What is Bitcoin Stock-to-Flow model?
The Stock to Flow model, proposed by PlanB, is frequently used to describe the new supply of an asset being created concerning the existing supply. The model predicts that Bitcoin's price can rise steadily and impressively in the future, with approximately tenfold returns every four years.
The Stock to Flow metric (S2F ratio), which measures the number of Bitcoins available to be mined, rises as time progresses since fewer Bitcoins are entering the market. According to this model, the future price of Bitcoin is expected to rise.
Plan B, created by an anonymous Twitter user, refers that Bitcoin provides an alternative to the current monetary system. Many Bitcoin supporters think their currency will one day replace others as the world's reserve. As a result, Plan A will be replaced by Plan B, which is governed by governments and run by central banks (Plan B).
How to calculate Bitcoin’s Stock to Flow ratio
The Stock to Flow (SF) ratio is a measure of scarcity. The fact that gold and Bitcoin have a high SF value sets them apart from "consumable commodities" like copper, nickel, and brass. The high SF ratio value implies the asset's low price elasticity of supply.
SF = Stock / Flow
- Stock: The existing supply of Bitcoin in circulation.
- Flow: The number of tokens mined in a year.
Instead of the SF ratio, the supply growth rate is also being used.
SF = 1 / supply growth rate
As the maximum supply of BTC is limited to 21 million tokens and the process of mining a new token is time-consuming and energy-intensive, the supply influx of Bitcoin is limited to a certain amount that can come into circulation within a given timeframe.
This model considers this scarcity and supply limitation while predicting the price of BTC. The monthly stock to flow value and price information are among the inputs used in the formula to calculate the price the model predicts.
Indicators of a power-law relationship can also be seen in PlanB's model. This is a relationship between two variables in a linear regression function that shows how a relative change in one quantity causes a proportional difference in the other.
Regardless of the starting sizes of those quantities, this relationship exists. In essence, it illustrates the impact of the annual Bitcoin halving events, where the SF doubles and the market value is supposed to rise 10x, and this effect is consistent for each halving event.
Should we follow the S2F model?
The S2F model's feasibility in the current market environment is being analyzed more closely. As evidenced by the model's live data chart and the Stock to Flow deflection, it has historically been one of the most reliable prices predicting models for Bitcoin.
The model's price projections are frequently questioned in light of the bulk of the cryptocurrency market experiencing a flash crash on May 19, also known as "Black Wednesday".
BTC's price is currently trading at around $20,000, which is less than one-fourth of the predicted price according to PlanB's model; by now, it should have surpassed $100,000.
PlanB forecasted in June that by the end of 2021, the price of Bitcoin might reach 450,000 USD. In the worst-case scenario, he said it might get at least 135,000 USD. In roughly 4 years, in July 2025, the model predicts that the price will surpass the much sought-after 1 million USD threshold.
However, that prediction might sound overly optimistic; PlanB's Twitter poll served as a sign of this. He disclosed the poll's findings in June of this year, which showed that 41% of respondents thought the price of Bitcoin would stay below $100,000 in 2021. Compared to a similar poll he conducted in March of this year, which showed that the same metric was at 16%, this figure is high. At this point, the token was currently being traded at 21,000 USD.
It is crucial to note that Bitcoin was trading at around 34,000 USD at the time of the second study, which was conducted in June. Since then, the market has experienced another rebound in interest, with Bitcoin leading the way with a price of 45,800 USD.
Given this recovery and the inherent volatility of the cryptocurrency markets, it is difficult to completely rule out any price predictions and assess the precision of PlanB's S2F model. It's also worth noting that, despite the model's relative accuracy in predicting the price of Bitcoin since it came to public attention in March 2019, during the bull run that began in late Q4 2019, the market price of the token outperformed the predicted price until May of 2020. This might be an anomaly because the token's overvalued according to the associated stock to flow deflection value.
The Bitcoin S2F live data chart model exhibits several discrepancies in addition to this one. Looking at PlanB's model's historical estimations of Bitcoin's value, there are multiple elongated positive aberrations where BTC has been overpriced concerning the asset's supply dynamics. The most prolonged time frame for these discrepancies is between 2013 and 2015.
It's feasible that new quantitative valuation models will emerge that value Bitcoin more accurately because of how quickly the market and its connected markets are evolving. The BTC Stock to Flow cross-asset (S2FX) model, which PlanB himself revised, is a modernized version of the original S2F concept.
Limitations of Bitcoin Stock to Flow model
While Stock to Flow is a valuable model for assessing scarcity, it doesn't consider every aspect of the situation. Models are only as reliable as the data they are based on. For one thing, Stock to Flow is predicated on the idea that value should be driven by scarcity as determined by the model. In the opinion of its detractors, the Stock to Flow paradigm fails if Bitcoin has other valuable characteristics outside supply scarcity.
In contrast to fiat currencies, which are subject to devaluation, gold has a relatively steady value store because of its scarcity, predictable flow, and global availability.
This model predicts that the volatility of Bitcoin will likewise diminish with time. Historical Coinmetrics data attests to this.
It is necessary to account for volatility while valuing an asset. The valuation model might be more accurate if the volatility is somewhat predictable. However, Bitcoin is renowned for having significant price changes.
Although overall volatility may be diminishing, Bitcoin has always been valued according to free market forces. This indicates that users, traders, and speculators mostly self-regulate the price on the open market.
Bitcoin is probably more vulnerable to unexpected surges in volatility than other assets when these two factors - relatively limited liquidity and this - are combined. Therefore, the model might also be unable to take this into account.
This approach might be undermined by additional outside factors, including economic "Black Swan" catastrophes. However, it's essential to keep in mind that the same holds for virtually every model that attempts to predict the price of an asset based on past data. A "Black Swan" event involves some degree of surprise. Historical data cannot account for strange occurrences.
FAQs about S2F model
Does the Stock to Flow ratio of gold exist?
Yes. Due to the limited supply and scarcity of Bitcoin, the stock-to-flow concept is relevant. As opposed to generally accessible commodities like oil and copper, the approach is typically applicable to rare commodities like gold, platinum, etc.
Does S2F fail?
Yes. When compared to the price of Bitcoin at the moment, the model does not work.
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