The Stock to Flow Model Meets Bitcoin
Why Buying the Dip May Be Wise
The Stock to Flow (S2F) Model forecasts the price of an asset over time, with the assumption that the price will rise as the supply decreases. Put simply, S2F predicts that the scarcity of an asset has the largest influence on its price.
S2F models are the ideal way to predict the price of any commodity asset or precious metal, as they perfectly reflect a supply and demand intersection. S2F calculates the price of an asset by dividing the total supply by the annual increase in supply, or flow. Despite S2F models theoretically accurately reflecting movements in supply (scarcity) over time and scarcity’s impact on the price of an asset, S2F models are rarely used by investors outside of the crypto sector. While a great tool in a perfectly predictable world, it is impossible to accurately calculate a result using such a model. Take gold for example - no one can know how much gold is mined each day, and no one knows how much sits in vaults around the world. Any estimation would be a wild guess, making the S2F model great in theory, but impractical in real life… unless applied to Bitcoin. Bitcoin was the first asset with a capped supply, and the ability to see the exact flow of supply, all viewable on the blockchain. For the first time, the S2F model had the perfect asset to track.
S2F predicts the price of Bitcoin on any given date by dividing the total supply of Bitcoin, divided by its annual flow. The total supply of Bitcoin was 21 million, though it is estimated that around 2 million of these coins have been lost over the last decade, bringing this number to around 19 million. Annual flow is the number of Bitcoin mined in the year. This can be calculated by multiplying the block reward (6.25 BTC) by the number of blocks mined in a day, multiplied by 365. For more information on how mining works, see a previous article here. The supply divided by annual flow should show the price of Bitcoin, according to the S2F model.
Bitcoin enthusiasts rallied around this model, especially after proving accurate up until the 2021 bull market. The S2F model served as a note of certainty for investors in such a volatile asset – a graph that had been true so far, suggesting that it would probably continue to be true in the future. Unfortunately, that trend has ended. Today, the Bitcoin S2F model suggests that the price of Bitcoin should be about $100,000, and yet the price sits just above $20,000. What happened to the S2F model, and does it still have merit as a price prediction tool in the future?
As with most other growth asset classes, Bitcoin has been dropping over the past few months as a result of the dreary economic conditions rolling in. Bitcoin itself has been hit with wave after wave of problems. From poor government policy written by politicians with no understanding of Bitcoin, to interest rate hikes, and billions of dollars of liquidations, the Bitcoin market has dropped to its 2017 highs, something that has never happened before in the Bitcoin market. The question must be asked, what is the driving force behind the price of Bitcoin? The S2F model says that scarcity should be the largest driving force behind price, and yet economic outlook has overshadowed this fact to decrease the price of Bitcoin well below its fair value. The Bitcoin S2F model has proven inaccurate, not because of its failure as a model, but because of investors’ failure to understand the asset. Treated as a speculative tech stock by wall street, as a pyramid scheme by politicians, and as a get rich quick grab by day traders, Bitcoin is facing a reputation crisis. One might think that an asset such as Bitcoin that is immune to inflation and to poor economic policy by central banks should be the safe haven asset of every investor in the world during these economic times, but the truth is that most Bitcoin investors know little about the underlying technology that makes Bitcoin an attractive investment. As a result, Bitcoin is often treated, even by many sophisticated investors, more so as a speculative, volatile asset that can result in short-term profits, rather than a long-term hold that grants unique benefits to asset holders. The failure of the S2F model serves not as a sign of Bitcoin’s imminent failure, but as a sign that Bitcoin is being looked at wrong by investors and could recover in the coming months. While the worry and fear that came from the recent price drop can cloud the judgment of investors, the S2F price deviation highlights that Bitcoin is an incredibly oversold asset. Confident investors can buy Bitcoin without a worry, knowing the value of the scarce asset they own, while the rest of the world scrambles to make sense of the economy around them. Do not let those clouded by fear change your perception on the value on Bitcoin. If you owned 1 Bitcoin at $60,000, you owned 1/21 millionth of the only true scarce asset on Earth. If you own 1 Bitcoin at $20,000, you still own 1/21 millionth of the only true scare asset on Earth. Pay no mind to the noise, and continue to hold with confidence.
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