Accurately predicting the prices of volatile assets like stocks, bonds, and cryptocurrency is perhaps the greatest wish of investors. Of course, knowing when to buy and sell makes the difference between a profitable and a losing investor. As a result, investors seek to make accurate forecasts via technical analysis, fundamental analysis, and other prediction models. One common Bitcoin prediction model is the Stock-to-Flow (S2F) model, which many investors find to provide accurate insights into the world’s first cryptocurrency – Bitcoin.
What is The Stock-to-Flow (S2F) Model?
Bitcoin’s Stock-to-Flow (S2F) model is a prediction tool that forecasts the price of Bitcoin based on scarcity. Bitcoin was engineered to deflate its supply automatically via a Bitcoin halving event that occurs every four years; this halving event reduces the mining reward by half to reduce the circulating supply.
Basic economic laws tell us that scarcity causes increased value as long as demand remains constant. Hence, the deflationary nature of Bitcoin means that its supply is systematically restricted to ensure it remains valuable.
The “Stock-to-Flow” is a number that shows the number of years required to achieve the current Bitcoin’s circulating supply. The higher the number of years, the higher the forecasted price of Bitcoin.
The Stock-to-Flow model isn’t entirely new. It has long been used to forecast the prices of commodities like Gold, Silver, Platinum, etc., by making predictions based on their scarcity or abundance levels. However, the commodity S2F model slightly differs from Bitcoin’s because the supply schedule changes every four years (due to Bitcoin halving).
Calculating Stock-to-Flow (S2F)
Stock to Flow is generally calculated as:
Stock ÷ Flow, or Circulating supply ÷ production rate.
For example, the current supply of Gold is around 244,000 tons at a production rate of 3,600 tons per year. Hence, judging from these numbers, the S2F is computed as 244,000/3,600 = 68 years.
If a new gold mine is found and the annual Gold supply increases to 260,000 tons with an increased production rate of 4,000 tons per year, then the S2F will be computed as 260,000 / 4,000 = 65 years.
The smaller number indicates reduced scarcity due to increased supply and a faster production rate. Hence, the future price projection drops.
Calculating Bitcoin’s Stock-to-Flow
The Bitcoin Stock-to-Flow model was created in 2019 by a Twitter user known as “PlanB,” who developed a model for forecasting Bitcoin’s future returns in relation to Bitcoin halving events. Basically, Bitcoin’s Stock-to-Flow is calculated similarly to Gold and other commodities. However, the difference is that despite the increasing circulating supply of Bitcoin, the production rate is halved every 4 years. Bitcoin rewards used to be 25 BTC after mining a block, and then it reduced to 12.5, then 6.25, and will continue to reduce after every 4 years, until 2,140 when the 21stmillion Bitcoin will be produced.
As a result of this halving, Bitcoin’s Stock-to-Flow model usually predicts a bullish return for Bitcoin in the long term.
Many individual researchers use the Bitcoin Stock-to-Flow to make forecasts based on PlanB’s model.
Is The Stock-To-Flow (S2F) Model Reliable?
Plan B’s Bitcoin Stock-to-Flow model has shown historical accuracy in the past. However, due to its model that predicts prices solely based on supply, it cannot be assertively deemed accurate. Markets are controlled by demand and supply forces; hence, it would be a blunder to base an analytical model on supply alone and ignore the demand. In truth, supply is much easier to predict than demand due to many factors; nevertheless, a model that totally ignores the variance of demand cannot be deemed accurate.
For example, based on PlanB’s model, they forecasted a minimum Bitcoin price of $100k by December 2021; it looked like this was going to happen for sure, as demand remained consistently high within the bull run that lasted from March 2020 to November 2021, seeing Bitcoin near $70k; however, sharp declines in demand due to market forces sent the prices crashing to begin a 9-month bearish run, seeing Bitcoin hover around $20k in recent times. As a result, depending on the Stock-to-Flow model for investment analysis may be lopsided.
Other limitations of the Bitcoin Stock-to-Flow Model include:
- Risk of Being Too Bullish: As a result of Bitcoin’s induced scarcity, the S2F model will mostly see Bitcoin as scarce, hence predicting bullish returns and ignoring other market factors. For example, PlanB predicted $100k by 2021 EOY, but Bitcoin has lost value by over 70% since its all-time high at $68k
June closing price $35,037 .. as far below S2F model as in Jan 2019. Next 6 months will be make or break for S2F (again). pic.twitter.com/W3TM5sOAwY
— PlanB (@100trillionUSD) July 1, 2021
- The Model Ignores Crucial Market Factors: Apart from ignoring demand, the S2F model doesn’t take volatility and black swan events into consideration. Bitcoin remains a highly volatile asset, and an unforeseen event (otherwise called a black swan event), such as government restrictions or other fundamental news that crashes Bitcoin’s price, could cause investors to panic and let go of their positions further liquidating traders and causing declining prices.
Due to its many limitations, many experts have heavily criticized the model. One such recent criticism came from Vitalik Buterin (Ethereum’s founder), who termed the model “harmful.” In addition, co-founder of EthHub, Anthony Sassano, regarded it as “hopium garbage.”
— vitalik.eth (@VitalikButerin) June 21, 2022Stock-to-flow is really not looking good now.
I know it's impolite to gloat and all that, but I think financial models that give people a false sense of certainty and predestination that number-will-go-up are harmful and deserve all the mockery they get. https://t.co/hOzHjVb1oq pic.twitter.com/glMKQDfSbU
Larry Cermak, Research VP at The Block, called it a “ridiculous wish believe,” stating that Bitcoin’s price will be solely determined by demand, not supply.
Despite many criticisms amid the failures of the model per the 2021 December prediction, Plan B has reiterated its stance on the S2F’s fidelity, and they claim that their model has worked well from March 2019 to March 2022, and the recent failure is because Bitcoin is “extremely undervalued.”
#bitcoin S2F original 2019 model (grey) and newest fit on most recent data (white dots). S2F model certainly had a good run from Mar2019 (BTC 4K) to Mar2022 (BTC 45K). For now: either BTC is extremely undervalued and will bounce back soon, or S2F will be less useful in the future pic.twitter.com/JdnLINpzTV
— PlanB (@100trillionUSD) June 20, 2022
Ignoring the recent failures, PlanB has set out another forecast for Bitcoin to reach $100k in 2023, maintaining the stance that $100k is the target for 2021 to 2023. Supporters of the model have claimed that the feat is easily attainable, while critics maintain that the supply schedule cannot solely predict prices accurately.
Both S2F and logarithmic regression point to $100K in 2023. pic.twitter.com/NHqoRpEmUl
— PlanB (@100trillionUSD) February 14, 2022
Final Takeaway
Despite its flaws, the Bitcoin Stock-to-Flow model could be slightly beneficial in making investment decisions, especially since it is majorly futuristic and aimed at the long term. However, it is generally advised that traders combine several analyses and not excessively rely on a single model.
Remember that only you are responsible for your decisions in the crypto space, whether good or bad; as a result, before trusting any analysis or model, it is important to do your diligence and be convinced that you are on the right path.
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