by Gabriel Negrín
Let's be honest, we've all seen these headlines of financial experts and bitcoiners predicting the price of bitcoin. Some are so bullish that they give unattainable targets in the short term. Others are so bearish that it hurts to see how in denial they are (Michael Burry, we see you).
Yet, bitcoin is so volatile that it's almost impossible to predict a price.
But there is something that can help us know where bitcoin is going: the Stock-To-Flow model.
What is the Stock-To-Flow model, how does it work, does it apply to bitcoin, how accurate is it?
Okay, we've all seen the comparison between bitcoin and gold. And they certainly have a lot of similarities. Both are relatively safe investments. Both gold and bitcoin are stores of value — although initially, bitcoin was a medium of exchange, but hey, people change, right? And most importantly, both are scarce, which makes them more valuable.
Well, supply-constrained assets can be subjected to something called a stock-to-flow model.
The stock-to-flow is a calculation model. It is a ratio based on the current supply compared to the quantity coming into circulation. The higher this figure is, the longer production will take. The longer it takes to produce one, the higher the demand. And the higher the demand, the scarcer it is — ergo, the more valuable the assets will be.
So how is it calculated? Take gold, for example.
Gold has a stock of 185,000 tons. Also, about 3,000 tons of gold are produced each year.
The calculation is to take the stock and divide it by the flow. The SF for gold is then 62.
What does this mean?
It means that it would take 62 years at the current production rate to reach the current stock.
And what does this have to do with bitcoin?
Well, bitcoin, as a scarce asset, can also be subjected to the stock-to-flow model.
At the time of writing, the bitcoin stock was 18,856,850 BTC.
Now, to know the bitcoin flow, we have to get out the calculator. About 52,500 blocks are mined every year. Each block gives a reward of 6.25 BTC. Multiplying them, we see that about 328,125 BTC are produced per year. That would be the current bitcoin flow.
Now, dividing the stock by the flow we get SF 57.47. That is, under current conditions, it would take about 57.5 years to recreate the current amount of BTC.
How Halving Makes Bitcoin Scarcer
Bitcoin has a couple of peculiarities. The first is that it has a limited supply of 21 million. The second adds further complexity to the calculation of its SF: the halving.
Every 210,000 blocks, about every four years, bitcoin's rewards are cut in half. The last halving happened in 2020 - the rewards went from 12.5 BTC to 6.25. The next halving will happen in approximately 2024. At that time, the rewards per block will drop to 3.125 BTC.
That is, about every four years, bitcoin SF increases.
Now, one user went through all the necessary math to create the correct stock-to-flow to bitcoin. Meet @100TrillionUSD.
In 2019, after a few months of work, he created a graph of the SF of bitcoin. In the graph, we can see how every four years the SF increases due to halving.
Plan B took the trouble to apply this model since the creation of bitcoin in 2009.
So far, the graph has been quite accurate in predicting the bitcoin price.
And according to the numbers on the chart, bitcoin could easily reach 135K by the end of the year. The horizon is infinite for Plan B. At the time, he stated that if all ideal conditions are met, BTC could close 2021 above 400K.
Would you rely on the stock-to-flow model? Well, that's up to you.
There are a couple of things to keep in mind that can't be measured in a chart. For example, some international ban on bitcoin energy consumption - which is unlikely, but still.
Also, being a chart created in 2019, the actual data is very little. Anyone can apply a model to what has happened in the past and say it works. The present can easily dictate otherwise. In fact, the model was almost invalidated last July. At the last minute, the bitcoin price went into negative S2F deviation.
In other words, while the model has been right, it would only take one mistake to completely invalidate the whole thing. Moreover, since its inception in 2019, the market has had bullish conditions. We will have to see how it behaves in a bear market.
Now, if it were up to me to decide, I want to believe that bitcoin's S2F works. It has all the conditions to do so. Yet, further stress testing is lacking. Time will tell — for now, we HODL the line.
