What is Bitcoin’s Stock-to-Flow model?
By: Gianmarco Guazzo
Tags: Cryptocurrency, Bitcoin, Stock To Flow, Gold, Technology

What is Bitcoin’s Stock-to-Flow model?

The speculations about the price that Bitcoin will have from now to months/years give voice to anyone and very often they are figures thrown at random to create a little more media attention.

Bitcoin is in effect a new asset class in the landscape of the modern financial world. As there is no historical data on which to retaliate regarding the price, more and more agencies and personalities in the sector are making their bet at what the price will be in an indefinite time.

Market capitalization model

There are currently two main ways to speculate on the price of Bitcoin in a relatively conscious way: follow the market capitalization or read the Stock-to-Flow model. For the first, the operation is quite simple: once you have identified a market capitalization of Bitcoin that may seem true, just divide it by the amount of BTC in circulation. We often hear people say “Bitcoin will have the same capitalization as gold in X years”. If we do two calculations, the price is simple.

The market capitalization of gold: 8 trillion (suppose and simplify)

Bitcoin in circulation: 20 million (let’s simplify here too)

1 BTC = marketCapGold/numberOfBitcoin = $ 400,000

Stock-to-Flow model

In addition to this way of calculating the future price of a Bitcoin, there is also a model called Stock-To-Flow (S2F) which has certainly different and very interesting dynamics. This model was introduced by an analyst called “Plan B” who is undoubtedly one of the most active in the Bitcoin community. The S2F model had already existed for several years in the world of commodities and precious metals such as Gold and Silver. In essence, this model connects the Stock (i.e. the quantity of the asset in circulation) to the Flow (i.e. the new quantity of the asset that is put on the market). With Stock, as regards Bitcoin, we refer to the number of Bitcoins already mined and in circulation while for Flow we refer to the quantity (usually annual) released into the market. This model exists only in contexts where scarcity is the fundamental quality of a given asset, which is why it was initially created for gold and precious metals and later for Bitcoin.

The difference that exists between the gold model and that one made for Bitcoin is all in the maximum quantity of the asset under consideration. While, as regards the cryptocurrency, we know that the final Supply (or Stock) will be 21 million BTC, as regards gold, this estimate is very difficult to make. In fact, the amount of gold in circulation derives from the physical extraction done by miners around the world and therefore this necessarily refers to the possibility or not of finding a mine with a lot of gold inside. In this way, the maximum quantity is not estimated with certainty, if not in a short time, compared to that of Bitcoin which is managed by code written indelibly in the computers of hundreds of thousands of people around the world.

A good model but not the best one yet

By comparing the historical price of Bitcoin with the S2F model, the Plan B analyst found a strong correlation that has led this model to be one of the most used in recent years as well as the most accurate. Obviously, this model is definitely not the perfect one but on the contrary, there are some flaws. Price growth is seen as a static curve that is driven simply by the scarcity of the asset even if in reality what drives the price of the cryptocurrency up is demand. The demand for Bitcoin depends on many points of view and the analysis of the same cannot simply be referred to as a graph. What pushes investors into the BTC network more than ever is the global socio-economic situation which, after the pandemic and the measures taken by central banks, necessarily leads to a devaluation of fiat currencies.

Conclusions

What is certain is that the demand, as can be seen from the graph, is increasing dramatically and every day we hear some characters calling “$ 100,000 per Bitcoin by 2021” rather than “$ 300,000 by 2025”. In short what is certain is that the scarcity and the world situation are pushing many people and companies to evaluate Bitcoin as a store of value in such hostile times. Regardless of what your point of view is, you now know how 99% of Bitcoin price assumptions are made.