Bitcoin’s Stock to Flow Model (or S2F,) made famous by pseudonymous Dutch trader PlanB, has become the main argument for Bitcoin proponents in defence of their chosen investment asset. The model, which values BTC in similar fashion to traditional commodities; gold, and silver, seeks to value Bitcoin based on the asset’s rarity – among other assumptions. There are, however, many detractors who do not believe the model to be a reliable predictor of the benchmark digital asset’s future value.
To put it as simply as possible, the Stock-to-Flow model is a means of calculating the abundance/scarcity of a given asset. To come to a Stock to Flow ratio – a value which gives an indication of how much new supply of an asset is produced, in comparison to how much is in reserve – one divides the asset’s estimated reserve amount by the estimated amount of the asset coming into supply each year; SF = stock / flow.
With Stock representing the sum of the asset held in reserve, and Flow representing the average supply – of given asset – coming online every year, then the higher the Stock to Flow ratio, the smaller the amount of new supply. With smaller amounts of the asset finding its way onto the market each year, the price of said asset should – theoretically speaking – enjoy a stable price. Thus acting as a good hedge. Conversely, a lower S2F value will indicate a high amount of new supply, year-on-year; this category is made up of assets like wheat, or oil.
Relating to Gold
Since Bitcoin is often compared to gold, we’ll set the stage with gold. Gold also happens to, typically, have the highest S2F ratio of all other comparable assets. With the total amount of gold that has ever been pulled out of the ground being estimated at 190,000 tons, and the industry adding an average flow of 3,200 tons, the S2F value of gold stands at about 54 S2F.
With a 59 S2F value, we can assume that it would take about 59 years for the gold industry to double the current amount of gold held in stockpile – also assuming that the earth holds that much. Theoretically implying a stable supply.
Relating to Bitcoin
Regarding Bitcoin, the Stock to Flow model – at first glance – seems to have found the ideal technological candidate. Bitcoin’s supply is algorithmically entrenched, thus making the question of supply a rather predictable one.
With 18.5 million of the digital asset in Stock, by current supply parameters – about 329,500 new Bitcoin being minted every year – BTC’s S2F currently stands at 56 (hence the comparisons.) Since Bitcoin’s, per block, supply is set up to decay by half every 210,000 blocks (about 4 years,) BTC flow shrinks over time. Which increases it’s S2F over time. It is predicted that BTC will have a higher S2F value than gold, by the year 2022.
The Stock to Flow model evaluates Bitcoin’s historical values to ascertain a picture of where it might head in future, it all hinges on limited supply. The original S2F model predicted an all time high of circa $55,000, with a market cap of $1 trillion. An updated version of the model, published in April of 2020, includes metrics derived from gold – as well as – silver markets and arrives at a prediction that is fivefold as optimistic as the original; over $288,000.
The Stock to Flow model – like all prediction models – is limited by the assumptions they take into account to arrive at an answer, and can never offer a complete picture. The Stock to Flow model is limited by the fact that it holds the assumption that the scarcity of an asset should be the only factor to influence it’s value. Neglecting volatility, as well as black swan events.
Nico Cordeiro, Fund Manager, and Investment officer at Strix Leviathan highlights a few more of the model’s failings, dismissing it as a reliable predictor of Bitcoin’s future performance.
The Stock to Flow model is usually applied to precious metals, but offers a unique approach to predicting Bitcoin’s future performance. Despite its limitations, it can possibly be considered in conjunction with a combination of other models to deliver a more rounded prediction of market performance. It should probably not be used alone though, as Bitcoin has not been around long enough to be completely relied upon.