Efficient Market Hypothesis and Bitcoin Stock-to-Flow Model

Would you pick up that bitcoin or follow EMH?

Introduction

Stock to Flow Model

Efficient Market Hypothesis

  1. Weak EMH: historical price data is already priced in and cannot be used to make profits. Technical Analysis (TA) and Time Series Analysis (TSA) do not work.
  2. Semi-strong EMH: public news from media outlets like MSNBC, Bloomberg, WSJ and research companies is already priced in and cannot be used to make profits. Fundamental Analysis (FA) does not work.
  3. Strong EMH: even inside information can not be used to make a profit, because all information is already priced in.

Risk & Return

Assuming EMH

Risk & Return Model

Bond, Gold, Stocks: 1955–2019 data. Bitcoin: 2009–2019 data.
  • Risk that bitcoin dies
  • Risk of governments making bitcoin illegal and prosecuting developers
  • Risk of fatal software bugs
  • Risk of exchange hacks
  • Risk of 51% attacks by centralized miners
  • Risk of miner death spiral after halving
  • Risk of hard forks

Derivatives markets

Source: https://twitter.com/skewdotcom
Source: https://www.theice.com/products/72035464/Bakkt-Bitcoin-USD-Monthly-Futures/data?marketId=6137544
  • 42% of investors see bitcoin futures as the biggest risk (whales and governments manipulating the price of bitcoin with 'paper bitcoin', spoofing and wash trades).
  • 16% still fears miner capitulation after the halving.
  • 15% fear selling pressure from scams.
  • I know from discussions with institutional investors that their biggest fear is government making bitcoin illegal.
  • Another risk frequently mentioned by institutional investors is "the next bitcoin", a new (government/central bank backed) coin replacing bitcoin.

Conclusion

References

Translations

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PlanB

PlanB@100trillionUSD is a former institutional investor who created the Bitcoin Stock-to-Flow (S2F) model. https://planbtc.com/