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Investing in cryptocurrencies can be a challenging pursuit considering their volatility and unpredictability. Accurate decision-making relies on informed predictions of asset values in the crypto space. In order to make more strategic and structured decisions on crypto investment, using the Stock-to-Flow model comes in handy. The Stock-to--Flow model is an investment strategy that measures the current stock of an asset against the production rate or total amounts mined over a year. To be more precise, the S2F model compares an asset's scarcity or relative abundance.
A Small Dive into Stock-to-Flow Model Applications
The model measures various commodity values, including natural resources such as silver or gold. These are referred to as store-of-value resources, and in theory, they retain their values over long periods due to low flow and scarcity. There are numerous advantages that investors can get from using the Stock-to-Flow model. BTC S2F model uses live chart data that easily tracks predicted asset prices at a certain time and their actual price at the same period. It is also a time series model since the data points indexed are in accordance with time.
Bitcoin’s S2F Model
The Stock-to-Flow model of Bitcoin uses live chart data in tracking the asset’s price across various periods. The line chart plots the BTC price across the chart and, in turn, creates a comparative view of Bitcoin’s price forecast vs. its market price. The chart shows the current Bitcoin price and how much it differs from its price forecast at a specific time. Investors from around the globe use the S2F model as an indicator as well. They use the model to trade Bitcoin assets such that negative deviations in the forecast interpret as a signal to buy the dip. Positive deviations, on the other hand, indicate a signal to sell. The S2F ratio is calculated by dividing the stock (current number of BTC in circulation) by flow (number of BTCs made). The Stock-to-Flow model predicts the changes in value in a relatively straightforward manner. The current stock is compared to the yearly production rate of an asset. 19 million BTC are currently in circulation. As such, a higher ratio indicates a greater scarcity, which results in a high price value. The SF2 model takes advantage that BTC’s scarcity causes an increase in its value.
Bitcoin’s Scarcity
Only 21 million bitcoin are left to be mined, and the scarcity of the asset proves to drive its price value across the blockchain market. About 1.9 million bitcoins are left to be mined before 2140, and the halving events push the asset price even higher. PlanB explains how BTC is the first scarce crypto considered a store of value. He also shows the use of the S2F model in predicting Bitcoin’s value. PlanB predicts that the BTC price will sore to an outstanding $1 million value in the next four years. Currently, the BTC price is valued at $28,801. However, PlanB estimates that BTC’s market value will reach $5.5 trillion before 2024, translating to a Bitcoin price value of $288,000. Considering Bitcoin's open-source code, its production rate is constantly increasing, increasing its scarcity. After every four years, 210,000 blocks of BTC are mined, meaning about 52,500 blocks annually. The flow is equal to the product of the number of miners rewarded and the blocks minted annually. Therefore, with the current reward price of 6.25 BTC, the flow per year will be around 328,500 Bitcoins produced per year. Considering that about 19 million BTC are in circulation, the S2F model that’s stock/flow results are 57.839 years.
Bitcoin’s Updated S2F Model
Bitcoin’s Stock-to-flow model released in 2019 by PlanB was based on price data and monthly S2F, making it a time series model. PlanB upgraded the model a year later by eliminating time in the model and incorporating gold and silver. He calls it the BTC S2F Cross Asset Model (S2FX). The updated model tries to capture Bitcoin’s abrupt phase transactions the asset might experience and the resulting increase in market value. The asset's value has increased over the years based on a change in its narrative from “Proof of Concept'' to “E-Gold” to “Financial Asset.” The S2F chart realized by PlanB illustrates clusters that indicate phase transactions. However, regardless of the merits of using the S2F model, there are various criticisms about the model. The model is a semi-strong Efficient Market Hypothesis (EMH) version that doesn't capture all the information available. The model bases its information on public data such as BTC’s supply rate. Thus, conclusions and analyses are usually already priced.
Author’s Take
It's going to be harder mining Bitcoin, as such, increasing its scarcity. Factoring in the BTC S2F model in understanding asset price trends is useful for investors. Despite the criticisms of the model, it's still an effective model for investors. The Stock-to-Flow model factors in the flow of an asset and the stock in supply over some time. However, the new updated model compares asset prices with natural resources (Gold and Silver).