Cryptonomics: Bitcoin Stock to Flow Model Explained

The stock to flow, a model typically used for precious metals, can be applied to BTC. Bitcoin is the first currency that has been measured with this model due to its scarcity.

By
Wilfred Victor
on
March 1, 2021
Category:
Cryptonomics

Introduction

Bitcoin stock to flow, also known as S2F, attempts to value Bitcoin in ways similar to other scarce assets like Silver and Gold. The idea is that scarce commodities have the innate tendencies to store value over the long term compared to general commodities that can be replicated and reproduced anytime. The model explains why Bitcoin will retain its value for a long time, in contrast to what many have speculated. It displays that this is not a bubble but the face of novelty in the financial and digital world.


What is Stock to Flow

Source

The S2F model quantifies scarcity by taking the total global supply of a commodity and dividing it by its annual production. Stock, in this sense, is the total amount of an entity or resources in existence. The flow defines the rate of production or entry of the asset class to the market. A higher S2F indicates a decrease in the flow of the stock. Taking Gold as an example, the highest number of Gold ever mined is capped at 190,000 tons; it is estimated that 2,500 -3,200 tons are mined each year. This attributed scarcity of Gold gives it its value amongst precious metals. A higher S2F for Gold will mean a decreasing/decreased number of mined Gold each year relative to its capped supply.

The scarcity nature explains why the S2F model does not consider regular commodities like crude oil, household items, or even groceries and appliances. In the real sense, the mentioned items, although important, are not necessarily scarce and would only experience some form of scarcity in stressed situations. For instance, during the high point of the Convid-19 virus last year, toilet paper and masks became scarce due to high demand. Only in such rare and tense situations do we have general commodities become scarce.

Although this model applies to resources, Bitcoin, as a digital cryptocurrency, is modeled using the S2F model due to its scarcity. This scarcity has driven its value to its current All Time Highs (ATH). On top of this, the fact that the amount of mined BTC is halved every four years, giving the asset class higher S2F ratings.


Bitcoin Stock to Flow

The S2F model considers Bitcoin a scarce commodity similar to gold and silver due to its scarce nature. Only 21 million BTC exists. About 900 new coins are mined each day which translates into 325,500 each year; this gives Bitcoin an S2F of approximately 64.5, i.e., divide the total capped supply over the flow of 325,500 BTC each year (21000000/325500 = 64.5).

Although the original model of the Bitcoin S2F is based on historical price data, monthly S2F, and price data, it was recently adapted to a new model (S2FX). This model took away time and added other assets (Silver and Gold), adopted by Plan B in this medium post. Since it has retained its value over time, it only makes further sense to view the model from other assets’ correlation.

Compared to Gold, whose S2F is about 55.9 and Silver 22. Bitcoin S2F at 64.5 gives an overview of a reducing flow of total supply, caused by the halving event done every four years and made possible by Satoshi Nakomoto - Bitcoin inventor(s).


Bitcoin Halving

Satoshi Nakomoto created Bitcoin in early 2009, the first-ever digital currency adopted by the S2F model. Its code can split its reward into half every four years, ensuring that new supply shrinks over time. Every 210,000 blocks or four years, miners’ reward for minting new coins gets halved. The event reduces the available supply, making it the first-ever currency/commodity to achieve provable and programmable scarcity. Not even Gold or Silver, two of the world’s most valued assets, have this property.

Despite all of its strong appeals, Bitcoin still has many opposing views. These financial analysts haven’t completely embraced the Bitcoin cryptocurrency technology and only view the currency as a mass speculation tool. The S2F model for Bitcoin is not without its weaknesses.


Weaknesses of the Bitcoin Stock to Flow Model

One property of Bitcoin that has made many analysts doubt the Bitcoin S2F model is that the asset is notoriously volatile. New events can create a spike at any time. At the same time, the S2F model is only strong as its assumption. The assumption that Bitcoin will remain valuable due to its scarce nature could easily be faulted. As Black Swan event, an element of surprise is real, and since the S2F model can not account for such circumstances, the model has often faced strong criticisms.


In Conclusion

There is no doubt about the scarce nature and halving of Bitcoin will continue into the 2040s, as many Bitcoin proponents like Nick Szabo have predicted. Bitcoin retains its value through scarcity on top of the numerous adoptions and uses cases that have been built using crypto. Overall, this has brought a new wave of firm believers the technology has never witnessed before. 

The stock to flow, a model typically used for precious metals, can be applied to BTC. Bitcoin is the first currency that has been measured with this model due to its scarcity. However, a model is only strong as its assumption and may not account for all aspects of Bitcoin valuation. Seeing that the currency is only a little over ten years in existence, the historical data is not as broad as Gold or Silver.


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Wilfred Victor

Ace finds himself as a blockchain enthusiast who is focused on growing with the entire crypto sector. He is an energetic and passionate writer who believes that all things are achievable.