The stock to flow model is maybe one of the most famed and discussed indicators in the crypto market. Even though it also faced a lot of criticism, it gave many analysts reason to believe that Bitcoin is going at least above 100.000 US-Dollar at the end of 2021.
Who created the S2F model for Bitcoin, and how does it work? And even more important, is the stock to flow model valid or just a glorified chart?
What is the S2F model?
The stock to flow model for Bitcoin was invented by PlanB, a Dutch Bitcoiner who is also very active on Twitter. But the stock to flow formula itself is nothing new, though. It measures the abundance of a particular resource. In most cases, it is used for natural resources like gold, oil or other commodities that can be traded on the traditional stock markets. It is calculated by dividing the resources held by the amount that is annually produced.
To give you an example, let’s look at the gold supply in the year 2017. It was estimated that the total supply of gold was 190.040 tons at that time. The yearly production rate was measured at about 3.500 tons of gold per year. We have the stock, and we have the flow, let’s do the math:
190.040 : 3.500 = 54,29
The stock to flow ratio of gold was 54,29 in the year 2017. The ratio simply indicates that it would take more than 54 years to produce the same amount of gold that is available at that time. While the supply of gold held by governments and banks is well recorded, the global supply and the production rate is always estimated, and it is also fluctuating.
Stock to flow and Bitcoin
Unlike gold, Bitcoin has a finite supply. There is no such thing as a new Bitcoin mine or additional resources that can be discovered in an exotic place. There will be only 21 million Bitcoin ever coming into existence. This can easily be verified by each node in the network and is guaranteed by Bitcoin’s protocol.
Bitcoin’s production rate is decreasing slowly over time because of the halving. Meaning that the block reward that mints new BTC is cut in half to control Bitcoin’s inflation rate. With a fixed supply and a production rate that is decreasing every four years, the stock to flow ratio for Bitcoin is about to increase drastically over time. Let’s do the math for BTC:
18.834.468 : 328.500 = 57,33
As you can see, the ratio is already at the same level as gold, which is considered a scarce resource but arguably not as scarce as Bitcoin.
Is the Stock to Flow Model predicting Bitcoin’s price?
It is not predicting the price of BTC, but it is suggesting that there is a strong correlation between the stock to flow ratio and the price. According to PlanB’s model, Bitcoin’s price should be around 100.000 US-Dollars already.
While the model has been correct for many years in the past, it also shows that there were times where the price deviated from the model. This was almost every time the case when Bitcoin saw a massive bull run and faced a parabolic increase in price. With only three months to go until the year 2021 ends, many critics have pointed out that the stock to flow model designed by PlanB is probably wrong.
However, October is statistically an excellent month for Bitcoin’s price development. With BTC jumping above 50.000 US-Dollars there is still a chance that the price will be in tune with the stock to flow ratio again.
Will Bitcoin reach 100.000 US-Dollars?
That is the one question nobody can answer for sure. Instead of focusing on a single model, it is worth paying attention to more fundamental questions and draw conclusions from the events throughout 2021.
China has banned Bitcoin for good, making it illegal to transact or conduct business using Bitcoin. Bitcoin miners already had to leave the country in May this year. Did the network vanish? No. Did the price get obliterated? No, there was a significant move down in May, but the market recovered from it in a very short amount of time. In fact, BTC showed tremendous strength around the price level at 40.000 US-Dollars during the last dip.
On the other hand, El Salvador adopted Bitcoin as legal tender. If you take all these things into account, you don’t need to ask yourself if Bitcoin will 100.000 US-Dollars at the end of the year as PlanB has predicted.
You need to ask yourself if Bitcoin is going to stay. And it seems that it is indeed indestructible.