Bitcoin Options & the Stock to Flow Model — Trade Idea 2
TLDR; Stock to Flow could be the next version of ‘The Institutions are coming’ for newcomers. Once 10 day STF multiple, or Mayer Multiple goes over 2.4, I’ll start buying long-dated, way OTM puts. Until then I hold a mix of BTC and USD and I go Long Vol when my setup hits.
As a thought experiment, let’s say @100trillionUSD’s Stock to Flow (STF) model becomes the next bull market meme. This seasons version of ‘The institutions are coming’. What would cashing out based on this model look like on a curve?
Right tailed, MS Paint, a bell curve. Co-integrated with broken dreams.
The longer the STF model holds, the more newcomers become convinced it can’t fail, irrespective of the creator’s warnings. As excitement builds, more people decide they shouldn’t sell below $100k.
If you look at the responses to any stock to flow Twitter thread, you get predictions that look a bit like this curve. The wisdom of crowds? Not exactly. The above numbers are NOT where I think peak selling will happen. The chart is where people say or think they will sell, in theory. In practice, Bitcoin newcomers usually buy when the all-time highs get broken, sell when the price doubles, and buy back towards the next top.
IF the STF model holds up, I expect the following to play out among more experienced market participants:
- Some STF watchers sell off well before $100k (sell the news) and bank significant gains from $3–4k.
- Others will use STF in conjunction with the Mayer Multiple and other metrics and chart patterns, which may lead to selling before or after the coveted $100k.
Mayer Multiple. You are Here.
- Some long term holders won’t sell at any price, creating the next ‘price floor’. Many are waiting to use Bitcoin as collateral in a less centralized way than current offerings. This often represents ‘a part’ of more experienced Bitcoiners holdings as opposed to some mythical, stoic holders of last resort.
- In 2020 the model will be perceived as ‘under the radar’ for newcomers until we approach previous all-time highs. (Google trends search data can convince you of anything if you input enough variations. Halvening, STF, moon, etc).
- Some are saying that historically we tend to ‘overshoot’ the model and hope for the same to happen again. The sample size is damned.
- If the price breaks $20k, Much more STF believers, who buy in above this level, will depend on the model holding up and will aim to sell at $100k, looking for a quick win. Crazy predictions will really get going if $100k holds for any length. Queue ‘End of Fiat’ articles.
- Many people will plan to sell if the model gets overshot, but in practice, they get carried away and don’t sell till it’s way too late. Maybe those newcomers sell at $120k, panic buys back in at $160k. The price peaks at $200k and they ride it all the way down to $40k. Welcome to Bitcoin.
As Bitcoin bull markets develop, historically volatility increases, so puts become more expensive. Having said that, long-dated( 9 months+), way OTM puts ( 50–80 % drop in price), in times of euphoria, will give you the peace of mind and insurance you’re looking for when others are losing their cool.
My plan is to:
- Buy way OTM puts once the Mayer Multiple goes over 2.4. The 10-day STF Multiple may also be useful at around the same level. These will be small but I’ll keep buying them as the price goes up as ‘insurance’ against a BTC spot. https://digitalik.net/btc/sf_multiple
- Go 1x short on Bitmex, a way to synthetically move your holdings to USD. You need to trust Bitmex not to exit scam though, so I don’t recommend holding too much. Maybe 10–20% of holdings.
- Possibly withdraw and pay capital gains tax on a few year’s living expenses. This buffer, even if you cash out too early, allows you to worry less about your trading balance.
There is no guarantee that Bitcoin will stick to the STF model. There is also no guarantee that it won’t KEEP going if it ever even hits $100k. But having some kind of exit plan helps you avoid the ‘Bulliever’ mistakes that I made in 2017. Credit to Bambouclub and Preston Pysh who both marked the June 2019 tip above 2.4 on the Mayer Multiple is a time to be wary.
Follow me on Twitter cryptodeepdiver.
Bitcoin Options & the Stock to Flow Model — Trade Idea 2 was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.