Bitcoin Stock to Flow Model Explained

The stock-to-flow model is a theory that predicts the price of bitcoin based on its scarcity and rate of new supply issuance. It suggests that bitcoin's increasing scarcity over time leads to increasing price valuations. But is this model truly accurate for forecasting bitcoin's future price?

Let's dive deeper into the topic.

The stock-to-flow (S2F) model has become popular for evaluating bitcoin's current price and making predictions about future valuation. But what exactly does this model involve and how accurately can it forecast bitcoin's trajectory?

What is the Stock-to-Flow Model?

The stock-to-flow model was originally devised for measuring the scarcity of commodities like gold and silver. It calculates a ratio based on the existing supply versus the flow of new production.

For bitcoin, the stock measurement refers to the total amount mined so far. The flow refers to the annual rate of new bitcoin issuance each year.

So the higher the stock-to-flow ratio, the more scarce the asset is since less new supply is entering circulation in relation to the total. As an asset becomes more scarce, the model suggests it increases in value.

The creator of the bitcoin stock-to-flow model is anonymous bitcoin user PlanB. Their model is built on the hypothesis that bitcoin's stock-to-flow ratio puts its scarcity on par with precious metals and leads to increasing price valuations over time.

Key Predictions of Bitcoin's S2F Model

The bitcoin S2F model makes several key predictions:

• Bitcoin's scarcity, as measured by S2F, is growing over time since new issuance is halving every 4 years. There will only ever be 21 million bitcoin.
• Low S2F assets like oil are less scarce and more abundant. High S2F assets like silver and gold are rarer and valued higher.
• Bitcoin's current S2F is higher than silver and gold, suggesting it should be valued much higher.
• Bitcoin's price has closely followed the S2F model so far. The model predicts prices surpassing 6 figures in coming years.

By March 2020, PlanB's model predicted an average bitcoin price of $8,600. The actual price was $8,160. The accuracy has led believers in the bitcoin community to be confident about the S2F model's price predictions.

But many skeptics remain unconvinced about bitcoin's S2F model and caution relying too heavily on its price forecasts.

Limitations of Bitcoin's Stock-to-Flow Model

While the S2F model has demonstrated some prescience to date, many critics argue there are limitations that undermine its future accuracy:

• The model does not account for any emotional, speculative mania around bitcoin or other external factors that drive price.
• Bitcoin has only been around for just over a decade. Some believe the model has not been tested long enough to prove its accuracy decades into the future.
• Mining reward halvings are known in advance. That information could already be priced into bitcoin's current valuation.
• The model assumes decreasing supply issuance leads to scarcity and value. But bitcoin is only scarce because of its software code, unlike gold's physical limitations. The code could change.
• Bitcoin is not yet widely adopted as a store of value like gold. Its valuation relies heavily on speculation that it will someday reach that level of adoption.

Due to these constraints, some believe bitcoin's future price is highly unpredictable and cannot truly be forecasted by a model. The bitcoin market has already surprised experts before and may continue to do so.

Scenarios That Could Disrupt the S2F Model

Here are some hypothetical situations that could alter the bitcoin S2F model's accuracy:

• Governments prohibit mining, disrupting flow production.
• A bug is discovered in Bitcoin's code, leading to an exodus.
• Transaction fees spike, making bitcoin unviable for payments.
• Quantum computing allows hacking bitcoin wallets, destroying faith in its security.
• Adoption stalls as new cryptocurrencies surpass bitcoin's appeal.
• Institutional investment fades as major fund managers exit positions.

While none of these scenarios are guaranteed to happen, they demonstrate risks that could undermine the S2F model's core assumption that decreasing issuance leads to increasing price. The future is highly uncertain.

Time Will Tell If Stock-to-Flow Model Holds True

The bitcoin stock-to-flow model is an interesting concept supported by bitcoin's increasing scarcity and promising price history so far. But the model has not been definitively proven accurate yet for long-term price prediction.

The true test will be if bitcoin's valuation follows the S2F model for years and decades to come. With further halvings still ahead, the bitcoin community will be highly interested to see if PlanB's model plays out as projected over time.

While the S2F model should not be any investor's sole tool for forecasting bitcoin's price, it does provide an insightful way to think about the digital asset's programmed scarcity. Only time will tell if bitcoin's real world valuation remains on par with PlanB's predictions.

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