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The process of interpreting Bitcoin’s future price growth is, in many ways, enigmatic. People have tried and failed a lot over the years. Critics, of course, are the most representative group in this arena, having called Bitcoin worthless repeatedly while its price has skyrocketed instead. But even Bitcoin’s staunchest supporters find themselves at odds with one another when it comes to price predictions. If you spend enough time on Bitcoin Twitter for example, you’ll hear price predictions of $100k, $500k, $10 million, and everything in between.
Stock-to-Flow to the Rescue
While truly predicting the price is next to impossible, there is one pricing model that has fared better than most for several years: the Bitcoin S2F model.
Originally created by a pseudonymous financial analyst named “PlanB”, the model seeks to forecast Bitcoin’s long-term price growth by relying wholly on an analysis of Bitcoin’s stock-to-flow (S2F) characteristics.
Before we dive into the specifics of Bitcoin’s S2F, know that stock-to-flow is not new and has been used, directly or indirectly, for thousands of years to price goods and to determine the propensity of certain goods to be ideal stores of value. In simple terms, stock-to-flow analysis compares the existing supply of an item (i.e., its “stock”) to the yearly rate at which the item is created or produced (i.e., its “flow”). Let’s take a quick look at two items that exemplify the high and low ends of the stock-to-flow spectrum:
Gold
Gold is the obvious choice when it comes to high marks in a stock-to-flow analysis. The metal’s durability means that almost all of the gold ever mined in human history is still with us today in one form or another. In other words, gold’s stock is massive. Meanwhile, the process of mining new gold is rather expensive and time-consuming. Thus, the flow of new gold is relatively low when compared to the massive amount that has already been pulled out of the ground.
Fiat
Fiat’s stock-to-flow score is laughable next to gold’s. The stock of fiat currency is arguably quite large. For example, global wealth is denominated in fiat currencies and is estimated to be hundreds of trillions of dollars. That said, the digital age has made the process of creating new fiat instantaneous and costless. Take the COVID pandemic: over ¼ of U.S. dollars currently in existence (whether physical or digital) were created in the nearly 18 months since the pandemic started. And the governments of the world could easily “print” an infinite amount of their currencies overnight. From a stock-to-flow perspective, fiat is a perennial loser.
Bitcoin S2F Bucks The Trend
Gold is currently the most well-known winner when it comes to stock-to-flow analysis, but that will change due to one simple reason: Bitcoin’s total supply is fixed while gold’s is not. In a nutshell, this means that gold’s flow will presumably continue into eternity while Bitcoin’s flow will come to an abrupt halt once it arrives at twenty-one million. At that point, Bitcoin will essentially have a perfect stock-to-flow score.
We discussed earlier that stock-to-flow is often used to gauge whether a good can function as a high quality store of value. Is it any wonder then that Bitcoin is quickly outpacing gold as the preferred store of value for people, corporations, and governments? In this regard, the fact that stock-to-flow works as well as it does to predict Bitcoin’s price growth makes a lot of sense. After all, scarcity is its own reward when it comes to money.
What Else Drives Bitcoin’s Value?
There’s a common critique against the Bitcoin S2F model, and it’s that there are other factors driving Bitcoin’s value appreciation. In other words, critics seem to be mad that the model’s creator, PlanB, didn’t include an exhaustive look at EVERYTHING that impacts Bitcoin’s value. Let’s look at a couple of those factors here:
Adoption
This is naturally one of the most important factors because scarcity isn’t very valuable if nobody wants to buy the scarce item.
Over the last twelve years, Bitcoin has gone from being used by a few dozen cryptography fans on obscure chat forums to being used by tens of millions of people the world over. That exponential increase in demand to hold Bitcoin has driven its price from $0 to over $60,000 as of writing.
Decentralized
Remember how we talked about governments having a limitless ability to create their fiat currencies? That ability is enabled entirely by the fact that governments have absolute control over the currencies and, to a large degree, the economies that utilize them.
Bitcoin by comparison is free from interference by anyone. The past several years have shown that:
Governments cannot stop Bitcoin
Altcoins cannot stop Bitcoin
Corporations can only help Bitcoin
Bitcoin’s network entirely shuns overbearing overlords and is becoming larger, and thus more decentralized, everyday.
Should you have a plan B?
Whether or not you believe in the value of Bitcoin’s S2F model, it can be a helpful way to quantify and understand how scarcity directly drives Bitcoin’s price appreciation. I encourage you to do your own research into the model and determine what impact, if any, it has on how you understand and interact with Bitcoin.
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Crypto Roundup 🤠
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This is not financial advice. This newsletter and related content are for informational purposes only. Cryptocurrencies, stocks, and similar assets can be risky. Always do your own research before making any sort of investment.
Yes, s2f helps to understand the market trend. But the factors that determine and influence the market is far more powerful. It was a good read ,man.