Crypto asset markets are constantly evolving, and with it, new tools and methods for understanding and analyzing the market. One such tool is the bitcoin stock-to-flow (S2F) model, which aims to predict the price of bitcoin based on its scarcity.
In this guide, we’ll explore what the bitcoin stock-to-flow model is, the pros and cons of the model, and whether you can use it to trade bitcoin.
What is the bitcoin stock-to-flow model?
The mastermind behind the bitcoin stock-to-flow model is a Twitter user known as plan b, Despite his mysterious identity, he claims to be a highly-accomplished institutional investor hailing from the Netherlands, with a background in both legal and quantitative finance.
PlanB took the classic stock-to-flow model and gave it a digital twist, using it to make predictions on the value of bitcoin.B T c, S2F’s predictions are proving accurate many times Brief History of BitcoinPlanB’s stock-to-flow model quickly became popular tool For bitcoin investors.
The stock-to-flow (S2F) model is an economic model that measures the relationship between the current stock (supply) of a commodity and its flow (annual production or supply growth). The stock-to-flow ratio is calculated as stock divided by flow and is used to measure the scarcity of a commodity.
stock-to-flow = stock/flow
The stock-to-flow model was originally developed for precious metals such as gold and silver, but has since been applied to other assets, including bitcoin.
In the case of bitcoin, the stock-to-flow model compares the existing stock of bitcoin to its annual production, which is the new bitcoin that is created through mining.
The stock-to-flow ratio is calculated as stock divided by flow and is used to measure the scarcity of a commodity. A higher stock-to-flow ratio implies lower annual production and a relatively larger existing stock, which generally leads to higher perceived value and price.
To put this into better perspective, let’s take a look at the stock-to-flow of gold. Gold reserves are 197,576 tonnes, and flows are 3,000 tonnes per year. This calculation gives us a stock-to-flow ratio of 65.85, which means that it would take mining approximately 66 years to double the amount of gold currently in circulation. This shows that gold is very scarce compared to silver, which has a stock-to-flow ratio of 22. This helps explain why gold is more expensive at $1,914 an ounce, while silver is priced at $23 an ounce.
Similarly, we can calculate the stock-to-flow of bitcoin as of January 31, 2023. The stock (supply) of bitcoin is 19.28 million, and currently around 385,000 bitcoins are being mined a year.
19.28M/385K = 58.69.
Since we know the exact supply of bitcoin even in the future, we can calculate its stock-to-flow and predict future prices, and thus make more informed investment decisions.
How bitcoin scarcity affects the stock-to-flow model
Bitcoin’s scarcity is a key factor in understanding its value and price, and is closely tied to the stock-to-flow model.
Bitcoin has a limited supply, only 21 million bitcoins can ever be created. This scarcity, combined with increased demand for the currency, puts upward pressure on its price.
An important aspect of bitcoin scarcity is the halving event. Every four years, the rate at which miners can mine new bitcoins is halved. When bitcoin was first introduced, miners were rewarded with 50 bitcoins per block. This amount was reduced to 25 bitcoins in 2012 and further reduced to 12.5 bitcoins in 2016. As of May 2020, the reward for mining a new block is 6.25 bitcoins.
This pattern of reducing the flow of new bitcoin into the market will continue, meaning that the stock-to-flow ratio of bitcoin will continue to rise.
Eventually, there will be almost no new supply of bitcoin entering the market, leaving its price entirely determined by demand. This situation has led to some optimistic predictions about the future price of bitcoin.
bitcoin stock-to-flow chart
The bitcoin stock-to-flow chart provides a visual representation of the stock-to-flow ratio over time and is used by some investors to assess the current state of the market. The chart shows bitcoin’s historical stock-to-flow ratio as well as projected ratios for future years.
Pros and Cons of the Bitcoin Stock-to-Flow Model
Like any economic model, the bitcoin stock-to-flow model has its strengths and weaknesses. Here are some of the pros and cons of the model:
pros
- provided a framework for understanding The relationship between scarcity, value and price in the case of bitcoin.
- provides a simple and Straightforward way to assess current market conditions on the basis of scarcity.
- Provides long term outlook: The stock-to-flow model takes into account the long-term supply and demand dynamics of bitcoin, making it a valuable tool for those looking to make long-term investment decisions.
Shortcoming
- limited scope: The stock-to-flow model does not take into account other factors that can affect the price of bitcoin, such as demand, market sentiment, regulatory changes, global economic conditions, technological advances, and competition from other cryptocurrencies.
- Historical data only: While the stock-to-flow model has been accurate in the past, it is based solely on historical data and does not account for unforeseen events that may affect bitcoin’s price in the future.
Can You Use the Bitcoin Stock-to-Flow Model to Trade Bitcoin?
The short answer is yes; You can use the bitcoin stock-to-flow model to trade bitcoin.
By understanding the stock-to-flow ratio and the historical trends of the market, traders and investors can make informed decisions about buying and selling bitcoin.
however, It is important to note that the bitcoin stock-to-flow model is only one tool among many, and should not be relied upon exclusively. Many factors can affect the price of bitcoin, and it is important to consider these other factors when making an investment decision.
Additionally, it is important to approach any type of trading or investment with caution and to thoroughly research and understand the market before making any decisions. While the bitcoin stock-to-flow model can provide valuable information and insight, it is always important to consider multiple sources of information and use a combination of different tools and methods when analyzing the market.
Finally, the bitcoin stock-to-flow model is a useful tool for understanding the relationship between scarcity, value, and price in the case of bitcoin. Traders and investors can make informed decisions about buying and selling bitcoin by keeping the currency’s scarcity and market historical trends in mind.
However, it is essential to note that the model is only one tool among many, and must be used in conjunction with other sources of information and analysis.
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