This is an informal post, a pondering of potentials in positives for Bitcoin.
In a proper article, I would cite sources, provide diagrams, and do all of the things. Instead, I'm a'gonna just write.
Right.
S2F, or stock to flow, is about what drives price, and what drives price underlying is really to answer what drives value. With Bitcoin, there is one position that believes the amount of Bitcoin currently available, evaluated also by the amount that can be produced, along with the rate at which it can be made available, all have a strong determining factor in the value people place on Bitcoin's price. There is an opposing perspective that believes in the simplest of terms, that value is derived from supply and demand, and if Bitcoin is not becoming increasingly valuable in it's demand, meaning its usefulness at market, then the stock to flow will have little affect on its value.
Let's break this down.
Supply and demand is a basic economic principle where a value, or perception of value in a product can set an average price for that item. With this established price, people may be willing to pay more if there are not enough of the item available at the time of peak interest, and alternately, if there is increased production to keep up with demand, the price may even come down to perpetuate the popularity of the item.
The manufacturer of a product, for instance, can define a retail market value based on the cost of materials, distribution, marketing, personnel etc. Then, once it goes to market, a popular product will sell for at least a certain time frame. New models, competitive prices, better advertising can all push the value of this item down, and there is only a certain margin that makes it viable to continue producing if the value remains above cost. If there is a limited supply, or the value is too low, production may slow or cease. Conditions can easily change where suddenly people will take an interest in the same product while it has been in decline in production, or always was limited. If there are fewer, or finite supplies, people will become more willing to pay more to have the same item, understanding the opportunity is now becoming a rare one. the ebb and flow between supply and demand can greatly affect value.
With Bitcoin, there is a limited supply for the entirety of the coin's existence. This is additionally factored in with a built-in difficulty in mining, or earning off of computing transactions in the blockchain network. The halving, of which we expect the next to occur May, 2020, will cut the mining reward in half, while the number of Bitcoins that can be produced shrinks steadily every day.
The economic model of a Bitcoin is built so that if an equal value were placed on a Bitcoin every hour of every day, this would begin to increase steadily solely based on the difficulty of creating new supply, and the desire to hold on to supply as there is increasing talk of its value.
Those who do not agree with the value placed on Bitcoin based in stock to flow, believe that the cryptocurrency simply has not become useful enough in market terms, to increase in value simply based on the reduction of available supply. Keep in mind, supply is not just about the number of coins that will ever exist. It is also about how many are currently in circulation. There are people entering newly into the crypto market every day. Someone this coming Monday at 3 PM EST may be very eager to buy their first Bitcoin, or fraction thereof. They might be willing to pay the current price, because they've heard it is going to be 10X that price in months or years. Someone else might be willing to wait until Bitcoin comes down to "X" before ever considering buying one.
The demand-side argument is that until Bitcoin proves it made a better payment system, became useful for buying coffee, or had the next killer video game that could only be purchased in Bitcoin, or in-game assets that were only valuable in Bitcoins, then demand will never increase to the point where available supply will matter.
It is a complex model, to which we may never actually fully understand the full impact on price, but in the past we have seen popularity rise when the price rises, and negative news coverage has driven this down heavily when the price comes crashing back down. Even though the greatest affect of the halving in the short term is felt by the miners themselves, who will have to assess whether they can afford to continue, or whether adjustments have to happen, there is likely to be a run up on price in the days leading up to the halving out of pure interest, and on the flip-side, if whales truly drive the majority of the market movement, there may be a heavy sell-off before the real heavy buying takes place.
There are more sophisticated sides to all arguments, but in the end, the question is largely about whether the model itself is a good design. I can say "yes" in my opinion, but the beautiful thing about this, is it is all theory. There has never been a time in history where it was possible to play this kind of experiment out in real-time, using a global technology for everyone to take part in. There are numerous flaws in the model, despite the desire to protect it. But, in the end, we are witnessing a grand experiment and we all get to take part in perhaps the most exciting element of that right now.
Cheers to discussing the halving in 1 month from now and seeing where it stands at that time!
For now, two halves of Gordon Freeman... out.
