to-flow ratio.

A higher ratio indicates that the commodity is increasingly scarce – and therefore more valuable as a store of value.

As you can see in the chart (as of January 2021), the price is tracking the model very closely and seems to be on course to the $100,000 level where the model predicts things will flatten out for a few years until the following halving.

A more detailed version of the chart and an explanation of what everything means can be found here.

NET UNREALISED PROFIT/LOSS

Profit and Loss metrics answer the question: if all units of a given currency were sold today, how much would investors stand to gain or lose?

By looking at the delta between the price when a UTXO was created vs. the current price of an asset, we can determine whether the specific coins in that UTXO are in a state of unrealized profit (price has increased) or loss (price has decreased). When looking at this across the entire network, we can see how much of the network is in profit, and how much is in loss.

NUPL (Net Unrealized Profit/Loss) specifically looks at the difference between Unrealized Profit and Unrealized Loss to determine whether the network as a whole is currently in a state of profit or loss.

Any value above zero indicates that the network is in a state of net profit, while values below zero indicate a state of net loss. In general, the further NUPL deviates from zero, the closer the market trends towards tops and bottoms. As such, NUPL can help investors identify when to take profit (blue) and when to re-enter (red).

THE RAINBOW CHART

The Rainbow Chart is meant to be a fun way of looking at long-term price movements, disregarding the daily volatility “noise”. The color bands follow a logarithmic regression (introduced by Bitcointalk User trolololo in 2014), but are otherwise completely arbitrary and without any scientific basis.

Whilst the original chart was graded as simply ‘buy’, ‘sell’ or ‘average’, this has now taken on a finer delimitation.

At the top end we have ‘maximum bubble territory’, going through sell indicators, building FOMO, and down to ‘HODL!’ in the middle yellow band.

On the lower end of the spectrum, the scale goes through various levels of good value, down to the final ‘basically a fire sale’ band.

Back in March 2020, I had written about it being a fantastic time to stockpile on Bitcoin. To zoom in on the chart then:

This doesn’t prove anything about the chart, but it did work perfectly well in the last dip. Right now, it seems like we’re heading into some shaky territory where a good dip would not be that unexpected. However, there still seems to be some room for growth.

THE BITCOIN-GOLD RATE PEAKS AT AN ALL-TIME HIGH

Early on the morning of January 1st, the Bitcoin-gold rate peaked at 15.62 ounces, surpassing the December 2017 peak of $29,000. Even though gold also experienced large gains in 2020, these gains were minimal in comparison to Bitcoin’s meteoric rise. Gold ended the year with a 25% gain while Bitcoin had an increase of 300%. Investors seem to be choosing the “efficiency” and “portability” of digital currency over gold.

JPMorgan Chase analysts believe Bitcoin’s digital gold narrative is taking capital from precious metals. It is thought that Bitcoin’s supply shortage will drive its prices higher as 2021 progresses.

HODL WAVES

HODL Waves are a data visualization that displays colored bands representing the percentage of total bitcoin and the length of time that bitcoin has been sitting in a given address.

Glassnode offers this visualization, but you’ll need a free account to see them.

This visualization is made possible because the bitcoin blockchain is completely public. You can read the original article that describes them here. By comparing the age of bitcoin sitting in addresses to the current US dollar prices, we can make some interesting conjectures about the bitcoin economy and the sentiment of HODLers.

While the price crash in March was sharp, we can see that the coins shifting hands during that time were coins that had previously moved within the last 6 months, indicating that the crash may have been caused by leveraged traders getting liquidated. Long-term holders were unaffected by the movement, meaning that coins that had been sitting in addresses for longer than 6 months became a higher percentage of the total bitcoin sitting in addresses. This helps explain the rapid 2-month recovery back to the previous prices.

On-chain data provided by Coin Metrics also shows that recent price movements were likely mostly driven by shorter-term and relatively new holders. Long-term holders appear unfazed in spite of the severe market downturn.

While market cap for most cryptoassets fell, the market cap for most stablecoins increased. This potentially signals that investors were piling into “cash,” or at least crypto-cash equivalents.

As of January 2021, we can see that 59.03% of bitcoin has been held for longer than 1 year. That is still a long way away from the bottom of the last cycle, which was April 10, 2018 at a price of $6,839 (after running up from $172 in January 2015), when only 41.1% of available bitcoin was held for 1 year or longer. If the 2018-2020 HODL wave looks anything like the last one, we can expect some extreme price movements as new entrants try to recapture that ~18% difference between 59.03% and 41.1% of long-term held bitcoin.

Hopefully, using a combination of these charts, you’ll begin to see how to use data to make data-driven decisions as to when to buy, sell, or hold.

Expect much more on these topics in newsletters to come!