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Stock-to-Flow: is Bitcoin’s price predictable?

October 8, 2021

6 min

Stock-to-Flow: is Bitcoin’s price predictable?

Stock-to-Flow is a model that attempts to explain and predict the behaviour of Bitcoin’s price in correlation with its scarcity.

The pattern was associated with Bitcoin and spread on Twitter by a user named PlanB.

An asset’s scarcity: digital gold

The Stock-to-Flow (or S2F, or S/F) model is usually used in reference to gold and rare commodities.

Applying it to bitcoin then means comparing bitcoin to scarce value stocks like gold, silver, and platinum.

These assets in fact are hard to find and expensive to mine, just like bitcoin.

Bitcoin is in fact created through mining, which requires large energy, time and cost resources.

On top of that, less and less bitcoins are mined about every 4 years or so thanks to the halving program included in the bitcoin protocol since its creation.

Halving concerns more specifically the reward given to miners, a reward that consists of new bitcoins.

What is stock-to-flow?

Stock refers to the existing, already created units of currency or assets, i.e., the circulating supply. Flow represents the number of units that are created or mined each year, i.e. mined in the case of Bitcoin.

The ratio between stock and flow would then quantify the scarcity of the asset. The higher the ratio, the greater the scarcity and therefore the value.

stock to flow

Gold for example currently has a S2F ratio of about 66 points. That means it would take 66 years of mining to get the current amount of gold in circulation.

Silver on the other hand stands at 74, making it more scarce than gold.

Gold’s Stock-to-flow

Many people think that the maximum production of gold has been reached, however, statistics show that in recent years the growth has continued, albeit slight. If new ways to extract it more economically were found, its scarcity would be in danger.

Currently, the cost to produce a single ounce of gold is between $1,000 and $1,800.

According to the latest 2019 data from the World Gold Council, gold is distributed this way on Earth and underground:

Underground reserves are 54,000 tons

Total aboveground stocks are 197,576 tons.

They are composed of:

  • Jewelry: 92,947 tons, 47%
  • Private investments: 42,619 tons, 21.6%.
  • Official holdings: 33,919 tons, 17.2%
  • Other: 28,090 tons, 14.2%.

To understand how scarce gold is, consider that if all the gold above ground were stacked to form a cube, it would measure 21 meters on each side: all the gold in the world could fit into a building of about 6 stories.

Fun fact

In 1980, the scientist Glenn Seaborg transmuted several thousand bismuth atoms into gold. His experimental technique was based on nuclear physics, in fact it consisted of removing protons and neutrons from bismuth atoms. Seaborg approached for the first time the prodigy of the Philosopher’s Stone dreamed by alchemists, however the costs that the experiment required were unsustainable in practice.

But does the Stock-to-Flow actually reflect the price trend of gold? According to this chart, since the 1990s, the movements of the two values are similar, albeit distant.

The correlation is late because until 1971 (for the US) the price of gold was set by the government as it was the underlying asset that gave value to legal tender, so it could not depend on the S2F model.

While there are many proponents of this sophisticatedly named theory, others criticize its simplistic approach especially with regard to Bitcoin.

How to read the Bitcoin Stock-to-flow chart

stock to flow bitcoin chart
  • The rainbow line indicates the price of bitcoin
  • The line’s colour indicates the days left until the next halving
  • The “stepped” line indicates the expected stock-to-flow ratio
  • The red and green line represents how far or close the price is from the expected price, thus the difference between price and S/F ratio

The Stock-to-Flow model limitations for Bitcoin

According to many observers, the limitation of Stock-to-Flow is that it starts from the premise that bitcoin’s value depends solely on its scarcity.

It, therefore, does not consider the high volatility of bitcoin compared to gold. Of course, bitcoin’s volatility could decrease over time due to growth in adoption and liquidity in its market. Then we’ll see if stock-to-flow can predict its price more accurately, also thanks to more historical data.

The S2F also does not consider bitcoin’s technological value, i.e., its use case as an alternative currency for payments.

Bitcoin is also more vulnerable to Black Swan Events and news that cause fear or hype.

Black Swan Event

The black swan theory is a metaphor describing a surprising event with major effect, and that is often wrongly rationalised with the benefit of hindsight. For example, the appearance of an abnormal, unpredictable value, therefore far from expectations.

Any model is said to be as valid as its assumptions. If you think the assumptions of S2F are valid and complete, it will be valid too.

Vitalik Buterin was among those who expressed criticism of this model.

Against S2F proponents who claim that halving causes bitcoin price rises, Vitalik argues that this is a very vague thesis, because a “cause” can imply both immediate effects and effects months or years later.

For this reason, it is also impossible to disprove, and the fact that historically the price of bitcoin has been trending upwards, in the same direction as the stock-to-flow, could be a mere coincidence. Therefore, the model would not be of much help in predicting bitcoin’s trend.

A less diplomatic critic is Nico Cordeiro, CIO of the Strix Leviathan fund, who compared S2F to an astrological model, pointing out that the premises are not proven by Research.