Cryptocurrency has certainly stolen the show for asset classes in 2021. We have seen the total market cap for cryptocurrency increase by over 300% to $2.79 trillion in the last ten months.

Much of this increase in market cap is primarily due to Bitcoin, which increased from $694 billion on January 1st to $1.42 trillion by November 1st. Other cryptocurrencies like Etheruem and Litecoin have also seen increases in their total value. But nothing comes close to Bitcoin’s dominance.

As Bitcoin continues to soar in 2021, it leaves maximalists, investors and crypto enthusiasts wondering where it can go by the end of the year.

In this week’s Netcoins Progressive Investor post, we will break down some of the reasons for Bitcoin breaking all-time highs. In addition to the reasons for the new all-time highs, this post will also discuss the stock-to-flow model, price predictions and some on-chain metrics that may be useful for investors.

Why Did Bitcoin Hit New All-time Highs?

There are several reasons why Bitcoin hit an all-time high in April and then surpassed it in November. 

Some of the reasons for Bitcoin record-shattering price include inflation, increased institutional investment, greater adoption and a much-needed protocol upgrade.

Increasing Inflation Is Positive News For Bitcoin Investors

Part of the reason Bitcoin is increasing is due to inflation. As governments continue to print more money to save the economy, prices for goods and commodities go up. We have seen the price of real estate and stocks and this is also the case with Bitcoin. 

What separates Bitcoin from stocks and real estate is that we know for sure Bitcoin has a fixed amount and that the amount of new Bitcoin created is cut in half every four years. This halving makes Bitcoin deflationary and over time becomes more scarce. As Bitcoin becomes more scarce, the price will increase with demand.

Institutional Investment In Bitcoin Increases Confidence

This year, Bitcoin’s rise in price is partly due to more institutional investors, which is nothing new in Bitcoin’s short lifespan.

If we look back to December 2017, when Bitcoin futures launched on the Chicago Mercantile Exchange, the price of Bitcoin closed 23% higher on the very first day. Coincidentally this was also the peak of that bull run.

Just this fall, a handful of futures ETF products were approved and made publicly available. The Pro Shares Futures ETF (BITO) became the fastest ETF to reach a $1 billion valuation. In addition to BITO, two more futures ETFs were approved in October. Although these new forays into cryptocurrency for traditional markets are derivative-based, they bring significant movement to the upside for Bitcoin.

Currently, there are three Bitcoin ETFs in Canada, all of which became available earlier in the year and met with success. In addition, there are also three Ethereum based ETFs. There is no doubt Canada welcomes the idea of institutions dipping their wealth into cryptocurrency.

If institutional wealth continues to enter cryptocurrency, the price of Bitcoin and other crypto-assets such as Litecoin, Bitcoin Cash and Stellar will undoubtedly benefit. The addition of new types of institutional investments is also mirrored by increased adoption globally.

Bitcoin Adoption Steadily Increasing in 2021

The most significant Bitcoin adoption headline of this year is undoubtedly the El Salvadoran government proudly recognizing Bitcoin as legal tender. This move to allow Bitcoin to move within the country freely is gaining attention in other parts of the world.

There is also growing interest in adopting Bitcoin as legal tender in the inflation-plagued African nation of Zimbabwe. There is no doubt that African countries have taken a considerable interest in cryptocurrencies in the past year thanks to the potential benefits of borderless payments and access to unbanked populations.

Although these are headlines produced by governments and financial institutions, the transactions themselves can be seen using an on-chain metric that analyses new addresses produced by Glassnode Studios. More people opening up Bitcoin addresses is a good indicator of the growth that we have seen this year, reflected in the price increases.

Bitcoin’s increasing adoption is also due to its ability to upgrade and enhance the innovation the network already provides.

New Updates To Bitcoin Make It Faster and More Private

The mere fact that cryptocurrencies possess the ability to produce smart contracts and continually adapt through upgrades makes them world-changing. We have not experienced any sound updates to our current fiscal environment aside from the central bank’s quarterly interest rate announcements. These stark differences set up Bitcoin and other cryptocurrencies to be more favourable monetary tools.

Bitcoin and other cryptocurrencies are commonly seen as speculative by many who don’t understand it. True enthusiasts on the other hand view crypto assets as technology more than anything else despite some bad actors taking advantage of new entrants to the space. The longevity of crypto is in its inherent ability to adapt and upgrade.

Bitcoin just recently integrated a new upgrade called Taproot. The last upgrade to the Bitcoin network was SegWit back in 2017. Given how many upgrades have been made to Ethererem, (there are many more upgrades to come) Bitcoin was undoubtedly overdue. 

Taproot aims to be more usable and accessible by increasing the speed and privacy of transactions. The upgrade will create more confidence for retail users to use Bitcoin in their everyday lives.

Could it be a coincidence that Bitcoin’s last historic bull run year included an upgrade and the introduction of crypto to traditional financial products? Maybe, maybe not.

2021 has undoubtedly seen similar price pumps to 2017, which for investors can be helpful when predicting what sort of prices we may see at the end of the year.

Bitcoin Price Predictions for End of 2021

You may have heard of the online persona PlanB, who in 2021 has made a name for himself with his spot-on price predictions. Taking a look at his Twitter account, you can see that he has correctly predicted the closing prices of Bitcoin for three consecutive months. Perhaps this is a tweet worth minting into an NFT.

Plan B is credited with using the stock-to-flow model to accurately predict the monthly closes of Bitcoin and even predicting a year-end price of $165,000. 

Predicting the closing price for three consecutive months is no easy feat, and Plan B is certainly not shy about sharing his methodology.

What Is The Bitcoin Stock-to-Flow Model?

Technical analysis of charts and candles may seem intimidating to the average investor. The good news is the stock-to-flow model is not complicated. Any investor with a couple of pieces of easy-to-find data and a calculator can figure it out.

Simply put, the mathematical model quantifies scarcity.

At its core, the model is a measure of scarcity. Scarce assets have more value as they are harder to acquire and even more so as demand goes up. The prices of commodities are driven by the same concept.

Stock-to-flow is determined by taking Bitcoin’s current supply in circulation and dividing it by the yearly production. This produces a ratio that tells you how long it would take in years to mine the total supply of Bitcoin. 

The longer it takes to mine all of the Bitcoin in the total supply, the more valuable the asset becomes. That makes sense, right? Ultimately an increase in the time required to mine all bitcoins in existence means bitcoins are a more scarce commodity. Scarcity drives value.

How Does Stock-to-Flow Predict Bitcoin’s Price?

The stock-to-flow ratio can be entered into another equation to produce a projected price. Simply put, a higher stock-to-flow produces a higher estimated price.

If Plan B’s hypothesis is correct, investors should expect Bitcoin to see its total value rise to be worth just as much as gold as it has similar scarcity. Although precious metals like gold and silver are different markets, they are in line with the Bitcoin model values for the stock-to-flow model.

Investors can check out Plan B’s articles or head to Youtube, where you can find many explanations of his predictions and logic.

What is certain about the stock-to-flow model is that it is providing investors with extra confidence in the future price of Bitcoin heading into the final months of 2021 and beyond. Sound technical analysis is excellent for predicting price moves and allows investors to position themselves for run-ups or downturns. 

Investors can use this knowledge and some other valuable metrics to make better investing decisions.

Is 2021 Another Bitcoin Bubble?

Looking at Bitcoin investing strategies through rose-coloured glasses can be myopic and tragically lead some investors to painful falls, which are not uncommon in crypto. Investors can almost always expect all-time highs to come with some steep drops.

However, Bitcoin is a resilient technology and is able to pull itself up by its bootstraps to new all-time highs time and time again.

The reality is that it’s difficult to tell if Bitcoin is in a bubble because the world has never seen an asset behave like this before (and we also haven’t seen this amount of money printing due to a pandemic before).

In a recent interview, PlanB believes the ups and downs seen this year indicate a normal cycle in which we will see Bitcoin go back down, the same way it has after the last two halving events. 

Fear, uncertainty, and doubt will eventually grab a hold of the market again, and Bitcoin is still not big enough as an asset to be safe from crashes (most assets aren’t). PlanB does not believe Bitcoin has matured sufficiently to be considered as a better alternative to money. Once it is, a potential supercycle that pushes the price way up to new heights could take place sometime between 2024 and 2032.

In the meantime, savvy technical analysts consistently use publicly available on-chain data to produce metrics that help investors make wise decisions when faced with the threat of a potential bear market.

Revolutionary On-chain Metrics for Bitcoin

There are a few valuable tools on Twitter that can better help investors and analysts determine the health of the crypto market. Who would have imagined a world where anyone can receive technical analysis in the form of tweets!

One of the most useful Twitter tools to determine if Bitcoin is in a bubble is the Greed Index, which provides investors with a quantifiable measure of whether the current market sentiment is driven by fear or greed. 

A higher number indicates investors are feeling greedy and a correction might be near. On the other hand, a lower number indicates fear is reaching its height and it might be a good time to buy the dip.

Glassnode Studios is another helpful resource that investors can use to see real-time on-chain metrics to determine when it may be the right time to take profits, consolidate more Bitcoin or validate the HODL. Subscribers to Glassnode and its Twitter account can receive daily updates as to what is happening on-chain.

In addition to the stock-to-flow model, analyzing the following on-chain metrics can help you make better investing decisions.

• Network Value to Transaction Ratio (NVT). NVT is calculated by taking the total market cap valuation of a cryptocurrency and dividing it by the total transacted volume. The resulting ratio provides a balance that can be used as an indicator to determine if a market is overvalued or undervalued. The higher the value, the more likely the asset is undervalued.

• Net Exchange Flow. Net Exchange Flow displays the net flows of Bitcoin, Ethereum and USDT either leaving or entering exchanges. For example, if the flow of Bitcoin to exchanges is negative, it means less Bitcoin is available on exchanges for buying and selling, making it more scarce. If we think back to the stock-to-flow model, we know the scarcer the asset, the higher the price.

The above on-chain metrics are some simple tools investors can use to plan their next moves, and they can be applied to several other cryptocurrencies. 

Although signing up for the full suite of tools may not be everyone’s cup of tea, investors can receive regular tweets when on-chain metrics indicate all-time highs or all-time lows. These tweets can be beneficial for validating your current strategy.

A helpful and straightforward motto when investing in crypto and traditional assets is to go against the grain when it comes to emotions. If the market seems greedy, be fearful. If the market is fearful, be greedy. 

You can thank Warren Buffet for that nugget.

Positive Outlook for Bitcoin Investors As 2021 Ends

Investors can ride out the waves in the long term to see Bitcoin reach even higher all-time highs despite the potential for bad news and more strict regulations that undoubtedly will come its way. Investors loyal to the saying “buy the dip” may want to take the next rounds of FUD-induced lows to strengthen their position in Bitcoin.

Bitcoin recently became a teenager when it turned 13 on October 31st; investors can expect the crazy swings up and down and back and forth to continue just as teenagers do. If we think back to our teen years, they were likely marred by mood swings, fun and uncertainty. According to PlanB, at the end of adolescence comes young adulthood, which is when Bitcoin will probably rise to a whole new level.

If you want to buy Bitcoin, look no further than Netcoins. Our exchange offers several ways to purchase cryptocurrencies such as Bitcoin, Litecoin, Ethereum and Stellar. 

You can buy, sell or trade all of the above by depositing crypto to your account. You can also deposit Canadian dollars using e-transfers, online bill payments or crypto deposits. Sign up for your free account today.

Thanks for reading this edition of Netcoins Progressive Investor.