Market Meditations | May 26, 2021
Little-known tool. Unbelievable profit potential. Shh!
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Although newcomers to the space have been shocked by the turn of events over the past week, even the most seasoned of crypto veterans have gone on record saying the volatility has been some of the highest they’ve ever seen.
We’ve said time and time again that during periods of heightened volatility, it’s helpful to zoom out on the fundamentals and technicals of the space.
? The Stock to Flow model (S2F) is one tool in our toolbox to do just this. In this article, we’ll explain what S2F is, how to use it, and where to access it. Before we begin, however, we’d like to remind you that you should never use one model or indicator in isolation.
Often, models including but not limited to S2F rely on previous data to help us gain insight into the future. History, however, does not have to repeat itself and this is especially true for markets.
⚠️ Make sure that, when reading this article, you use it as confluence with your fundamental and technical analysis, risk management, and financial goals to create a trading and investment strategy that works for you. Check out our video about creating your profitable trading strategy to learn more.
❓What Is It
Put simply, S2F is a way to quantify scarcity. It uses data to answer the question:
“How abundant is this asset or commodity?”
Whilst many investors here might know of S2F with respect to crypto, in actuality the model was originally applied to natural resources like gold, silver, oil, etc.
1️⃣ EXAMPLE. Using the example of gold, the World Gold Council has estimated that the total amount of gold ever mined is approximately 200,000 tons.
2️⃣ STOCK. This is where the “stock” facet of the “stock to flow” phrase comes from.
3️⃣ FLOW. Similarly, the WGC estimated that 3,000 tons of gold are actively mined each year. This is where the “flow” facet of the phrase comes from.
In other words, to measure the scarcity of an asset, the model looks at the total current supply and added supply of any resource or commodity.
4️⃣ RATIO. To calculate the S2F ratio, take the total current supply (or stock) and divide it by the added supply (or flow) of any asset.
? How To Use It
How can we use S2F to our advantage as traders and investors?
A higher stock to flow ratio indicatesthat less supply is entering the market relative to total supply.
A lower stock to flow ratio indicates the opposite, namely that more supply is entering the market relative to total supply.
Although we have been conditioned to believe that a lower supply is superior, it’s important to note that the concept of what is superior depends entirely on what the commodity or resource’s use case is.
? INDUSTRIAL COMMODITIES. Industrial commodities, for example, are valuable because they are consumed and are not meant to be a store of value. One example of this is textiles, which derive their value from being a raw material used in creating furnishings, carpetings, towels, coverings for tables, beds, and other flat surfaces.
? It follows that the lower the S2F ratio is for textiles, the better.
Commodities with lower S2F ratios, however, typically make for poor investment assets over the long run due to this increasing supply. Assets with a S2F that trends higher typically make for higher probability investments, especially as demand for the asset grows at the same time the supply decreases. If supply decreases at a shockingly fast pace, as can be argued is the case for Bitcoin, the asset may perform exceptionally well. Check out our podcast episode where we discuss trading crypto and commodities.
? BITCOIN. Applying S2F to Bitcoin equates the crypto asset to other precious metals like gold and silver. The reason for this is that both Bitcoin and precious metals like gold and silver share the property of relative scarcity and low flow (i.e. a high S2F).
? The conclusion one could draw strictly using S2F, then, is that Bitcoin and precious metals make for a good investment due to the decreasing supply. Let’s discuss this a bit more.
One reason proponents of S2F argue that Bitcoin is a generational investment is due to the mechanism known as the Bitcoin halving, which drastically reduces supply every four years more than any other asset of which we are aware.
We know that Bitcoin’s maximum supply is 21 million and the current circulating supply is nearing 19 million, but the real fuel to the fire is the fact that the “flow” of Bitcoin is halved approximately every four years with the Bitcoin Halving.
This phase sharply increases the S2F ratio, and according to proponents of the model has direct correlation with price appreciation. In fact, according to this tweet inspired by S2F, the Bitcoin bull market is not over and “60k was not the top.”
? Where To Access
If you would like to track the S2F live, you can do so here.
It’s important to remember that the S2F only accounts for supply, which is only one factor in whether an investment has a high probability of increasing in price. It’s worth having an understanding of catalysts, demand for an asset, narratives, and other things that impact the price of an asset short and long term.
MARKET SENTIMENT. Elon Musk’s tweets and the BTC dump seem a distant memory in many minds today. With a decent chunk of green on 24 hour price action through the top 20 altcoins by market capitalization. BTC in particular is retesting the $40k resistance.
? OUR TAKE. We love a rally as much as the next yogi, but we continue to regard the BTC market structure as neutral. At least until we claim a few key levels.
REMAIN CAUTIOUS. After a 60%+ market crash, it’ll take more than a small bounce to shift bias back to bull market bullish. To add some numbers: cautious until we capture $45,000 BTC and $3,400 ETH.
? PATIENCE IS A VIRTUE. Certainly when it comes to altcoins, now might be a time to observe and plan your next move instead of making aggressive moves. Particularly, if such moves involve the use of leverage. Monitor altcoins that are showing strength now, in times of volatility, as potential plays when the market shows a more convincing sign of recovery.
ROOM TO BREATHE. As we mentioned in yesterday’s newsletter, MATIC has been one of the main beneficiaries of the renewed faith in the markets. Particularly, with the recent discovery that Mark Cuban is bullish Polygon.
We were looking for a breakout above the $2 level which we have seen now.
? TIP. Note MATIC is now a bit more capped. As coins transition and become more mature we begin to see a reduction in volatility. Remember this when setting targets.
Just because the market isn’t pumping, doesn’t mean there aren’t opportunities. At the moment, we’re looking for talented crypto writers / researchers / technical analysts. If this sounds like you, please follow these instructions ?
By COB Friday (28th May), please could you write up a short crypto segment on the recent BTC dip and send it to ? firstname.lastname@example.org ? Imagine you are writing it to be included in the Market Meditations newsletter. There will be two components to this:
1) Researching and writing an engaging and useful crypto story
2) Understanding and matching the style/communication/brand of the Market Meditations newsletter.
Please use the ‘Will the Bull Market Continue?’ section of this letter as an example. What makes this example good? The topic is relevant and interesting, the writing is clear and concise and it is actionable (references other resources that readers can use to continue their growth and development should they so wish to [Glassnode, Cryptoquant etc.])
⏰ We look forward to reading your writing by COB next Friday (28th May)!
Please note while we are primarily looking for writers, all talent is welcomed and there are multiple other roles at Team AK for those wishing to go beyond. i.e community manager, content creator, meme lord etc.
Total Stablecoin Supply Crosses the $100 Billion Mark
The total supply of dollar pegged stablecoins has risen past the $100 billion markt; most of that growth has been driven by the largest two stablecoins: Tether’s USDT and the Centre consortium’s USD coin (USDC).
The sharp growth in stablecoins suggest that crypto market participants are increasingly deploying funds, including in areas such as derivatives and decentralized finance (DeFi). Derivatives traders often use stablecoins for collateral, whereas DeFi users utilize stablecoins to trade and lend funds to earn yields. – The Block
The growth has also caught the attention of global regulators. With proposals that would require all stablecoin issuers to have bank licenses.
Improve your Trading through Fundamental Analysis with Koroush AK
In this episode, we run through top tips to improve your trading through the use of fundamental analysis. Early access made available to premium members only.
Fundamental analysis can play an important role in a successful trading strategy
At its core, fundamental analysis is used by investors to establish the “intrinsic value” of an asset. By looking at a number of factors, the goal is to determine whether the subject asset is overvalued or undervalued by the market.
Exchange inflow and outflow can help us understand the macro state of the market
Large net inflows of crypto assets onto exchanges suggests the market is planning to sell large quantities of coins. Large inflows of stablecoins onto exchanges suggests the market is planning to purchase large amounts of crypto assets. Large outflows of crypto assets from exchanges suggests the market is planning to hold these coins in the short term. You can use CryptoQuant to access this data.
The number of active addresses can gauge the level of adoption of a network.
This metric measures the number of unique addresses that were active within a network either as a sender or a receiver. The higher the number of active addresses, the higher the network effect is. Check out Glassnode for this information.
Fees generated are crypto’s equivalent to revenue
Higher fees generated by a network indicates higher network activity. Often the networks with the highest fees are the ones that have gained the most adoption and this can correlate with price appreciation of the underlying asset. You can use either Crypto Fees or Coinmetrics to access this data.
Always understand the tokenomics of a project before investing
This concerns the understanding of the supply and demand characteristics of a specific token and can help determine the level of risk. If supply is mostly owned by a few parties, those parties could cause significant movements or even manipulate the price to your detriment. To see how the funds were initially distributed check out the project whitepaper and for real time metrics you can use Nansen.ai.
The team behind a project will be the real determinants of success
There are a lot of good ideas in the crypto space, however many teams lack the ability to execute. Use the project website or whitepaper to find out who the team members are and investigate each member asking questions such as, have they previously been involved in successful ventures, do they have the relevant technical / commercial expertise to achieve their vision and have they been involved in any scams?
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Disclaimer: The content in this newsletter is for informational purposes only. Nothing in this email is intended to serve as financial advice. We are not financial advisors. Every investment and trading move involves risk. Do your own research when making a decision.