The Controversy Around Bitcoin’s Stock-To-Flow Model Explained

Like in traditional finance, technical analysis is commonly utilized to predict where the crypto market and the prices of individual digital assets are heading.

Sometimes, experts’ tools and indicators work as intended, providing more or less accurate forecasts for industry players to analyze. In other cases, models generate flawed results, leading to analysts drawing the wrong conclusions about the cryptocurrency industry’s future.

Today, we will explore the Stock-to-Flow model, one of the most commonly utilized technical analysis tools used to predict Bitcoin (BTC)’s price, and why it has been heavily criticized lately by Ethereum co-founder Vitalik Buterin.

What Is the Bitcoin Stock-To-Flow (S2F) Model?

Created in 2019 by institutional investor and quant analyst PlanB, the Stock-to-Flow (S2F) model aims to predict Bitcoin’s future price by measuring its scarcity.

To achieve this goal, the model takes two key variables into account:

  1. Stock: The total supply of the asset, which refers to all BTC that has been ever mined throughout the cryptocurrency’s history
  2. Flow: The yearly production of newly mined BTC

Unlike with commodities like gold and silver, we don’t have to rely on estimates to calculate either the stock or the flow of Bitcoin – as all data is transparently recorded on the blockchain.

After we have the data for both variables, we have to divide Bitcoin’s stock by its flow to calculate the cryptocurrency’s Stock-to-Flow ratio. Take for instance July 29,2022. It will look like this:

  • Stock: 19,106,618
  • Flow: 328,500
  • Bitcoin S2F: 19,106,618 / 328,500 = 58.16

Essentially, the higher the value of an asset, the scarcer it is, as its total supply is much larger than the rate at which new supply can be created.

In this case, miners would take more than 58 years to generate as much new BTC as is circulating on the market.

As a side note, achieving this would be nearly impossible for Bitcoin as its maximum supply is capped at 21 million coins. At the same time, the deflationary halving mechanism reduces the new flow of BTC supply by 50% roughly every four years, which makes this goal even harder to reach.

Why Do People Criticize the Bitcoin Stock-to-Flow Model?

We can safely conclude that the Stock-to-Flow (S2F) model is a practical tool for measuring the scarcity of different assets and seeing how they compare with each other. However, it is not the primary purpose of why crypto market participants use S2F.

After creating the Stock-to-Flow model, PlanB incorporated BTC’s S2F ratio, the historical price of the cryptocurrency, and the days after the next halving event into a chart- with the goal to foresee Bitcoin’s future price.

Look into Bitcoin

As you can see in the above image, the main idea here is that Bitcoin’s price should in theory follow the predicted price based on the cryptocurrency’s 365-day average Stock-to-Flow ratio. We can observe some periods when the model was accurate.

Examples of such include:

  • March 2020 – March 2021
  • December 2015 – October 2016

However, there were also multiple times when it predicted a much higher or lower price for Bitcoin than in reality. Sometimes, even for more extended periods. Considering the current bearish trends and the last market crash, it also seems a bit unrealistic for BTC to reach $68,000 by the end of the year. The coin trades at $24,000 as of July 29, after a 65% fall since November 2021’s high.

While the tool has many proponents, Bitcoin’s Stock-to-Flow model has received quite some criticism from prominent crypto industry players due to the above inaccuracies. Recently, Ethereum co-founder Vitalik Buterin also shared his views about S2F, stating that the model “is 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,” he continued in a June 21 tweet.

Vitalik Buterin’s tweet on Bitcoin’s Stock-to-Flow model

Earlier in June, Buterin argued that the idea behind the Bitcoin Stock-to-Flow model – that each halving causes BTC price spikes – is “unfalsifiable.” In other terms, Ethereum’s co-founder believes this theory is impossible to disprove as any price quoted by analysts can be utilized as evidence for demonstrating the model’s accuracy.

While Vitalik seems to have a valid argument regarding the S2F model, it is important to point out that Bitcoin’s halving event regularly has a positive impact on the BTC price, facilitating multiple crypto bull runs since the dawn of the industry.

The Bitcoin Stock-to-Flow Controversy

While it is one of the most popular models for predicting Bitcoin’s future price, Stock-to-Flow is a controversial tool that has received quite some criticism over the years. And not without reason, especially if we consider the significant deviation between the current BTC price and the one displayed on PlanB’s charts.

Bitcoin price predictions by crypto analyst PlanB, the creator of the Stock-to-Flow model

On the other hand, as there were two relatively longer periods when S2F predicted fairly accurate prices for Bitcoin, we can’t safely conclude that the tool is of no use for crypto industry participants.

Taking all the controversy and criticism around the model into account, Stock-to-Flow remains an excellent way to measure the scarcity of assets, such as gold, silver, and BTC, providing valuable data for investors looking to gain exposure to a rarer instrument to store their value.

Since no model can generate precise results for digital assets – or other instruments traded on capital markets -, investors should refrain from relying on a single tool, theory, or analysis to make crucial decisions regarding their investments and finances.

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