Bitcoin stock-to-flow model: Everything you need to know

As the first and largest crypto, Bitcoin (BTC) has always been at the forefront of the crypto industry. The price of Bitcoin has reached levels many believed was impossible; however, many still think Bitcoin will go on to reach new heights. Debates about its long-term value have led analysts to try and discover different methods of predicting the asset's future value. One such method is a model called stock-to-flow (S2F).

This guide will explain what the stock-to-flow model is; it will look at its history, implications, benefits, and limitations.

What is the Bitcoin stock-to-flow model?

The stock-to-flow model is used to help forecast the potential future price of an asset. Initially, it was used for predicting the price of precious metals like gold and silver. However, the model can also be applied to Bitcoin since it has a fixed supply.

As the name suggests, the model assesses two elements of an asset to predict its future value. Firstly it looks at its stock, which refers to the total existing supply of an asset. Secondly, the model also measures the asset's flow, which is the new supply created by the commodity or crypto each year. Comparing these two attributes helps you compare a commodity's relative abundance.

The history and accuracy of the stock-to-flow model

The S2F model wasn't used within the crypto space until 2019 when a Twitter user known as PlanB came up with the idea to use a stock-to-flow model on Bitcoin. The user is a former Dutch institutional trader with over 20 years of experience and is well-respected within the space.

In March 2019, PlanB published a Medium post titled "Modeling Bitcoin Value with Scarcity". Since then, the model has gained popularity in the crypto community.

How does the S2F model work?

To understand how the S2F model works, we must first consider the crucial difference between crypto and fiat currency.

Crypto vs. fiat

As we all know by now, fiat currency is provided by central banks across the world. The banks control the issuance and distribution of the currency, with the ability to print money if needed. Since fiat money has a physical form, this is necessary to replace damaged bills and ensure liquidity. That way, merchants and businesses can continue performing transactions. Meanwhile, the country's citizens can use cash to pay for goods and services.

However, printing money also has its negatives. Doing it too much can increase the amount of money in circulation, leading to a decrease in value. This is the reason why inflation occurs, as it generates a distortion of the pricing of goods and services. This has happened multiple times, even in modern times. Venezuela, for example, suffers from hyperinflation because of it.

Precious metals and cryptocurrencies such as Bitcoin cannot be replicated, unlike fiat currencies. There will only ever be 21 million Bitcoins; its supply is limited, and there can never be more than that.

Bitcoin's capped supply allows the stock-to-flow model to work

As mentioned above, the stock, within the stock-to-flow model, refers to the number of existing reserves. In the case of Bitcoin, its stock would be the number of coins, which is 21 million. Flow, on the other hand, refers to the production rate on an annual basis.

So, calculating Bitcoin stock-to-flow means taking the number of existing BTC and dividing it by the production rate. Bitcoin's supply is currently at around 19 million. This represents approximately 90% of all Bitcoin. Meanwhile, its annual flow is 328,500 BTC. We know this because Bitcoin produces one block per 10 minutes, with each block creating 6.25 Bitcoin.

By applying these figures to the S2F formula, we get a stock-to-flow ratio of 57.712. This means it will take 57 years to mine Bitcoin's total supply. Or, it would if not for the halvings. If halvings are included in the equation, Bitcoin's new stock-to-flow ratio goes up to 124. This is the number of years it will take Bitcoin to reach its maximum supply.

Stock-to-flow: Benefits and limitations

On paper, the stock-to-flow of the Bitcoin network looks excellent. However, in practice, it has benefits and limitations like every other model. Let's look at the pros and cons investors should know before making investments based on the model.

Pros:

• It lets users track price movements through token economics and similar fundamental drivers.
• It has been in line with price forecasts when Bitcoin halvings took place.
• It uses supply, which is nearly constant.
• It offers an optimistic prediction for the price of Bitcoin.

Cons:

• It doesn't consider market volatility, which significantly influences the price of Bitcoin.
• It fails to consider the black swan economic events.
• It assumes that Bitcoin demand would remain constant and doesn't account for drops in demand.

As you can see, despite its benefits, the model fails to consider some influential factors. The idea is still sound, and the stock-to-flow of Bitcoin is considered by many to be reliable in theory. However, using a single model as your base for investing is never a good idea, especially when it doesn't consider matters like volatility, one of cryptocurrency's defining characteristics.

Criticisms of the stock-to-flow model

While some believe in the stock-to-flow model and ratio, others aren't so keen on the model. One of the harshest critics of the model is Ethereum's co-founder, Vitalik Buterin. Buterin criticized S2F in June 2022 when the price of Bitcoin did not reflect what the model suggested.

Other critics, such as Chief Investment Officer at Strix Leviathan, Nico Cordeiro, have also voiced their opinion on the model. He called the model a "chameleon" — a term used to describe models built on "dubious assumptions."

Is Bitcoin's stock-to-flow model a helpful tool?

Bitcoin's stock-to-flow model is among the most popular financial indicators. However, it has its critics, as well as its downsides. Many consider it overly optimistic, while others have pointed out that it is inaccurate and unreliable.

Despite its critics, the model is still widely used within the space; however, one should never base their investment strategy on one model. It's important to consider other models and indicators when attempting to predict the price of Bitcoin.

FAQs

Is Bitcoin stock-to-flow accurate?

Bitcoin's stock-to-flow model has sometimes been accurate; that is true. However, many claim that its accuracy is coincidental rather than factual.

What is crypto stock-to-flow?

While the stock-to-flow model was traditionally used with precious metals, in 2019, it began to be used within the crypto space. The stock-to-flow ratio suggests how long before the asset's supply has been fully mined and released into circulation.