Stock to Flow Model 2.0
Bitcoin becomes more scarce over time. With a fixed supply, and reducing distribution, there is deflationary pressure on the asset. Halvings play an important role in this deflation because they represent shifts in supply/demand. As S/D changes, the value of Bitcoin fluctuates.
- The blue curve represents the amount of Bitcoins in circulation. The hard cap is 21 million, and the relative increase in market supply decreases at an exponential rate.
- While the orange curve represents % inflation exerted on the asset. Hint: it is negative.. Since less is given out over time, you could compare this to how the scarcity affects existing Bitcoin.
Takeaway: locked supply and reduced currency expansion exerts scarcity pressure on the asset. The "flow" is in the introduction of a new asset into the pool, while the "stock" represents the asset which already exists.
Stock to Flow 1.0
This model for Bitcoin has been around for a while, and been the focus of mainstream analysts since fruition. Its an interesting concept that integrates different factors which are associated with the valuation of Bitcoin. Lets dive in!
You've likely encountered this before, and the picture it paints is easy to understand. Although not updated with current data, you can see that halving events preceded all time highs. This cycle of decreasing supply/demand repeats approximately every four years as the scarcity increases.
There are a couple things which make the origination of this model interesting. First, it was designed by comparing the fundamentals of Bitcoin to that of precious metals. Both have a tangible cost to produce one unit. It has comparative scarcity to silver or gold. However, this is the first digital asset with a tangible scarcity. Lets look at the most recent data..
This is the exact same model, but has much more recent data available. It shows the same trend: scarcity induces valuation changes.
Stock to Flow 2.0: S2FX
So.. The original model used time on the X-axis and was based upon the fundamental commonalities between gold and silver.. What if we added them to the chart to compare behavior, correlations, and measure the impact that scarcity has? This is what you'd get: S2FX Model.
Lets break this down..
1. Precious metals (gold and silver) have been added. These can be found towards the upper right hand quadrant identified by their gold and silver color. Their measured on X axis by "stock to flow" or asset pool/asset expansion, while on the Y axis it is defined by their market evaluation. In this instance, price is being measured by total market cap of Bitcoin/precious metals. The model now has a concrete and tangible model for how gold/silver are valued based on their relative scarcity.
2. Monthly Market Cap of Bitcoin compared to stock to flow. These data points can be found in purple, and they form four identifiable clusters on the graph. These clusters represent statistical grouping when BTC was exhibiting similar patterns of price/S2F for continued periods of time (ie: between cycles)
3. Four major clusters for Bitcoin. Each of these clusters have different fundamental properties because of the perception at that specific time..
Cluster One: Bitcoin was a proof of concept and very new. It had a low stock to flow ratio and low price because it was not scarce and not valued highly.
Cluster Two: Bitcoin gains respect as a method of payment. Scarcity had since increased and demand increases as BTC makes a reputation for itself.
Cluster Three: Bitcoin becomes even more scarce and recognized as a potential "e-gold". This would be comparable to 2016.
Cluster Four: Bitcoin is treated like a financial asset. Scarcity is at an all time high, this is where we are now.
4. Power Regression Line is the "best" fit line for the model. This is used to concrete predictions for the model and what the future can hold. Looking at the data above, you can see that BTC has a similar method evaluation to gold/silver: Scarcity impacts price.
What Does the Model Predict?
Since we can define the scarcity and stock to flow of an asset, we can predict the price based on the previous data correlating the two. This is the idea of the regression analysis.. Where are we going, and why?
This model predicts S2F of 56 from 2020-2024 because the scarcity is constant and will not change for this time period.
This concretes an expectation of 5.5 Trillion dollar Market Cap.
5.5 Trillion Bitcoin Market cap = 288 000/Bitcoin evaluation
When I can I buy a lambo?
Good Question.. Hopefully soon!? This model does a great job of putting scarcity in context with stock to flow, and then comparing it to relative market cap expansion. Its clear to see that it follows four year cycles determined by the halving. With this in mind, we are entering a new cycle. With new data comes the opportunity to prove old models false.. or prove them true!
Nobody knows if this model will hold true in the future. The original S2F model has been shockingly accurate, but past performance does not indicate future results. This novel model is more advanced and includes precious metals for comparison, and the similarities are astounding.
TLDR: 288k/BTC is dervied from comparing S2F of BTC post 2020 halving to that of precious metals and extrapolating the data forward to contextualize total market cap by relative scarcity defined by S2F.
Want to find the original post depicting the model? Click here.