Def of Stocktoflow
The stock-to-flow model is a forecasting tool for Bitcoin price based on its scarcity and supply schedule. It estimates Bitcoin’s price by comparing the available supply of Bitcoin to the amount that is mined annually.
The model has been relatively accurate in predicting Bitcoin prices in the past, and it is a popular tool for forecasting Bitcoin’s future prices.
Key takeaways
- Definition: A stock-to-flow model is a tool predicting Bitcoin prices via scarcity and supply assessment.
- How It Works: Compares Bitcoin’s available supply to annual mining, driven by scarcity.
- Usefulness and Limitations:
- Usefulness: Guides trades, gauges risk, and compares Bitcoin to gold.
- Limitations: Ignores external factors, assumption.
- Implications for Bitcoin: Links scarcity and value, assists investment decisions, but not all-encompassing.
How the stock to flow ratio works
The stock-to-flow model is based on the idea that scarce assets tend to be more valuable. Bitcoin is a scarce asset because its supply is limited to 21 million coins. The supply of Bitcoin is further constrained by halvings, which occur every four years. When a halving occurs, the block reward that miners receive is cut in half. This reduces the amount of new Bitcoin that is entering the market each year.
Formula
The stock-to-flow model uses the following formula to calculate the stock-to-flow ratio:
Stock-to-flow ratio = (total supply of Bitcoin) / (annual issuance of Bitcoin)
The higher the stock-to-flow ratio, the more scarce Bitcoin is and the more valuable it is expected to be. The stock-to-flow model has been relatively accurate in predicting Bitcoin prices in the past.
Usefulness and Limitations of the Btc Stock to flow model (S2F)
Usefulness
The S2F model, championed by the pseudonymous analyst and creator known as PlanB, stands as a valuable tool for discerning Bitcoin enthusiasts and traders. It offers a methodical means to quantify the scarcity inherent in Bitcoin—a digital asset that has captured the attention of both seasoned investors and newcomers alike.
This framework rests upon a fundamental concept: that rarity often equates to increased worth. Indeed, Bitcoin epitomizes scarcity, with its capped supply of 21 million coins and the strategic tempo of its issuance, orchestrated through meticulously timed events known as halvings.
Let us delve into the manifold advantages that this model bestows upon those traversing the intricate pathways of Btc investment and trade:
Prowess in Spotting Opportunities
The S2F model unfurls as a compass steering investors toward opportune junctures. Cresting stock-to-flow ratio beckons as an auspicious time to procure bitcoins—a promise of augmented value yet to unfold.
Conversely, a trough in the stock-to-flow ratio might herald a judicious moment for parting with Bitcoins, foreseeing a period of diminished worth.
Risk as Gauged by Scarcity
Scarcity, the quintessence of the S2F model, serves as a measure of risk. Elevated stock-to-flow ratios align with enhanced scarcity, a feature that often stands alongside reduced risk.
In contrast, low stock-to-flow ratios may evoke increased susceptibility, as scarcity wanes and the potential for depreciation augments.
Renaissance in Contrast to Gold
This model invites the intriguing juxtaposition of Bitcoin and gold—two entities vying for their role as stores of value. Bitcoin, with its exalted stock-to-flow ratio, eclipses gold in scarcity, sparking contemplation about the digital asset’s potential ascendancy over its lustrous analog counterpart. The future, as illuminated by this model, portrays a panorama where the value of Bitcoin might surpass even that of gold.
Limitations
While the S2F model stands as a luminary in the realm of Bitcoin analysis, it is imperative to acknowledge its limitations, those subtle shadows that temper its brilliance. The model remains blind to variables beyond scarcity—variables like market demand and regulatory shifts that wield considerable influence over Bitcoin’s valuation.
Not including everything
The stock-to-flow model is a popular forecasting tool for Bitcoin price, but it does not take into account all of the factors that can impact Bitcoin’s price. Some of the other variables that can impact Bitcoin’s price include:
Global events
Bitcoin is a global currency, and its price can be affected by global events, such as wars, economic crises, and political instability. For example, the price of Bitcoin fell sharply in 2020 after the COVID-19 pandemic began.
Market sentiment
Bitcoin is a highly volatile asset, and its price can be affected by market sentiment. When investors are optimistic about the future of Bitcoin, the price tends to rise. When investors are pessimistic, the price tends to fall.
Macroeconomic trends
Bitcoin is also affected by macroeconomic trends, such as interest rates and inflation. When interest rates rise, the price of Bitcoin tends to fall, as investors move their money into more traditional assets. When inflation rises, the price of Bitcoin tends to rise, as investors seek out assets that will protect their purchasing power.
Regulation
Bitcoin is a relatively new asset, and its regulation is still evolving. This uncertainty can impact the price of Bitcoin, as investors try to gauge how governments and regulators will ultimately view Bitcoin.
Adoption
The adoption of Bitcoin by businesses and consumers is another factor that can impact its price. As more businesses and consumers adopt Bitcoin, the demand for Bitcoin will increase, which could lead to higher prices.
Technology
The development of new Bitcoin technologies can also impact its price. For example, the development of a more user-friendly Bitcoin wallet could make Bitcoin more accessible to a wider range of people, which could lead to higher prices.
Further, the model stands upon the assumption of predictably timed halving events, an assumption that, if disrupted, could cast shadows upon its forecasts.
Looking at the chart
The Old S2F Model
The original S2F model was created by PlanB, a pseudonymous Bitcoin analyst. The model uses the total number of bitcoins in circulation (the stock) and the annual production of new Bitcoins (the flow) to calculate a ratio called the S2F ratio. The higher the S2F ratio, the more scarce Bitcoin is and the higher its price is expected to be.
The New S2F Model
PlanB later updated the S2F model to take into account Bitcoin halving events. Halving events reduce the block reward that miners receive for validating transactions, which in turn reduces the supply of new bitcoins entering the market. This makes Bitcoin more scarce and increases its S2F ratio.
The BTCUSD Price
The BTCUSD price is the price of Bitcoin in US dollars. The chart compares the BTCUSD price to the S2F line. The chart shows that the BTCUSD price has historically followed the S2F line, with the price rising as the S2F ratio increases.
The Halving Events
The chart also considers Bitcoin halving events. Halving events are marked on the chart with vertical lines. The chart shows that the BTCUSD price tends to rise sharply after each event.
The 365-day Average
The chart includes a 365-day average of the BTCUSD price. The 365-day average is used to smooth out the price fluctuations and provide a better view of the long-term trend.