The Bitcoin Stock-to-Flow Model – Forbes Advisor

The price of Bitcoin (BTC) is a bit of a roller coaster ride. This year alone, the original crypto has bounced around from a peak of $47,000 to trade at just over $20,000 today.

Where is Bitcoin going next? It’s a very difficult question, and one of the most common ways to answer it is by consulting the stock-to-flow model.

Bitcoin’s inherent digital scarcity makes it similar in some ways to commodities like gold or silver. In theory, that makes stock-to-flow a good fit for predicting Bitcoin prices.

What are floating shares?

The stock-to-flow model is often used to price raw materials. As the name suggests, the model considers two attributes: stock and flow.

Inventory is the total existing supply of an item. Flow is the new supply of the commodity created each year. Comparing these two attributes helps you assess the item’s relative abundance.

Let’s take gold as an example. About 187,000 metric tons of gold have been mined in history – this is the stockpile of gold. Gold is virtually impossible to destroy, so most of this stock still exists.

Now let’s look at how much gold is mined annually. Around 3,000 tons of gold are mined each year, according to the World Gold Council. This includes the flow side of the model.

Divide the stock by the flow to get gold’s stock-to-flow ratio. The equation looks something like this:

187,000 / 3,000 = 62.3

This ratio means that it takes approximately 62 years to obtain the total amount of gold that currently exists. The higher the inventory-to-flow ratio, the more scarce the commodity.

How is the Stock-to-Flow model used for Bitcoin?

One of Bitcoin’s most notable features is that the exact amount of new supply entering circulation each year is already known.

This means Bitcoin’s stock-to-flow can be modeled with surprising accuracy, unlike other commodities like gold, which rely on less precise mining or supply estimates.

The total supply of Bitcoin will be 21 million coins, of which almost 19.2 million have already been mined. New Bitcoins are created when miners validate transactions on the blockchain, following a predetermined schedule. The final Bitcoin should be put into circulation sometime in 2140.

Miners are currently rewarded with 6.25 BTC per block. With one block mined every 10 minutes, that means an annual flow of 328,500 BTC.

This means that the current Bitcoin stock-to-flow ratio looks like this:

19,171,050 / 328,500 = 58.35

Incidentally, this is similar to the 62 years we calculated previously for gold. Let’s take a closer look at how Bitcoin’s stock-to-flow ratio compares to other commodities like gold and silver:

The supply of Bitcoin will not be released linearly. Bitcoin undergoes a so-called halving every four years when the amount of Bitcoins released to miners to validate a block of transactions is halved.

The last halving happened in May 2020, and the next halving is expected in 2024. When the next halving happens, a block reward for Bitcoin will be 3.125 BTC. This means that Bitcoin’s flow will also be halved – hence the stock-to-flow ratio should double.

Is the Bitcoin Stock-to-Flow Ratio a Good Model?

The stock-to-flow model’s predictive ability for Bitcoin has proven accurate over the years.

As Bitcoin skyrocketed during the pandemic, the model gained a lot of traction online due to its past accuracy.

There was a divergence between Bitcoin’s price and the stock-to-flow model in 2011 and 2013, prior to Bitcoin’s emergence in mainstream investing. But between 2015 and the end of 2021, the model accurately predicted Bitcoin’s price.

With Bitcoin at all-time highs in November 2021 at around $69,000, the model stayed on course. That was until crypto hit a wall, dampened BTC price growth and diverged from stock to float.

One of the model’s main flaws is that it does not take into account volatility and Bitcoin’s vulnerability to price swings. Investors panic during highly volatile periods, causing significant drops in BTC prices.

During the crypto winter, the stock-to-flow model failed to accurately predict Bitcoin prices.

The model predicts a Bitcoin price north of $100,000 in 2022, which is significantly higher than we have seen so far, with Bitcoin currently trading around the $20,000 mark.

This has led many to dismiss the stock-to-flow model as broken. Ethereum founder Vitalik Buterin is among the critics, even going so far as to declare it “harmful”.

Stock-to-flow is really not looking good now.

I know it’s rude to enjoy yourself and all that, but I think economic models that give people a false sense of security and predestination that numbers-will-go-up are harmful and deserve all the scorn they get. pic.twitter.com/glMKQDfSbU

— vitalik.eth (@VitalikButerin) 21 June 2022

“Stock-to-flow really doesn’t look good right now,” Buterin said in a June 2022 tweet. “I know it’s rude to gloat and all that, but I think financial models that give people a false sense of certainty and predestination that numbers will increase are harmful and deserve all the scorn they receive.”

Variables that disturb the stock flow

In retrospect, many of the proponents of the stock-to-flow model overlooked certain aspects of its predictive power.

For example, the years 2020 and 2021 were highly unusual years when more money was created than at any time in history, and values ​​of financial assets across all markets rose sharply.

The Covid-19 pandemic and its attendant fiscal stimulus were the biggest drivers behind Bitcoin’s rise. But the pandemic was also a total “black swan” event, and so attributing Bitcoin’s growth to supply-side dynamics, as S2F does, now appears to be a reach.

Many other variables ultimately determine Bitcoin’s price.

Commodities such as gold and silver have existed for thousands of years and have built up a long history of price data, perceived value and a place in the monetary and societal sphere. On the other hand, Bitcoin is still a highly experimental technology that is only 14 years old.

Predicting the price of an asset so unique on the world stage is a very difficult task. With Bitcoin nowhere near the levels predicted in the model, believers are seeing big losses.

Other Bitcoin Forecasting Models

The difficulty of predicting the price of Bitcoin has not stopped the emergence of other models.

People positive about Bitcoin’s store of value properties point to the market value of gold, which some argue is a countercyclical inflation hedge, as a good benchmark for Bitcoin. If Bitcoin rose to be worth the same as the current market value of gold, $11.3 trillion, BTC would be worth $540,000.

Other methods to predict BTC prices:

• Elliot Wave Theory. Others use technical analysis, and the most common method of Bitcoin modeling is Elliot Wave Theory. This method assumes that the market goes through predictable bull and bear cycles based on crowd psychology.
• Fulcrum Index. Greg Foss, who worked in the credit markets his entire career, produced a thesis that was even more aggressive than the stock-to-flow model. Foss’ Fulcrum Index model assumes that Bitcoin can be seen as insurance on worldwide sovereign debt. Using credit default swaps, Foss places the fair value of Bitcoin between $108,000 and $160,000, although this is a long-term assessment of Bitcoin’s intrinsic value and less of a forward-looking price predictor.
• Greater Fool Theory. Others take a more straightforward approach, insisting that Bitcoin will go to zero because it has no intrinsic value. These naysayers declare that Bitcoin has appreciated due to the Greater Fool Theory, a financial mantra that states that the price of overvalued assets rises only because people buy them in the hope that they can sell them at a higher price to an even “greater fool.”

Time will tell if any of these models prove to be accurate in the long term. Meanwhile, the enigma of Bitcoin’s pricing has proven to be a difficult nut to crack.