I recognize the risks of making predictions. Because nobody knows the future. The markets are unpredictable. However, we can study the probabilities. They are two very different things. Probability considers trends, patterns, and correlations. Prediction is more wishful thinking, superstition, and quackery. The difference lies in how we arrived at the conclusion and in the level of certainty. The probability is projected with reservations and doubts. The prediction affirms with blind and absolute faith. There are no absolutes in probability. $ 100,000: round and highly voiced figure. Is Bitcoin likely to hit that figure this year?
First of all, I don’t use the stock / flow model to make my projections because I consider it to be a highly incomplete model. Its simplicity is extreme. Its effectiveness is questionable. And its popularity is suspect. Does not take into account the demand, for instance. Incredible but true. It does not study the macroeconomic situation of the moment. It does not study the fiscal and monetary policy of the world’s major economies. It does not consider the weakness or strength of the dollar, yen, yuan or euro. And it does not take into account the sentiments of investors. All you have to do is overestimate the importance of scarcity in determining the value of an asset.
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In my (not so humble) opinion, the stock / flow model is popular for two reasons. First, it is a model built from liberal economic thought. Libertarians, unlike the consensus, see deflation as something extremely positive. And the marginal value theory is among the most emblematic approaches of this particular school. Second, it is the default model of the crypto community and the one most used by the most well-known crypto-libertarians. I’m talking about developers, early crypto investors, and old-guard influencers. Ironically, It is not a very popular model among economists, fund managers, or bankers with experience in financial markets. I mean, the model does not sink into Wall Street.
Faith in this model is such that when it fails it is considered a buying opportunity. In other words, it is not the model that fails. It is the market. The funny thing is that the models are built with the data generated by the market. In other words, from the bottom up. Because models, at their core, are descriptive. This particular model does not describe. Prescribes. The model is above the results. The model is never wrong. It is the price that is wrong. Which is obviously a huge contradiction for a price prediction model. This can only be explained in one way: Ideological bias is largely responsible for the sacredness that the stock / flow model enjoys in some circles.
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Of course there is no perfect model. All models are wrong. The only false model is the one that claims to be sacred. Now, the stock / flow model is useful when used in combination. In other words, supply is important, but so is demand. It is not about placing supply as supreme. It is about assessing the supply in its proper measure in combination with the other variables. Supply, confidence, sentiment, regulation, infrastructure, psychological weight of resistance, risk tolerance, averages, dollar liquidity, monetary policy, fiscal policy, population growth, dominance of the technology sector, and macroeconomic data are very important variables in the universe of complexity that determines the price of Bitcoin. To pretend that only the supply is important is a great reductionism.
Right now, we are experiencing a rotation in the markets. The “value” sector was severely affected during the worst of the pandemic. Like the service sector. I mean hotels, entertainment, tourism, travel, restaurants, cinema, airlines, cars, energy, etc. This sector, which for the purposes of this article we will call “value”, is experiencing a boom. It has benefited greatly from the return to normalcy and concerns about inflation. So whenever inflation becomes an issue, investors put their money in this sector.
On the other side of this rotation, we have the sector called “growth”. This sector is closely related to innovation. Big Tech, Startups, AI, automation, renewable energy, crypto, fintech, etc. Like consumer goods such as electronic devices, laptops, tablets, smartphones. This sector benefited greatly during the first injections of liquidity from the Federal Reserve in the context of the recovery, but suffered somewhat during the second quarter of the year due to the boom in the value sector. This sector tends to increase when concerns about inflation dissipate.
In a conservative climate, generated by a possible overheating of the economy, investors will seek refuge in the defensive and value sector, moving away from the growth sector. Expecting a liquidity cut from the Reserve, investors will most likely seek a haven in the value sector. After all, the best way to fight inflation is to invest in productive assets. The value sector, the dollar, corporate bonds, and sovereign bonds will be the main beneficiaries in the context of a currency cut.
However, in a less conservative climate, the investor will surely increase his tolerance for risk and will want to invest in the growth sector. This will be possible with an increase in production. In other words, if the production and distribution failures, generated by the crisis, are solved soon, inflation will moderate. Of course, nobody expects inflation below 2%. In moderation, I mean inflation below 3-4%. If this happens, the growth sector will benefit enormously.
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Right now, there are two types of investors. the camp of those who think that inflation is permanent and are moving away from the growth sector. And the side of those who think that inflation will moderate, because we will have, sooner rather than later, an increase in production. In other words, the logistics crisis will be solved in the coming months. Which implies that the Reserve will not have to cut so soon. In recent weeks, the “growth” camp has been gaining ground.
If this optimism holds, in a couple of months, Bitcoin could be breaking the all-time high of $ 63K per unit. One could assume that the last quarter will be the best this year due to historical trends and because it will be the most “normal” period since the start of the pandemic. If we are guided by the increases during the last quarter of last year, it would not be unreasonable to assume that $ 100K for Bitcoin is possible. In fact, it is not just possible. It is probable.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, readers should do their own research when making a decision.
The views, thoughts and opinions expressed here belong solely to the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.