What is the Bitcoin Stock-to-Flow (S2F) Model?
The Bitcoin Stock-to-Flow (S2F) model is a formula for quantifying the scarcity and helps us gage an expected value of Bitcoin.
PlanB regularly tweets updates about the S2F model and how it is actualizing. In his tweets, he appears extremely confident that the model will play out for this cycle at least.
And in his latest revision of the S2F model, PlanB said the Bitcoin price could reach as high as $288,000.
What is the Bitcoin Stock-to-Flow Model?
The ‘stock-to-flow’ is a number that shows how many years it will take to produce the current stock at the rate of which they’re being produced.
The higher the number, the higher the value.
It’s only possible to use a stock-to-flow model on assets that are provably scarce such as gold, silver and platinum.
And because Bitcoin is even more provably scarce than every other asset, the S2F model has been used to try and discern the price pattern Bitcoin will take.
Gold, silver, platinum and Bitcoin are all ‘store of value’ assets because they retain their value over a long period of time.
This is because all scarce assets are difficult to significantly increase the supply, and in Bitcoin’s case, it’s pretty much impossible to change the trajectory of the increase in supply.
The Bitcoin Stock-to-Flow (S2F) ratio is used to evaluate the current stock of all mined bitcoins against the flow of newly mined Bitcoins per year.
For store of value assets, a high S2F ratio indicates that they’re being mostly used as a monetary hedge, which drives up the stock-to-flow ratio.
And a higher S2F ratio indicates an asset is increasingly scarce, and is more valuable as a store of value.
A Closer Look at The S2F Model
The stock-to-flow is the number that we get when we divide the total amount (stock) by the annual production (flow).
For example, at time of writing there are 18,457,225 bitcoins created, and the current production rate is 328,500 per year.
So, if we put that into the S2F model: 18,457,225 / 328,500 = 56.1864
That means we need just over 56 years of the current Bitcoin production rate to produce the amount of bitcoins we have now.
The current S2F of gold is believed to be around 62, but remember Bitcoin has the halving events, which obviously gold doesn’t.
We also know exactly how many Bitcoins will be mined every day, something we don’t know for sure with gold or any other asset.
How To View The Bitcoin Stock-to-Flow Chart
On the chart the price trajectory is in the different coloured dots on top of the S2F line. The Stock-to-Flow model takes the Bitcoin halvings into account, which we can see the S2F line taking a steep climb every four years.
The coloured dots on the price line show the number of days until the next Bitcoin halving.
Bitcoin halvings are coded into the Bitcoin protocol and when it executes it cuts the production of newly mined bitcoins by 50%. The last one was in May 2020 and the reward for each block was cut from 12.5 to 6.25.
Halvings are scheduled to take place every 210,000 blocks, every four years or so. They will continue until the maximum supply of 21 million bitcoins have been mined into existence, in around the year 2140.
And because we know the mining and block reward schedule and the exact number of bitcoins that are and will be in circulation at anytime, it makes the Bitcoin Stock-to-Flow model arguably more accurate than the gold S2F model.
Looking at the S2F chart, we can see the price is following the stock-to-flow of Bitcoin over time. Of course the price runs away and falls short at times, but the macro trend is following the stock-to-flow even around the Bitcoin halving events.
Of course nothing is guaranteed, and even PlanB says the S2F model will fail eventually. However, he is confident it will play out this cycle, and his revision of $288,000 is very exciting indeed.
Bitcoin cycles are about 4 years long, and we’re about 2.5 years into this price cycle, so if it all goes according to plan, we should top out around the end of 2021.
PlanB doesn’t commit to the end of 2021, however. He says the price should reach that within the ‘halving cycle’ of 2020-2024.
That said, the cycle tends to top well before the halving, and then a consolidation phase pre-empts it and as we’re seeing in this cycle, a steady climb before and after the halving events.
It’s hard to imagine Bitcoin being $288,000 in just 2-4 years. However, many prominent Bitcoiners, macro analysts, and investors say we’re grossly underestimating where the Bitcoin price could be heading in this price cycle.
Only time will tell if the S2F model plays out this cycle. It’s all mathematics, but then again so is Bitcoin, and it’s shocked the world many times before.