Stock to Flow Bitcoin model
By Yaroslav Krasko Updated November 11, 2021
There are currently many different models that try to predict the value of Bitcoin. But usually every year most of them change or lose their relevance. In this article we will tell you about one of the most famous models of Stock-to-Flow for bitcoin, which shows itself perfectly throughout the existence of Bitcoin.
What is a Stock-to-Flow BTC model?
Initially, this model was used for precious metals and other scarce goods, such as gold, silver, platinum, etc. But now this model is used on other types of assets. Since Bitcoin is considered a deflationary asset (BTC’s offer is limited), the Stock-to-Flow model is also suitable for this asset. According to this model, the shortage of Bitcoin, gold and other similar assets are directly related to the price, with declining supply, demand increases, which in turn leads to an increase in the price of bitcoin.
Who created the Stock-to-Flow model for BTC?
The first to create this model for bitcoin was an unknown institutional investor under the pseudonym PlanB.
PlanB@100trillionUSD is a Dutch former institutional investor with 25 years of experience in the financial markets. He has a legal and quantitative financial background and has always been passionate about risk and return modeling. In March 2019, he created a Bitcoin Stock-to-Flow (S2F) model in which he uses scarcity to quantify the value of Bitcoin. A year later, he introduced the Stock-to-Flow Cross Asset (S2FX) model, which includes gold, silver, diamonds and real estate. Now he is mainly involved in Bitcoin valuation models, chain analysis and investment strategies.
PlanB claims that next months will be key and until Christmas Bitcoin will cost 100 000.
Stock-to-Flow BTC model live chart
How does the Stock-to-Flow model work?
Typically, the Stock-to-Flow model is used to measure the final supply of an asset. The Stock-to-Flow ratio is used to measure the current stock of a product compared to its annual production. In other words, it quantifies the deficit of an asset.
In order to better understand the concept of the S2F model, let’s look at the example of gold. The stock, i.e. 185 thousand tons of gold is currently mined, about 3 thousand tons are mined every year. We can calculate the ratio of stock to gold flow using these indicators.
SF = stock / flow
According to this method, Stock-to-Flow gold is 62, which means that it takes 62 years to obtain the current gold reserves. This is the highest ratio of inventories to flow among all commodities, and it can fluctuate over time. When the price of gold is higher, its production becomes more viable, which stimulates further production and increases the flow of gold to the market, reducing its S2F. On the other hand, when the price of gold is low, its extraction is not so profitable, which reduces the rate of its extraction. As the flow of gold decreases, its coefficient S2F increases again.
A similar concept can be applied to other precious metals such as silver, palladium and platinum.
If a commodity reaches a higher Stock-to-Flow ratio, it is more likely to be used as a means of saving rather than as an industrial material. In other words, a higher S2F ratio indicates a growing shortage of goods, making it more valuable.
According to supporters of the Stock-to-Flow model, bitcoin is a similar resource. It is scarce and its maximum reserve is limited to 21 million coins. In addition, you may be aware of halving, which reduces the amount of assets produced by the system by halving every 210,000 blocks (approximately every four years).
The combination of these properties creates a scarce digital asset that has, in the long term, highly compelling attributes of a store of value. The model predicts that the price of bitcoin will increase significantly over time due to the fact that there is a constant increase in the ratio of stocks to growth.
There are now about 18.8 million coins in circulation, at the time of writing this article the Bitcoin Stock-to-Flow ratio is at 50. After the next halving, this figure will increase, indicating that over time the value of bitcoin will only increase. According to the Stock-to-Flow model, at the end of this year the price of bitcoin may be in the range of $100,000 – $88,000.