Bitcoin Stock to Flow Model: The Ultimate Guide

The Bitcoin stock to flow model has drawn much attention because it says that one bitcoin will be worth AU$ 1 million by 2025. The model, later on, became more reliable because the price of bitcoin has followed it pretty closely for over a decade.

The stock to flow model, is usually used for precious metals like gold and silver. However, since bitcoin is now seen as "digital gold" and has a fixed supply, it works well with the model. 

The idea is simple: as bitcoin becomes harder to get and more people want it, its price will go up.

Bitcoin and the stock to flow model: An overview

The stock to flow, or S2F, model was made by an anonymous investor named PlanB. After it came out in 2019, this model became very popular. Even "The Bitcoin Standard," a well-known book, talks about it.

Investing is all about taking a chance at how much an asset is worth. Please remember that this value is not the asset's current price. If the value you predict is higher than the market price, the asset price might go down, and the opposite is also true.

The stock to flow model can find this number by considering the current supply and future production rate. 

Prediction of S2F Model 2010-2025

S2F can be available in the crypto world for all assets whose value comes from how few of them there are. Bitcoin is the OG player in this game.

Bitcoin is made so that the number of coins in circulation keeps going down. When miners get Bitcoins as a reward for validating transactions, the system gets more Bitcoins. 

This reward gets cut in half every 2,100,000 blocks or about four years. This reward is worth 6.25 BTC, but it will go down to 3.125 BTC in 2024.

In the past, the price went up every time Bitcoin's supply was cut in half. This is a big sign that models based on scarcity, like S2F, can be used to explain things like Bitcoin.

Gold and silver, which are very valuable, have also been used with S2F to predict their prices. But as technology improves, it's getting easier to mine these metals. 

Bitcoin, on the other hand, is made up of lines of code. No one could ever make more Bitcoin than was planned.

What is the stock to flow model for bitcoin?

The Bitcoin Stock to Flow (SF) model is a way to measure the scarcity of assets, particularly commodities like gold and silver. It is now available to measure the scarcity of BTC.

Let's look at how the Stock to Flow model works for a commodity like gold so that we can understand it better.

In its traditional form, the Stock to Flow model is helpful to figure out how much of a resource or commodity (gold, in this case) is there. And this is done by taking into account the total amount ever made and the amount made each year.

The World Gold Council thinks that about 197,576 tonnes of gold will have been mined by the end of 2019. And between 2,500 and 3,000 tonnes of gold will be mined each year.

Now, to figure out the SF model, we need to divide the total amount of gold (the "stock") by how much gold is made each year (the "flow"). This gives us the following:

197,576 / 2,750 = 71.85

In the above example, we considered the average amount of gold made yearly, which is 2,750.

As a result of the calculation, the Stock to Flow model tells us how much newly mined gold comes onto the market each year compared to the total amount of gold.

Based on our example, it would take about 72 years to make as much of the good as it is on the market.

Generally, fewer new gold bars are made yearly than the total supply when the SF is higher.

Because of this, a high Stock to Flow ratio could mean that an asset's value will go up in the long run. This is because a high Stock Flow ratio means that the asset is scarce and will take a long time to make more.

How does the stock to flow model for Bitcoin work?

We all know that Bitcoin is often considered a store of value, like gold or silver. The stock to Flow model has been applied to it by a user named PlanB, who wrote an article about it on Medium in 2019.

The Stock to Flow model does make sense to use with Bitcoin. In contrast to commodities, where we can only guess about the stock and flow, BTC's supply changes are recorded on the blockchain.

Thus, the number of Bitcoins can be limited to 21 million. The process by which they are made is programmed at the protocol level. This makes the process predictable.

To slow down inflation, the number of BTC created with each newly mined block is cut in half every 210,000 blocks. This is around once every four years.

During the last Halvening, which will happen in May 2020, the reward for a block has gone from 12.5 BTC to 6.25 BTC.

Blockchain.com says that 18.595 million BTC have been made so far. And 328,500 BTC are created annually (6.25 BTC is mined roughly every 10 minutes until the next Halving event).

The Bitcoin Stock to Flow ratio is 56.60, meaning it would take almost 57 years to mine all of the BTC in circulation. It won't be taking the maximum cap and Halving into account.

PlanB figured out BTC's SF and compared it to the Bitcoin Stock to Flow model and the BTC price. This is happening to possibly predict how the digital asset's value will change in the future.

Chart of BTC price followed by Bitcoin Stock to Flow model

Looking at a chart based on the author's calculations, we can see that the BTC price followed the Bitcoin Stock to Flow model's 365-day average. In fact, between March 2020 and January 2021, it has been very accurate.

How to use the stock to flow model for Bitcoin?

Bitcoin's S2F model is a live chart data model that makes it easy to keep track of the asset's predicted price at a given time. It often predicts the actual market price at that time. It is a time series model because the data points are ordered by time.

On the y-axis of the chart is the predicted price of Bitcoin. And on the x-axis is the period from 2010 to 2026. 

The market price of Bitcoin is plotted across this line chart to show how the predicted price compares to the market price. With this chart, you can see how much the actual price of Bitcoin differs from the predicted price at a given time.

For people who believe in the model, putting all of the charts together can even see the sign to buy or sell the asset. 

Positive deviations from the predicted price line could be seen as a sign to sell because the asset is now overpriced.

And the negative deviations could be seen as a sign to buy when the price goes down. The best way to measure this is with the stock to flow deflection ratio.

How can you calculate Bitcoin Stock to Flow?

To easily calculate the stock flow of Bitcoin, you must divide its current global stock by its overall current annual production rate.

Example: Let's say that gold has a current production rate of 3,000 metric tonnes (flow), and its current stock globally is estimated at around 185,000 metric tonnes (stock) (stock). Now, let's implement the complete formula:

Stock to flow = Stock/flow

= 185,000 / 3,000 = ~62

From our calculations, we can see that at the current production rate, we'll need at least 61 years to reproduce the total gold currently in circulation globally. 

Always remember the higher the stock flow, the greater the overall scarcity.

Now, let's try to relate this to Bitcoin. In September 2019, there were at least 19,000,000 bitcoins in circulation (stock) at a production rate of 1,700 BTCs daily, i.e., 647,000 BTCs per annum (flow) (flow). Let's input the actual numbers into our stock to flow model:

Stock to flow = Stock / Flow

= 19,000,000 / 657,000 = ~27

Bitcoin has a circulating supply of 18.75 million from a 21 million maximum supply. Before 2020, the leading digital asset had one mined block containing 12.5 BTC. 

However, after the halving event in 2020, it was reduced to 6.25 BTC per day. An average of 143 blocks is mined daily, amounting to 900 BTC in 24 hours. This rate has surged the current Bitcoin stock to flow ratio to about 59.6.

The next halving in 2024 should take Bitcoin's stock to flow to 113. Remember that gold has constant stock to flow of 61 and no halving events. 

As such, Bitcoin's stock will continue to increase and surpass that of gold with every halving event until the last mining. But the gold's stock to flow of 61 is unlikely to increase.

How does the stock to flow model predict price?

Bitcoin has a notably limited supply. As such, its price can only be driven by demand. Formerly, the Bitcoin stock to flow model was also available to forecast future Bitcoin price actions. 

Following this, a known hedge fund specializing in cryptocurrencies, Pantera Capital, predicted in April 2020 that Bitcoin's price would hit $115,000 around August 2020.

In April 2020, PlanB, a pioneer of the stock to flow model, published a blog post stating that Bitcoin's actual price could rise to almost $289,000 by 2024, regarding the model. 

Meanwhile, we must also note that the stock to flow model relies heavily on the premise that cryptocurrency scarcity will always upheave Bitcoin's value. Bitcoin's notoriously volatile price swings over shorter periods further stress the final facts.

Founder of ByteTree Asset Management, Charles Morris, even noted that the model was developed based on two halving events. 

He even noted that, in some ways, halvings might cause actual prices to boost by almost two times as the selling pressure on the miners continues to halve. 

In his conclusions, however, he highlighted that it would be a completely ridiculous idea to assume that future price paths will assuredly multiply beyond this.

Investing in cryptocurrencies using stock to flow model

Investors use the stock to flow (S2F) ratio model to anticipate where the price of cryptocurrencies is headed. 

The ratio is derived from forecasting the future issuance of an asset relative to its current issuance. "Inflow" describes this phenomenon.

Gold, silver, and Bitcoin are commodities modeled using the S2F technique. 

Understanding the model's inner workings and the factors that influence the stock to flow ratio is necessary before an investor can effectively use this model to invest in cryptocurrencies.

Determine a cryptocurrency's stock to flow ratio by looking at its total value. Total supply is the sum of all cryptocurrency coins and tokens in existence. 

There will be a high stock to flow ratio if resources are scarce. If something is in short supply, its value tends to rise. 

Conversely, a high total supply will result in a low stock to flow ratio. This means a greater supply of coins or tokens will be available at the same price.

Next, when calculating the ratio of a cryptocurrency, one must consider the number of new coins or tokens that will be added to the total supply over time. Since more coins will be in circulation if more money is invested, the stock to flow ratio will decrease.

Therefore, the current price level is appropriate. If a cryptocurrency's ratio is high and has a low inflow, its price should increase.

Cryptocurrency investors who want to use the stock to flow model should familiarize themselves with its inner workings. They should know the variables that impact the stock to flow ratio. 

Once understood, the model can identify the cryptocurrencies with the highest stock to flow ratios, allowing investors to allocate capital accordingly. 

Financial backers may do better in the long run if they put their money into assets with high stock to flow ratios. All these assets tend to become scarcer and more valuable over time. 

Stock to flow ratios can be affected by several factors unique to each cryptocurrency, so prospective buyers should do their homework.

Investors may fare better over the long term if they keep these things in mind. They are familiar with the stock to flow model when making cryptocurrency investments. 

When used properly, the S2F model can help investors identify which assets are most likely to appreciate. It will guide them about when and how much to invest.

In theory, by following these guidelines, investors can maximize their profits and minimize their losses when dealing with cryptocurrencies. 

Those who apply the stock to flow model to cryptocurrency investments may boost returns while decreasing volatility. The stock to flow model will likely continue to rise in popularity among cryptocurrency investors as more people become familiar with it.

To estimate future cryptocurrency prices, a Stock to Flow model proves useful. By considering both the existing supply and the expected new demand, this model helps investors determine which assets are likely to appreciate.

Major pros of the stock to flow model

It is possible to predict an asset's future value using the stock to flow model. A stock to flow ratio is a reliable tool for estimating the future price of Bitcoin, other cryptocurrencies, and commodities like gold.

The model outperforms those focusing on just one aspect of the market in terms of long-term price forecasting because it factors in supply and demand. 

In addition, it gives investors a realistic asset valuation by factoring in supply and demand. This overall reduces the potential for speculative bubbles. 

The stock to flow model can calm investors' nerves. This is because it eliminates the emotional swings associated with a fluctuating market and maintains stable prices.

Further, the stock to flow ratio facilitates comparisons between assets by only using publicly available information. More data like this is available to investors, giving them more options for allocating their capital. 

Finally, it is a great tool for novice and seasoned investors due to its simplicity and precision. It can provide insight into the asset they're looking to invest in and how its value will likely change over time.

Many advantages and benefits make the Stock to Flow model a good tool for predicting asset prices. 

The more you know about an asset, the less you have to guess its future value. Thus, the more informed decisions you can make about how to allocate your resources, the more you can rely on data that is already publicly available.

For this reason, it's important to consider any investor who wants to make astute investments in digital assets.

Does it have any drawbacks?

The model is an intriguing method for determining Bitcoin's scarcity and current supply. However, many factors beyond supply and demand could significantly alter Bitcoin's price; thus, the model fails to account for them. Given this, it is prone to errors.

The accuracy of its assumptions typically limits the quality of a model. Therefore, if the model's measure of scarcity is accurate, Bitcoin's value should continue to rise indefinitely. 

Many who have reservations about the model also believe it is doomed to fail. This is because it only provides evidence of supply shortages.

A few of its major drawbacks are:

Demand

The S2F model talks about the current supply and how fast the supply is growing every year. But it needs to consider the demand for a good or asset. 

Supply and demand have a big effect on the prices of cryptocurrencies. However, the S2F model does not take it into account.

For example, the next halving would decrease the flow of Bitcoin, which would make the SF ratio go up even more. However, it would never go up if the demand for Bitcoin went down. 

Black swan events

Another fault in our stars! Black swan events are described as unforeseeable and extremely rare. But they are possible catastrophic events that cause a significant crash in the price of an asset.

Bitcoin is prone to such events as regulatory crackdowns, 51% attacks, etc.

Volatility

Paper hands or those people who panic during times of distress can let the Bitcoin price fall. 

We all know that cryptocurrency is facing huge price fluctuations. In that scenario, it is expected that a sudden fall or rise in price highly impacts the short term. 

When did the stock to flow model fall short?

The model has been pretty accurate in the past, but it still needs improvement. 

In June 2021, the price of Bitcoin stayed around $40,000. This was $60,000 less than what stock to flow said it should be. Even though this is only the second time that Bitcoin has had a big difference, it shows the problems with this model.

chart shows how stock to flow model falls short

The model's simplicity can be a good thing. But it can also be bad because it can't consider everything that could affect it. 

For instance, it can show that demand is high, but it doesn't count that in its predictions. Changes in cryptocurrency laws and other outside factors can affect demand in ways that stock to flow can't predict, which can cause deviations.

Crypto stock to flow also can't consider things like disruptions in the blockchain, cyberattacks, or the general mood of investors. 

Changes that are expected to happen only some of the time in crypto. Like when the 100-year-old Kodak Company launched an ICO. This can affect how investors decide to spend their money. Because there are so few, these choices have a bigger effect on the value, leading to big, unpredictable changes.

Factors that impede the stock to flow transformation

Many of the stock to flow model's proponents only recognized the limitations of the methodology after it had already won widespread acceptance.

Profits in 2020 and 2021 were higher than they had ever been. And the value of all forms of capital appreciated dramatically.

Bitcoin's popularity surged due primarily to the economic stimulus caused by the Covid-19 pandemic. A "black swan" event like the pandemic makes it hard to credit supply-side dynamics for Bitcoin's meteoric rise, as the S2F does.

Several factors determine the value of bitcoin.

Gold and silver have been used as money and have established a cultural and historical significance over centuries. While other payment systems have been around for decades, Bitcoin is only 14 years old and is still in its early stages of development.

Estimating the value of something that has never been produced before is extremely challenging. Bitcoin's price is far below where the model predicted it would be, causing severe financial losses for believers.

Can the S2F model be used to look at a different coin?

Another cryptocurrency has a variety of uses, ways to get it, ways for platforms to make money, and other things that set it apart.

So, the straightforward answer to this question is "No." The different ways of valuing assets came about because the variables changed. 

It's good to know that there are other ways to find a light than the S2F model. Investors can also use the Total Addressable Market, The Equation of Exchange, Valuing Crypto Assets as a Network, Cost of Production Valuation, and other theories to determine how much cryptocurrencies are worth. 

Here, you can find out more about these theories.

The model (S2F) is a way to determine how much Bitcoin is worth so traders can make better decisions. 

The actual market value has stayed the same by focusing on the core of Bitcoin supply, such as its hard limits and halving events. This has proven the concept and brought it to the attention of cryptocurrency buyers worldwide.

Still, PlanB's great idea has some problems, which is why Stock to Flow Cross Asset (S2FX) was created as a new way to determine how much Bitcoin is worth.

Is the model worth using?

Over time, the model's ability to predict what will happen with Bitcoin is accurate.

As Bitcoin shot up during the pandemic, the model gained much attention online because it had been right in the past.

Bitcoin: Stock to Flow Ratio (USD)

In 2011 and 2013, before Bitcoin became a popular investment, there was a difference between the price of Bitcoin and the model. But the model was right about Bitcoin's price from 2015 to the end of 2021.

In November 2021, when Bitcoin was worth around $69,000, it was near its all-time high, so the model stayed on track. That was until crypto hit a wall, which slowed the growth of the BTC price and moved the market from stock to flow.

One of the biggest problems with the model is that it needs to consider how volatile Bitcoin is and how its price can change quickly, when markets are very unstable, investors panic, which causes BTC prices to drop significantly!

During the crypto winter, the model couldn't accurately predict how much Bitcoin would cost.

The model says that Bitcoin will be worth more than $100,000 in 2022. This is much more than we have seen, as Bitcoin is currently worth around $20,000.

Because of this, many people have said that the stock to flow model is broken. Vitalik Buterin, who created Ethereum, does not like it. He has even said that it is "harmful."

"Stock to flow doesn't look good right now," said Buterin in a tweet from June 2022. "I know it's rude to brag, but financial models that give people a false sense of basic certainty and predestination that number-will-go-up are quite harmful and deserve all the jokes they get.

Problems with the Bitcoin stock to flow model

The Bitcoin SF model has done an excellent job of explaining how Bitcoin's price has changed over time. It explains why it is worth more now than it was ten years ago. This was a challenge for the model, but it has been accomplished. 

Will the appearance of the model always remain the same? If we fast forward a few years, will this model still be able to make accurate predictions about the price of Bitcoin?

Let's look at a couple of the major problems in the model which could cause it to fail. These problems probably make it difficult to forecast the movement of prices in the future.

Problem no 1: First, there is a demand for Bitcoin

There are so few Bitcoins in circulation, and the process by which they are created are just some factor driving up their price. The value of the network is also dependent on the level of demand.

Consider how Litecoin and Cardano, two different blockchain platforms, have structures and release schedules that are very similar. 

A finite supply of currencies is associated with these blockchains. And the timetables for creating them are getting shorter and shorter. However, their SF models could do a better job of predicting the prices of these blockchains.

The number of people who want to buy into these cryptocurrencies' respective blockchains is much lower than those who want to buy the original Bitcoin. This is one of the major reasons why these cryptocurrencies' prices differ from the SF model. 

Problem no 2: The price of gold is unaffected by the ratio of the commodity

We all know that Bitcoin's supply is halved every four years. But, the currency's ratio is guaranteed to improve over time. 

A decrease in available Bitcoins is probably to blame for the recent spike in the cryptocurrency's price, as this appears to be the most likely explanation.

Based on what I know, this seems to make perfect sense. We ran into a supply problem in the middle of the pandemic in March 2020. This was when this essential item suddenly became difficult to locate. 

People started buying toilet paper even if they didn't need it as soon as they knew there might be a shortage. This rumor spread out so quickly. Because of the increased demand, the shortage became even more severe.

However, because there wasn't enough to go around, demand increased. If a straightforward reduction in supply and the SF ratio were reliable methods for predicting gold prices, then gold analysts would routinely rely on them.

The ratio was brought to the attention of non-professional investors when the research conducted by PlanB caused a significant stir.

According to Voima, the price of gold has absolutely nothing to do with the ratio of its SF.

Considering the length of time in which gold has been traded shows that there are more effective ways to forecast its price than the stock to flow method. 

Therefore, one could argue that using stock to flow analysis is also unreliable for determining how much a Bitcoin is worth.

Problem no 3: SF Ratio does not provide information regarding the prices of other Cryptocurrencies

Imagine the stock to flow ratio as the single most important factor in determining the value of a cryptocurrency. In that scenario, there would only be a reason to create another cryptocurrency if its supply was limited and decreased by one-half every month. 

The reason is that the SF ratio is one of many important factors determining a cryptocurrency's value.

We can also look at examples from the present day, such as Bitcoin Cash and Litecoin, which are digital currencies similar to Bitcoin but do not have the same value.

Problem no 4: Buying power needs to grow exponentially

The model predicts that the price of Bitcoin will increase by one thousand. Every time there is a fifty percent reduction in the total number of coins in circulation. 

If Bitcoin wants to compete with this model, there must be a significant increase in the number of people interested in purchasing Bitcoin.

We can learn from social networks such as Facebook that, eventually, growth will reach a point where it is no longer possible to continue increasing at an exponential rate. Bitcoin will eventually experience the same fate. 

At the moment, more individuals and organizations are choosing not to invest in Bitcoin compared to the one who is in love with Bitcoin. A maximum number of people have recently chosen Bitcoin just for the network. 

The very first publicly traded company to incorporate Bitcoin into its overall financial strategy was MicroStrategy. 

The chart above displays the total historical value of Bitcoin MicroStrategy's purchases. There may be other tales just like MicroStrategy in the years to come. 

However, in the future, a smaller percentage of institutions will include Bitcoin in their treasury strategy. Bitcoin will become distinct from the SF model due to the decline in demand from institutional investors.

What is the model predicting now?

See the PlanB tweet below for an illustration of how the S2F model predicts Bitcoin's value to be around $100,000, or more than three times its current value.

According to the model, Bitcoin's price will hover around $110,000 in 2023 before gradually increasing to $200,000.

Does Bitcoin still use Stock Flow analysis?

During the past 18 months, Bitcoin's price has deviated from what the S2F model predicted. And it doesn't appear to be returning to the model's predictions anytime soon.

Presently, one bitcoin is worth around $23,000, and its value has been at most $50,000 since last Christmas. As opposed to this, the S2F model predicts that Bitcoin should be worth around $110,000.

Bitcoin's price movement is inconsistent with the S2F model's expectations.

What is the best alternative to the stock to flow model?

A different S2F model is known as the "Floor Model." It is derived from various technical tools, such as the moving average of the past 200 days. 

This model was utilized by Plan B to forecast closing prices for the remainder of 2021. Prices of $47,000 in August and $43,000 in September were the only accurate ones

Following that, PlanB predicted that the final price for November would be close to $100,000. However, this prediction was incorrect because the final price was significantly lower than $60,000. 

He acknowledged that this was the first time the Floor Model was incorrect, but he insisted that the S2F was "still valid."

FAQ's

What does the stock to flow model for Bitcoin mean?

The Bitcoin stock to flow (S2F) model is an economic model that tries to figure out how rare Bitcoin is (BTC). The model looks at how many Bitcoins are in circulation and how many are made each year.

How does the stock to flow model for Bitcoin work?

The model for Bitcoin is based on the idea that assets that are hard to get tend to go up in value over time. The rarer something is, the more valuable people think it is. 

To figure out how scarce something is, the model looks at how much of it already exists ("stock") and how much of it is made each year ("flow"). The ratio is the relationship between these two numbers.

What are the pros of the model for Bitcoin?

The model for Bitcoin is useful in many ways. For one thing, it's easy to figure out how rare something is, like Bitcoin. This makes it easier for traders and investors to figure out how much Bitcoin is worth over time.

How good is the model for Bitcoin?

Analysts and traders have praised the Bitcoin stock to flow model, but it is important to remember that it could be better. How well the stock to flow ratio can be measured is one factor that affects how accurate the model is.

What are the things that the model can't do?

The model for Bitcoin has several flaws. One problem is that the model's accuracy depends on how well the stock and flow can be measured, which can be challenging.

Conclusion

The Bitcoin Stock to Flow model is a hot-button issue in the crypto community.

Whether or not the model works in real life, it's important to refrain from making a big investment decision based on Stock to Flow's Bitcoin price predictions.

Markets are complicated, and many things affect how prices are set. Because of this, no one, including people and mathematical models and algorithms, can accurately predict how the price of an asset will change in the long run.

But the Bitcoin Stock to Flow model can be a good way to understand how rare Bitcoin is and to help people think about the long term, not just short-term price changes.