Breaking down Bitcoin’s Stock-to-Flow Cross-Asset Model

As the Lead Business Development Manager and Co-Founder of the blockchain growth promoter and business facilitator called Platinum, I feel it my duty to educate the public on the industry’s hottest topics. 

This time, I have decided to break down what is called the Bitcoin stock-to-flow (S2F) cross-asset model. Let’s analyze together the primary aspects of this model and relate it to the most popular cryptocurrency in the world so that we can formulate a reasoned opinion about it. 

Backstory of the S2F model and public opinion

In January of 2008, the world was introduced to Bitcoin, thanks to the mysterious Satoshi Nakamoto. Despite the fact that no personal information has been revealed about Nakamoto, this genius of a man has drastically changed our current internet reality.

In 2009, Bitcoin was first used after it was released as open-source software, when its creator mined the starting block of the blockchain. Since then, Bitcoin has been literally traded millions of times, laying the groundwork for crypto and the blockchain industry.

Basically, Bitcoin was the first ever scarce digital object, just like precious metals such as silver or gold, but with one fundamental difference –  users have the ability to send BTC and execute transactions over the web.

To state the obvious, as a digital scarcity, Bitcoin has a certain value but that can be tricky to assess. This is how experts came up with the idea of applying the stock-to-flow model for predicting the BTC trend. 

In a broad sense, the stock-to-flow model is a formula that is used to predict the changes in asset prices based on data regarding the new production of an asset as well as its current stock. 

The higher the ratio, the greater the scarcity and consequently, the higher the price. 

Originally, S2F was widely applied to gold and silver. However, the crypto community has recently used it to determine the value of Bitcoin. To be exact, the Bitcoin S2F model was published in March 2019. 

The model received much recognition and became actively used by crypto enthusiasts and investors. There have inevitably been haters of the S2F model who have since justified their position using the Efficient Market Hypothesis (EMH) model – a well-known theory to economists. 

Why don’t we sort out which group is right and why the other side might be misguided in their judgment?  

What is the BTC S2F cross-asset model?

In order to apply the S2F model, you have to take into account the number of currently existing Bitcoins, in other words, the stock, then divide it by the flow parameter of production on a yearly basis.

As of now, the circulating supply of Bitcoin exceeds 19 million, while the new supply is approximately 0.35 million per annum. When we put those numbers into the stock-to-flow formula, we get a number that’s around 54.5.

Essentially this implies that almost 55 years of Bitcoin production at the present level is needed to produce the current stock. This number is much smaller than it is for gold but Bitcoin has something that gold does not - the ‘halvings’ we discussed previously. 

This number will inevitably spike after the next halving event, which will take place in March 2024. For those users who do not know what the halving event is, it happens after every 210,000 blocks are generated. When this occurs, the payout for mining a new block is halved, causing changes in the supply and as a result, the price of the asset.

Referring to the original article posted in early 2019, the formula used to predict the price of Bitcoin was:

ModelPriceUSD=exp(−1.84)⋅SF3.36ModelPrice

According to this mathematical model, the predicted price of BTC is little more than $108,000, which calls into question the validity of this model. 

Is the Bitcoin S2F model good at predicting the price? 

When it comes to predicting the future value of Bitcoin, the stock-to-flow cross-asset model is quite a controversial one. For instance, the model factors in the level of Bitcoin’s supply but ignores the demand for the cryptocurrency, which as a rule, plays a crucial role in its price. 

In June, PlanB predicted that Bitcoin would reach $98,000 by November, before climbing to $135,000 at the end of the year. However, the asset is currently well below that level. The coin reached a record high of $68,692 on November 10th.

When asked if he was still confident about his November forecast, the analyst said:

"Yes, I wouldn’t be surprised. In fact, it would be kind of an exception if the November close was not $98,000 (plus or minus 5%).”

To reach the magical forecast of $135,000, Bitcoin's price would have to gain another 107% on its current levels. In August, PlanB stated that the markets were entering the second phase of the bull market. This time, the prediction proved accurate and BTC reached a new ATH 7 months after the first cycle. In the same month, cryptographer Adam Back also predicted that BTC would reach $100,000 before Christmas.

The S2F multiplier, which tracks the actual price versus the predicted price, currently reports a deviation of -0.41 from the expected price of $98,000.

Quite interestingly, there is an on-going debate in the industry about the fact that in 2009, Bitcoin’s father Satoshi Nakamoto mined around 1 million Bitcoins and did not move them until today. This incident may be the reason why the model isn’t working perfectly as a price predictor.

But aside from that, the Bitcoin stock-to-flow cross-asset model also bypasses the following factors, which definitely have an effect on the asset’s price:

• Force majeure events. Also known as "black swan" events, this is a legal phrase to describe unanticipated, often economically-related events that, in this case, impact the price of an asset in a dramatic way. Namely, massive regulatory intrusion that effectively bans people from interacting with the cryptocurrency, which would undoubtedly cause the price of BTC to plummet.
• Volatility. Due to the nature of cryptocurrencies, Bitcoin is quite volatile. We should not ignore the Bear and Bull market cycles that cause panic reactions from investors who decide to sell off their holdings.

Final Word

To sum up what we have discussed, the Bitcoin stock-to-flow cross-asset model is a pretty good method for forecasting the price of the crypto asset. However, it does have a few drawbacks, which affect the accuracy of the predictions derived using the formula developed by the financial expert PlanB. These factors, outlined above, raise doubts about the true usefulness of the S2F cross-asset model when applied to BTC. 

Naturally, there is a significant statistical relationship between the stock and the market value of the asset. The probability that the relationship between the stock-to-flow and the market value being purely coincidental is close to zero. Time, as well as future studies, will tell whether the S2F model is applicable when assessing the value of Bitcoin.

As for me, I personally believe that the stock-to-flow cross-asset model will eventually replace the classic Risk & Return model for forecasting the future price of Bitcoin.

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