Bitcoin is a decentralized peer-to-peer form of digital money, created using blockchain technology. The idea of decentralization in bitcoin (and other cryptocurrencies) in this case, means that they aren’t owned or controlled by any one person or organization.
Ever since Bitcoin’s creation in 2008, its value relative to government issues currency has been on the rise. Bitcoin went from being worth only a few cents per coin to an all-time high of about $60,000 in 2021.
Bitcoin’s stock-to-flow model, however, suggests that the future price of the coin can be forecast roughly. Not only that, the model suggests that bitcoin will continue upward in its path, and be worth even more money per coin than it is now.
What Is a Stock To Flow Model?
Stock to flow models (or S2F models) is a comparison of new supply or demand, relative to existing supply and demand.
In essence, a stock-to-flow model attempts to quantify how much something can be worth in the future, based on its current scarcity.
S2F models were originally applied to precious metals and gems like gold, silver, and diamonds.
But the stock-to-flow model was applied to bitcoin as well, by a popular dutch trader who some say has 20 years of trading experience. This trader also goes by the Twitter handle ‘PlanB’. He is credited as the creator of the S2F model to date.
New bitcoin can be added to the current market supply in a process called mining. In mining, people (called miners) use computers to solve cryptographic puzzles on the bitcoin network.
In exchange for solving these puzzles and adding more blocks to the chain, the system rewards the miners with small amounts of bitcoin. This precisely, is how more bitcoin gets mined.
Halving, however, is a foolproof protocol on the bitcoin blockchain that reduces the rewards that miners get from mining bitcoin by half, after every new 210,000 blocks have been mined.
This means that if a miner receives 4 bitcoin after mining today, they receive ~2 after the next halving and ~1 after the next.
Bitcoin Halving And The S2F Model
The S2F model states that the price of bitcoin is largely influenced by its scarcity. This would make sense to anyone who understands the demand and supply relationship.
The less of a valuable commodity in circulation, the greater its demand and therefore its price.
To put it simply, the bitcoin S2F model points incredulously to bitcoin’s price moving towards $100,000 for this cycle. It also predicts $1,000,000 for the next, and so on.
The S2F model for bitcoin uses a 463-day timeline. Preston Peysh, author and YouTuber came up with this 463-day timeline because he believes that every bitcoin cycle happens in three phases
- The bull run
- The correction
- The mean reversal
There are about 210,000 blocks to be mined per bitcoin cycle. And if three phases in each cycle last four years, this would give one bull run, one correction and one mean reversal ~463 days each to run their courses.
463 + 463 + 463 = 1389 days, or approximately 3.8 years
This math checks out. There are, however, some drawbacks to the original model.
Problems With The S2F Model
To admit it, the S2F model does sound nonsensical if one considers some factors.
While the S2F model has been widely accepted by a lot of traders and enthusiasts alike, there are a few problems with it.
- The S2F model doesn’t take other factors like demand and volatility into account. These factors contribute significantly to the price of bitcoin.
- The S2F model assumes that the demand for bitcoin will continue to grow at the same rate.
- The S2F model assumes that bitcoin’s dominance in relation to other cryptocurrencies will remain fixed.
- The S2F model does not take the prices of other cryptocurrencies into account. It assumes that bitcoin is the only cryptocurrency available.
- The S2F model underestimates the problems with maintaining the same exponential growth it predicts
- For the S2F model to be relevant, bitcoin has to remain the best-performing asset.
- The price of bitcoin has to keep doubling after every halving. This means that in the next ten halvings, the price of bitcoin would have multiplied billions of times.