Bitcoin Stock-to-Flow Model (S2F)
The Bitcoin Stock-to-Flow (S2F) model is a quantitative model used to predict the price of Bitcoin based on its scarcity. The model calculates the ratio between the existing stock (total supply) of Bitcoin and its annual flow (newly mined coins). This approach has historically been used in commodities such as gold and silver, where scarcity is a key determinant of value.
In the S2F model, Bitcoin's total circulating supply is divided by the number of coins generated in a year, yielding the stock-to-flow ratio. A higher ratio implies greater scarcity, which proponents of the model argue should increase the asset's value over time. The premise is that as Bitcoin's halvings reduce the flow of new coins, its price should rise accordingly.
How the Stock-to-Flow Model Works
The S2F model is simple to calculate. The formula is as follows:
- Determine the total stock of Bitcoin (currently in circulation).
- Calculate the annual flow, which is the number of Bitcoin mined per year.
- Divide the stock by the flow to get the S2F ratio.
Currently, Bitcoin has a high stock-to-flow ratio compared to most other assets. The model predicts that as the ratio increases, Bitcoinโs price will rise due to increased scarcity. According to this model, Bitcoin is expected to reach much higher price levels after each halving.
Bitcoinโs Halving and the S2F Model
The Bitcoin halving event, which occurs roughly every four years, is integral to the S2F model. During a halving, the reward for mining a block is cut in half, thereby reducing the flow of new Bitcoin into the market. This event directly impacts the flow component of the stock-to-flow ratio.
As halving events reduce the flow of newly created Bitcoin, the model forecasts that Bitcoinโs price will rise due to increased scarcity. Historically, Bitcoinโs price has surged following halvings, lending some empirical support to the S2F model. However, many experts caution that this historical correlation does not guarantee future price behavior.
Use Cases of the Stock-to-Flow Model
Proponents of the S2F model claim that it offers valuable insights into Bitcoinโs long-term price potential. It provides a straightforward framework for understanding the relationship between Bitcoin's scarcity and its value. Many investors use this model as a guide to assess whether Bitcoin is under or overvalued.
The S2F model is primarily used by long-term Bitcoin investors who believe that scarcity plays a significant role in determining value. This model is seen as a tool for predicting Bitcoin's price based on its deflationary monetary policy and fixed supply of 21 million coins.
Despite its popularity in certain investment circles, the model remains controversial. Many view it as a simple and intuitive framework rather than a precise prediction tool. Critics often cite its inability to account for external market factors, such as demand shocks or regulatory changes.
Limitations of the Stock-to-Flow Model
While the stock-to-flow model has garnered significant attention, it is important to recognize its limitations. One major criticism is that the model relies solely on the supply side of Bitcoinโs market dynamics, ignoring the role of demand. Market demand is a key factor in determining asset prices, and the S2F model does not account for shifts in demand that can dramatically affect price movements.
The S2F model also assumes that scarcity alone drives value, which may not hold true in the long term. There are several external variables that influence Bitcoinโs price, such as:
- Market sentiment and investor behavior
- Global macroeconomic conditions
- Technological advancements and competition from other cryptocurrencies
- Regulatory actions and government policies
Additionally, some critics argue that applying a model originally designed for commodities like gold to a digital asset such as Bitcoin is flawed. Bitcoin is still a relatively young asset class, and its price can be influenced by factors beyond scarcity.
We Do Not Endorse the Stock-to-Flow Model
It is important to note that we do not endorse the stock-to-flow model as a reliable prediction tool for Bitcoinโs future price. The model is presented here only for informational purposes and should not be taken as financial advice.
Many alternative models and valuation methods exist, and no single model can accurately predict future market behavior. The S2F model offers a narrow lens through which to view Bitcoinโs price, and investors should consider multiple perspectives and approaches when evaluating Bitcoinโs potential.
As with any investment, understanding the risks and conducting thorough research is essential. The stock-to-flow model, while interesting, should be considered alongside other data points and models for a more complete view of Bitcoinโs market dynamics.