Bitcoin Stock-to-flow Model: A Comprehensive Guide. New cryptocurrency investors struggle to make informed selections due to the volatility of digital currencies. Given these challenges, the “stock-to-flow” (SF or S2F) model may help organize decision-making. Crypto investing, like stock market investing, relies on asset valuation. The stock-to-flow ratio can help. This number shows how many years it takes to create the same amount of items at the current rate. In most cases, higher numbers mean higher prices!
SF ratios are used to anticipate Bitcoin prices and have been linked to $42,489. Bitcoin is the oldest and most famous scarce digital object. Like silver and gold, there will never be more than 21,000,000 coins in circulation. The stock-to-flow technique capitalizes on Bitcoin’s scarcity-driven value. The stock-to-flow ratio estimates Bitcoin’s digital scarcity to anticipate its value. This in-depth research explains the stock-to-flow process and cryptocurrency investing.
Bitcoin’s Scarcity and Stock-to-flow Ratio
Nick Szabo, an American cryptographer and computer scientist, argued scarcity gives anything “unforgeable costliness” and intrinsic value. Bitcoins become scarcer when their technology reduces their supply. As proof-of-work, the miner who finds the hash value for a block of transactions earns a “block reward.”
Half the block reward occurs every 210,000 blocks, known as the “Bitcoin halving.” Block rewards have continuously decreased from 50 BTC in 2009 to 25 BTC in 2012, 12.5 BTC in 2016, and 6.25 BTC in 2020. Spring 2024 will see another halving. Bitcoin prices have risen after each half in prior years. Scarcity metrics can help investors decide when to buy Bitcoin (BTC), which rises in price as supply decreases.
The stock-to-flow method predicts value changes immediately. They are comparing present asset stock to annual production. Scarcity and pricing increase with increasing ratios. Dutch former institutional investors, under a pseudonym, popularized the “PlanB” Bitcoin stock-to-flow ratio. After gold and silver, the cryptocurrency world has adopted stock-to-flow, largely for Bitcoin. Since Bitcoin is rare and expensive, supply and demand determine its price.
Bitcoin output is more evenly divided owing to halving, whereas gold production increases due to technological developments in the precious metals mining industry. There is no way to produce Bitcoin physically, unlike gold and silver. Every cryptocurrency token is a supply since investors can sell them anytime. Thus, a high crypto stock-to-flow ratio indicates value. Due to this continuous influx, Bitcoin’s stock-to-flow ratio is easier to predict, but macro variables will change it as the asset evolves.
Check out the Bitcoin stock-to-flow formula. Bitcoin’s supply is 18,847,331 BTC, or 89.74%, and its yearly flow is 328,500 BTC. Stock value changes due to fresh blocks mined every ten minutes. Entering these data into the stock/flow calculation (18,847,331/328,500) yields a 57.374 SF ratio. The current Bitcoin supply would take 57 years to mine (not considering the maximum supply or halvings). Bitcoin prices climb as Bitcoin halving events increase scarcity and S2F ratio. This number is vital for investors to understand why Bitcoin is a money, not a commodity.
Is Bitcoin Stock-to-flow Price Prediction Accurate?
The methodology has substantial limits when forecasting the future value changes of digital assets, even though the Bitcoin stock-to-flow ratio has shown some historical relationship with BTC price.
Bitcoin Stock-to-flow Model: To illustrate, the model ignores the demand for Bitcoin and focuses only on its supply. Supply and demand are the primary variables that dictate an asset’s valuation. Therefore, if demand drops substantially, the price of Bitcoin will decrease sharply, although its SF ratio increases every four years during halving events. Aside from that, the Bitcoin stock-to-flow model disregards certain factors that may impact the asset’s worth:
Bitcoin is still susceptible to big price swings, even if its volatility has decreased considerably. Traders’ long bets could be liquidated, and the price of Bitcoin could drop significantly if investors sell their holdings in a panic following a large value loss during an extremely volatile time.
Black Swan Events
Black swan events are unexpected and highly consequential in economics, especially regarding asset prices. The complete ban on Bitcoin as a medium of exchange or purchase by government agencies would be a black swan event for the cryptocurrency. In this hypothetical scenario, the price of Bitcoin could fall dramatically.
Other Crypto Forecasting Models
Investors’ mental processes, sometimes called “collective psychology” or “crowd psychology,” are analyzed by Elliott Wave Theory to assess financial market cycles. American accountant Ralph Nelson Elliott put forth the Elliott Wave Theory in the 1930s. If you believe Elliott Wave Theory, the patterns of the waves will either rise and fall in a straight line or with some sloping. Price fluctuations between impulsive and alternate stages repeat across all financial markets, including cryptocurrency trading. The five sets of visible waves are distinct and alternate between motive and corrective waves. The waves are also identical and repeating.
Bitcoin Stock-to-flow Model: A logarithmic chart of Bitcoin’s price growth with color bands is called the Bitcoin Rainbow Chart, another prediction model. Using a logarithmic regression provided by Bitcointalk member “Trolololo” in 2014, Über Holger, CEO of Holger, created the colorful bars. Holger states these bands are completely arbitrary and not based on scientific evidence. Therefore, they will only be valid until a future date, even though the theory does not specify a specific period.
Users can see how the price of Bitcoin has changed over time, even when daily volatility isn’t taken into account, and learn when it is a good moment to purchase or sell Bitcoin. Because outcomes from the past do not guarantee future success, Holger claims that the Rainbow Chart does not offer investment advice. However, it arbitrarily splits Bitcoin’s price into eight color bands: a bubble, FOMO (fear of missing out), sell, bubble formation, still cheap, HODL, purchase, accumulate, and profoundly discounted.
The Stock-to-flow Cryptocurrency Investing Concept
Despite these issues, learning how to use the stock-to-flow approach in cryptocurrency transactions could be useful. Cryptocurrency value is expected to rise with an increase in the stock-to-flow ratio, as the model has historically predicted. Making investing selections can be aided by this relationship.
A stock-to-flow ratio of 50 or above indicates extreme relative scarcity, which in turn indicates that values will rise. Seeing that ratio can make an investor cash out some of their cryptocurrency holdings to take advantage of the current market price. On the other hand, they might increase their purchases when the ratio is low but predicted to rise. Despite its limitations, the stock-to-flow ratio is a useful financial tool for crypto investors. This model should be considered alongside other forecasting methods when considering cryptocurrency investments.