The stock-to-flow model applied in Bitcoin is one of the most discussed topics in the crypto community these days. In this detailed guide, we’ll take a look at everything you need to know about the Bitcoin Stock to flow or S2F model.
In a nutshell, the stock-to-flow model is popular because it possibly helps users predict the future price of Bitcoin. Let’s take a look at how the S2F model was created, what its uses are, and how it can help us predict Bitcoin’s price through mathematical formulas and calculations.
Understanding Bitcoin Stock-to-Flow Model
By calculating the scarcity of a cryptocurrency in the market, the stock-to-flow model can be used to predict the possible future price of coins like Bitcoin.
Initially, the stock-to-flow model was applied to traditional commodities like gold and silver. However, a Twitter user named PlanB once applied the same stock-to-flow model to Bitcoin and has been crowned as the creator of the Bitcoin stock-to-flow model.
The user PlanB is possibly an institutional trader and has over 20 years of experience in traditional trading and finance.
To understand how the stock-to-flow model works in the case of Bitcoin, we will have to understand how scarcity drives value in the case of every commodity and in the case of Bitcoin as well. The same is also applicable in the case of fiat currencies.
Fiat currencies are always controlled and printed by the central banks of related countries. More money is printed to replace damaged bills and keep the market liquid and provide enough money for businesses to keep the country functioning properly.
However, when the central banks start to print money excessively in the long run, it causes accelerated inflation in the country.
This increases the prices of everyday goods in the country and decreases the value of currency bills. This has already happened in lots of countries, and many other countries are on the brink of suffering from widespread inflation because of the same issue.
On the other hand, high-value assets like gold, silver, and Bitcoin are very difficult to find or create and cannot be faked either. Since these assets are available in limited supply, they are considered very valuable and can be used as a hedge against inflation.
The S2F model relies on the scarcity of an asset because of the difficulty of creating it. This includes gold, silver, and also Bitcoin in the case of cryptocurrencies. On the other hand, common goods, like soda cans, can easily be produced, and their production can be increased by the increasing demand.
On the other hand, unforgeable assets like gold and Bitcoin are costly. For example, Bitcoin mining includes the use of a huge amount of computing power, and this increases electricity consumption in the process. Another example is gold mining, which is also a tough and capital-intensive process.
Whenever a mine starts to deplete, its reserves are degraded in quality, and more mining efforts need to be made to keep getting the material from the same mine.
The design of Bitcoin makes it an effective hedge against inflation. The maximum supply of Bitcoin sits at just around 21 million Bitcoins. So, the scarcity of Bitcoin against traditional currencies makes it a valuable asset for investors.
On the other hand, fiat money can be printed without any limits and is therefore bound to decrease in value in the long run. While Bitcoin isn’t very liquid and easy to transfer, it has proven its worth as an effective store of value. It acts just like gold and helps investors keep their wealth safe from the dangers of inflation in the long run.
Application of the S2F Model
In the stock-to-flow model, stock refers to the amount of Bitcoin available, and flow means the yearly production rate of Bitcoin.
Calculating the S2F of Bitcoin is easy. All you have to do is divide the Bitcoin stocks by their yearly production rate.
The current supply of Bitcoin is currently at around 19 million out of the 21 million that are ever to be minted. This means 90% of the total Bitcoins are in circulation. The current block reward, the number of Bitcoins created per year, comes out to be 328,500 BTC.
By dividing 328,500 BTC per year by 19 million, we get 57.712 as the S2F value/ ratio of Bitcoin. This means it’ll take us over 57 years to mine all the Bitcoins if we were to ignore the halvings and maximum supply cap.
The S2F ratio of gold comes out to be 62. The gold mining process has been accelerated by the latest advancements in the field of mining and due to an increase in the quality of mining machines.
Bitcoin, on the other hand, has a fixed Block generation time of 10 minutes. Block rewards are generated and distributed among miners every 10 minutes. Block rewards generate new Bitcoins.
To keep the Bitcoin supply low, block rewards are halved after every 210,000 mined. After every halving, the number of Bitcoin rewards for every mined block is halved, and so does the number of Bitcoins entering into circulation.
This increases the scarcity of Bitcoin in the market and keeps its price up. In 2024, another Bitcoin will occur, and the S2F ratio of Bitcoin will increase to 124.
Just like any other model, there are both supporters and critics of the Bitcoin S2F model as well. Even the co-founder of Ethereum, Vitalik Buterin, disagrees with the Bitcoin S2F model. However, he also agrees that price increases not directly relating to halvings isn’t a piece of great evidence to reject S2F completely.
Just like this, there are many other critics of the S2F model, all with their points to disprove the S2F model.
Most of the critics say that since the S2F model relies directly on the supply and production of new assets with their increasing value, and there’s no proof to justify the connection, the S2F model is based purely on assumptions.
Problems with the S2F Model
Let’s take a look at the biggest issues with the S2F model, which even makes some people believe that the S2F model is ineffective and inaccurate.
One of the biggest problems with the S2F model is its prediction of Bitcoin’s value after a few years. For example, the model suggests that the value of 1 Bitcoin will sit at around $1 billion in the year 2039. This is a huge assumption and means that the total Bitcoin market cap would be over $20,000 trillion.
This value is more than 130 times the current value of the whole stock market. The model even suggests a more than tenfold increase in the value of Bitcoin in the upcoming years.
It is hard to convince anyone that Bitcoin’s price will see this much increase.
Another big problem with the S2F model is that it doesn’t take into account the demand of Bitcoin, but only its scarcity. As well all know, Bitcoin now has lots of competitors, and it is no longer the only cryptocurrency in circulation.
While Bitcoin is termed as digital gold, newly emerging cryptocurrencies are slowly picking up momentum and are stealing the market share from Bitcoin.
So, the failure of stock to flow model to take into account the changing demand of Bitcoin over the years is what makes it less effective. No matter how scarce the asset might be, it will only have value if the market demand for the asset is high.
For example, if an unknown artist creates a beautiful and limited collection of paintings, but no one wants to buy them, those paintings have no value whatsoever.
So, a model needs to be introduced which works according to the demand of Bitcoin and not according to its supply. For example, to increase the value of Bitcoin significantly, a significant number of new wallets will have to be made, and billions of people should show interest in it.
The last problem arises from the very construction of the S2F model. The model does the regression calculations in the wrong way. It does the regression starting from the beginning of Bitcoin to the latest date. If, instead of this, the model did the regression right before the halving period, the resulting regression would be very different.
According to the current calculation model, the market value of Bitcoin was to reach the worldwide market cap of diamonds by the end of 2016. However, when the halving happened in 2016, the same regression suggested that the market cap of Bitcoin would match that of Golds by the end of 2021.
But the current market cap is still ten times less as compared to Gold. So, this makes PlanB’s S2F Bitcoin model invalid.
Advantages of the S2F Model
Let’s take a look at the advantages of the stock-to-flow Bitcoin model. This will help us understand why the model is so popular and widely used by Bitcoin enthusiasts around the globe.
Simple and Straightforward
One of the biggest benefits of the S2F model is that it does not require complicated equations and calculations to be made to provide you with accurate results.
All you need is an idea about the total circulating supply of Bitcoin at the time of calculation and the total yearly supply, and you will be left with the stock-to-flow ratio of Bitcoin by dividing the total supply by the yearly production rate.
Works on Publicly Available Data
Since the model works entirely on publicly available data, it can be used to easily compare different assets and their value in the upcoming future. This way, investors can easily calculate the stock-to-flow ratio of different assets and can have a better idea of how they should diversify their portfolio by making new and valuable investments.
Since the stock-to-flow model is really easy to use, even a beginner investor can easily use it to calculate the ratio precisely. This will give them an in-depth inside into the asset they are looking to invest in. Moreover, the investor can easily get an idea of how the value of an asset might change in the long run.
Works on Assets with No Intrinsic Value
One of the biggest drawbacks of Bitcoin, according to many people, is that the asset has no real intrinsic value. In contrast, the stock market works by evaluating companies based on the goods they produce and the revenue they generate per year. This is why when you buy a stock, you own a percentage of the relevant company.
However, Bitcoin does not create anything and has no intrinsic value. This is the main reason why Bitcoin has been termed the gold of cryptocurrencies.
The value of gold is also derived purely from its high demand and scarcity. Moreover, gold is used in jewellery, medicines, utensils, and many more things, which significantly increases its demand.
Traditional financial formulas cannot be used to predict the future price of an asset that has no intrinsic value. But the S2F model successfully calculates the future price of assets like gold and Bitcoin and is therefore very popular.
Considers both Supply and Demand
Since the S2F model is very advanced and takes into account both the supply and demand of Bitcoin, it can create accurate future price predictions for the asset. In contrast, other models of price prediction usually do not take into account the possible future demand of the asset and are, therefore, less effective.
By considering both the supply and demand of Bitcoin in the market, the S2F model effectively eliminates any speculation about the price. Even if the market fluctuates, the stock-to-flow model can precisely measure everything and can provide the investor with much-needed peace of mind.
Accuracy of the Bitcoin S2F Model
No matter how accurate the stock-to-flow model might be, it cannot accurately predict the future price fluctuations of Bitcoin. However, it has been able to provide us with accurate past prices of Bitcoin.
That is because the S2F model purely relies on the supply and demand of Bitcoin, which can be affected by a huge range of factors that might not even be disclosed yet. The factors which might affect the value of bitcoin in the future include political, economic, and public opinion.
So, while the S2F model can be used to accurately predict the current market trends of Bitcoin, it cannot provide us with future price predictions regarding Bitcoin in any way. The main reason for this is the external factors that can change at any time.
Another reason for the inaccuracy of the S2F model is that it overly relies on assumptions, and assumptions are not always accurate. One of the biggest examples of assumptions made by the S2F model is that the demand for Bitcoin is directly proportional to its supply.
This assumption is not always true, and thus acts as an affected to make the ratio provided by the S2F model ineffective.
Moreover, the model tells us that the factors affecting Bitcoin’s price remain constant in the long run, which is also not true. So, we can conclude that the S2F model cannot accurately predict the future price of Bitcoin.
Do Traders Follow the S2F Model Before Investing in Bitcoin?
The S2F model is used by investors to accurately predict the future prices of cryptocurrencies by investors. This is done to see whether a cryptocurrency is good for investment or not before an investor can make the final investment decision.
Most of the calculations are done based on the current and future supply of the same cryptocurrency.
One of the most popular applications of the S2F model is to predict the future price of gold, Bitcoin, and silver. To start using the model in investments, an investor should first learn how to use the model effectively.
The most important thing you need to calculate to use the S2F model on an asset is calculating its total supply in the market. For example, the current circulating supply of Bitcoins in the market is around 19 million Bitcoin.
If the current market supply of an asset is low, the S2F ratio comes out to be high. This means that the asset is currently scarce, and its value you should increase in the future.
On the other hand, if an asset is readily available in the market, its S2F ratio will be low, meaning that its price will remain stable if the supply and demand are constant.
This is how the S2F model is used by investors around the globe to calculate the S2F ratio of an asset before investing in it.