What is the stock-to-flow model for Bitcoin?

Understanding the Stock-to-Flow Model

The stock-to-flow (SF) model is a valuation framework primarily used in the commodities market but has gained significant traction in the Bitcoin community. It measures the current stock (total existing supply) of an asset against its flow (new supply produced annually). The ratio helps determine the scarcity of an asset, which in turn can influence its price. In the case of Bitcoin, this model has been used to predict future price movements based on its halving events.

The SF ratio is calculated as:

SF Ratio = Stock / Flow

Where:

• Stock refers to the total number of units already in circulation.
• Flow is the number of new units created in a year.

For example, if there are 10 million units of an asset in existence (stock) and 1 million are produced annually (flow), the SF ratio is 10.

Application of the Stock-to-Flow Model to Bitcoin

Bitcoin’s supply issuance is programmed to decrease over time through halving events, which occur approximately every four years. These events cut the reward for mining new blocks in half, effectively reducing the flow of new Bitcoin entering the market.

As of now, the total supply of Bitcoin is approaching 21 million, with about 19.5 million already mined. Every 10 minutes, a new block is mined, and miners receive a block reward, which halves during each halving. This predictable supply schedule makes Bitcoin a suitable candidate for the SF model.

Before each halving, the flow of new Bitcoin decreases, increasing the SF ratio. Historically, this has been correlated with significant price increases. Analysts and investors use this model to forecast Bitcoin’s price based on its increasing scarcity.

Historical Correlation Between Bitcoin’s Price and Stock-to-Flow Ratio

Proponents of the SF model, notably PlanB (an anonymous analyst), have created models that show a strong historical correlation between Bitcoin’s SF ratio and its market price. According to this model, as the SF ratio increases due to halvings, Bitcoin’s price follows an exponential trend.

The model uses logarithmic regression to plot historical Bitcoin prices against their corresponding SF ratios. The result is a curve that closely aligns with Bitcoin’s actual price movements, especially around halving events.

For example:

• After the 2012 halving, Bitcoin’s price went from around $10 to over $1,000 by 2013.
• After the 2016 halving, Bitcoin reached nearly $20,000 in late 2017.
• Following the 2020 halving, Bitcoin surged past $60,000 in 2021.

These patterns support the hypothesis that increasing scarcity, as reflected in the SF ratio, drives up Bitcoin’s value.

Limitations and Criticisms of the Stock-to-Flow Model

While the SF model offers a compelling narrative for Bitcoin’s valuation, it is not without criticism. Some economists and analysts argue that the model oversimplifies the factors influencing Bitcoin’s price. They point out that:

• Demand factors such as macroeconomic conditions, regulatory changes, and investor sentiment are not accounted for in the SF model.
• The correlation between the SF ratio and price does not necessarily imply causation.
• The model assumes that Bitcoin behaves like a commodity, such as gold or silver, which may not fully apply to a digital asset with unique utility and speculative demand.

Critics also highlight that the SF model does not consider on-chain activity, adoption rates, or network usage, which are crucial for understanding Bitcoin’s value proposition.

How to Calculate Bitcoin’s Stock-to-Flow Ratio

To calculate Bitcoin’s SF ratio, follow these steps:

• Determine the total circulating supply of Bitcoin. This can be found on platforms like CoinMarketCap or CoinGecko.
• Calculate the annual flow of new Bitcoin. Since a new block is mined every 10 minutes, and the current block reward is 6.25 BTC (as of 2024), the annual flow is:

Annual Flow = Block Reward × Blocks per Year

There are 52,560 blocks per year (365 days × 24 hours × 6 blocks per hour). So:

Annual Flow = 6.25 × 52,560 ≈ 328,500 BTC

• Divide the stock by the flow to get the SF ratio:

SF Ratio = 19,500,000 (stock) / 328,500 (flow) ≈ 59.4

This means it would take nearly 60 years at the current rate to produce the current circulating supply of Bitcoin.

Using the Stock-to-Flow Model for Bitcoin Valuation

To estimate Bitcoin’s potential price using the SF model, analysts often use the following regression formula:

Price = SF^exponent × multiplier

For example, PlanB’s model uses:

Price = 0.4 × SF^3.3

Using the current SF ratio of ~59, this would yield:

Price = 0.4 × 59^3.3 ≈ $200,000+

However, this should be treated as a theoretical estimate rather than a guaranteed outcome. Market dynamics, adoption, and macroeconomic conditions can significantly influence Bitcoin’s actual price.

Frequently Asked Questions

Q: Does the stock-to-flow model work for other cryptocurrencies?A: While the SF model is primarily applied to Bitcoin, it can be adapted for other cryptocurrencies with fixed or predictable issuance schedules. However, its predictive power diminishes for assets with variable or inflationary supply models.

Q: Can the stock-to-flow model predict short-term price movements?A: The SF model is generally considered a long-term valuation tool. It may not accurately reflect short-term volatility caused by market sentiment, regulatory news, or macroeconomic events.

Q: How often does Bitcoin’s stock-to-flow ratio change significantly?A: Significant changes in the SF ratio occur approximately every four years during Bitcoin halvings, when the block reward is cut in half, reducing the flow of new coins.

Q: What happens to the stock-to-flow ratio after Bitcoin’s final coin is mined?A: Once all 21 million Bitcoin are mined (estimated around 2140), the flow will be zero, making the SF ratio infinite. At that point, no new Bitcoin will enter circulation, potentially increasing scarcity-driven value.