The cryptocurrency market, much like the stock market, experiences price fluctuations because of two things – supply & demand.
When there’s more supply and less demand (aka more sellers than buyers), market prices drop. It doesn’t matter if you’re talking stocks or crypto coins – when supply is up and demand is down, prices follow suit. Conversely, when demand is up greater than supply, prices begin rise.
Ok basics aside, how does this affect the bitcoin price forecast?
Well, depending on the asset in question, there are multiple factors influencing supply and demand. When all is said and done, the single most important factor necessary for a stock or crypto price to skyrocket is money flow; more demand than supply.
And this single metric forecasts that bitcoin could hit $100,000 within months. It’s called: The Stock to Flow Ratio.
Better known as good ol’ fashioned Law of Supply and Demand (wink, wink).
Stock to Flow – What Does It Mean?
The Stock to Flow Ratio, or S/F, is a model that basically assumes that lack of a certain resource drives its value. In practice, and in layman’s terms, Stock-to-flow is the ratio of how much of something currently exists and how much of that something is currently being produced. It can be applied in multiple situations and across multiple types of assets.
Which brings us back to supply and demand – in the crypto world when the supply is at an all-time low, the price spikes.
If you combine this all-time low supply with demand generation over the course of the rest of the year – you’ve got a Bitcoin forecast of $100,000 before the end of 2021.
Why does this happen?
For one thing, many investors who opt-in to Bitcoin and other cryptocurrencies aren’t day- or swing-traders – they’re in it for the long term. So, there are many Bitcoins that haven’t “moved” or been transacted in a while. When the number of these long-held “spoken for” coins begins increasing, it means lots of investors are buying the coins and holding their positions.
Major spikes in these types of holders are a forward-looking indicator of Bitcoin prices to come.
So, if you were to see a chart of these positions, it would make sense on its face – more investors are buying and holding Bitcoin, expecting price increases as time goes on.
Fundamentally it makes sense, too – keep in mind: supply and demand? As the ratio of long-time coin holders grows, coin supply shrinks and therefore becomes the catalyst for demand, which shoves coin prices ever higher.
These long-term coin holders – if history proves right once again – will push prices even higher over the coming months.
The last time the number of long-term Bitcoin holders was as high was in January 2020 – Bitcoin was sitting at around $8,500 per coin, and by January 2021, it had skyrocketed to more than $40,000.
On October 20, 2021, Bitcoin broke its previous record ($64,895) and hit $66,975. This brand-new record comes on the heels of several days of prices hovering at or above $62,000. This surge just happens to coincide with the release of the first ever Bitcoin ETF, BITO, which opened on its first day of trading at $40.07 (Tuesday, October 19, 2021) and was up to $43.07 in after-hours trading at time of writing.
Bitcoin’s current price is more than impressive – at this same time in 2020, the price was just around $11,500. It is important to note, however, that Bitcoin investments are still volatile and considered speculative investments. To highlight this, think back to April 2020, when the coin last saw record highs. It didn’t take long before the coin to shrink by over half, plunging to $30,000 by mid-summer.
So, what should you do in light of the coin’s newest highs? Perhaps nothing, say some analysts. Just because coins are soaring at the moment doesn’t necessarily negate the volatility felt all too often in this financial sector. While Bitcoin could certainly top $100,000, it’s also just as likely that the cryptocurrency giant could get knocked down a peg or two.
Price swings are as natural as anything in crypto, and if you consider yourself a long-term investor, it’s just part of the game.
So, What Should You Know as an Investor?
Cryptocurrency investors need to expect these highly volatile price swings to continue. This is why most experts suggest keeping cryptocurrencies to a fraction of your portfolio – no more than 5%.
One day, Bitcoin could be flying, jumping 20% in one day – and the next day it could drop 20%. If you’re a Bitcoin Maximalist, it’s tempting to check the price multiple times per day but perhaps the best advice is to and forget it unless you plan to actively day trade.
Craft a careful strategy. Dollar cost averaging is a smart way to ensure you don’t buy the top of the market.
Bitcoin has soared and plummeted – this latest increase is nothing new. Looking at long-term investments, Bitcoin’s prices over its lifetime have generally increased, but the volatility still exists, though admittedly is diminishing according to latest reports.
With a plan of when to buy and sell, you’ll be much more inclined to weather the storms of hype and gloom.
As a long-term holder, whether cryptocurrencies are rising or dropping, the best thing you can do is stand pat. If you’re stressing out, it’s probably best to take a step back. The likelihood is you’ve got too much exposure to the asset class and it’s making you nervous.
Over the long-term as this supply and demand war wages on, and demand grows, the shrinking supply should spark a rally for Bitcoin we’ve not yet seen.
Or, if you’ve been paying attention these last few months, you’ve come to realize that, as Bitcoin soars, so, too, do other cryptocurrencies – and sometimes even higher. Where will you stake your claim?
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.