Bitcoin's Stock-to-Flow Model in a NutShell

Bitcoin's Stock-to-Flow Model in a NutShell

By yourmitchy | CryptoTips | 23 Nov 2020


The latest version of the Bitcoin Stock-to-Flow pricing model published on April 27, 2020, predicts Bitcoin to reach a price of $288k by the year 2024. 

Now the question on everyone’s mind is whether or not the model will prove to be true? Many people are enthusiastic about the model and believe it to be true, while others are extremely skeptical and believe it has no merit.

No matter what you believe, all you can really do is follow the model until it has proved itself or it has broken. Thus far, with Bitcoin nearing $20,000 the model is right on track and has garnered newfound interest from the naysayers. 

So, what exactly is Bitcoin’s stock-to-flow model anyway? 

In the following article, I provide a short, simple, and easy-to-understand explanation of it so that you can follow it along until it makes it or breaks it. 

Who Created Bitcoin’s Stock-to-Flow Model

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PlanB’s Twitter profile

Bitcoin’s stock-to-flow, or S2F, pricing model was created by anonymous Twitter user PlanB, with the handle @100trillionUSD. He claims to be a Dutch institutional investor with a legal and quantitative finance background that manages around $100 billion in assets. 

PlanB has published two variations of his pricing model: 

The original BTC S2F model is a time series model while the second BTC S2FX model removes time and adds other assets (silver and gold) to the model.

The Model(s) in a Nutshell

In a nutshell, PlanB's S2F model actively tracks Bitcoin’s price activity in line with its supply which is vastly affected by its halving events which decrease Bitcoin’s inflation. Bitcoin halvings occur every four years where the newly minted Bitcoin supply gets cut in half, leading to a massive supply shock.

This supply shock is what makes Bitcoin increasingly more scarce and scarcity is at the basis of PlanB’s stock-to-flow model. 

In fact, scarcity is at the basis of any stock-to-flow model. S2F models can generally be applied to natural resources like gold, silver, platinum, oil, etc, and they are simply a way to measure the abundance of a particular resource.

Using the S2F model you can come up with an S2F ratio, which is the amount of a resource held in reserves divided by the amount that is produced annually.

In other words, stock-to-flow ratios are used to evaluate the current stock of a commodity (total amount currently available) against the flow of new production (amount mined that specific year).

So in the case of Bitcoin and other store of value commodities like gold, silver, and platinum, a high ratio indicates that the commodity is increasingly scarce, and therefore more valuable as a store of value.

But how does S2F calculate the price?

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(Source)

In the chart above, the BTC S2F model line is overlaid on top of the price of Bitcoin. As you can see, the price of Bitcoin has continuously followed the S2F line fairly accurately over time and is following it very closely right now.

Therefore, the theory suggests that the price of BTC will continue to follow the S2F line and since we can project the S2F line into the future (because it’s calculated by the approximate mining schedule of future Bitcoin mining), we can observe where the price is likely to be.

Moreover, in the chart above, the colored dots overlaid on the BTC price represents the number of days until the next Bitcoin halving. As such, you can more easily interpret how price relates to the Bitcoin halving event based on the colors and price action in the last cycles. 

That said, all eyes are now on Bitcoin and the S2F model to see if it continues to hold true in its price projection. 


yourmitchy
yourmitchy

doge is no joke


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