• CROX ROAD
  • Posts
  • Bitcoin and the Stock to Flow Model

Bitcoin and the Stock to Flow Model

The bitcoin stock-to-flow model is a statistical tool that is used to measure and predict bitcoin's price. It makes use of the cryptocurrency's supply and inflation rate.

Table Of Content

  • Content

  • Conclusion

  • FAQ

  • You May Also Like

  • External Links

The stock-to-flow (SF or S2F) model, in its most basic form, is a technique for estimating the availability of a given asset. A resource's stock-to-flow ratio is calculated by dividing its stockpile by its yearly output.

It is common practice to use the stock-to-flow model when discussing renewables and other non-renewables. Take gold as an example. Although estimates may vary, the World Gold Council puts the total amount of gold ever extracted at roughly 190,000 tons. The stock can be thought of as the total amount of available inventory.In the meantime, between 2.5 and 3.2 metric tons of gold are extracted each year.What we may call the flow is this sum.

Bitcoin And Stock Flow Model

Using these two indicators, we can get the stock-to-flow ratio. Sure, but what does it imply in practice? This metric is useful for illustrating the annual rate of addition to the available supply of a certain resource. When the stock-to-flow ratio is high, fresh supply enters the market at a slower rate than the overall supply. Stocks with a high stock-to-flow ratio should, in principle, be more stable investments.

On the other hand, a high stock-to-flow ratio is not usual for commodities and consumables. To what end is that? Inventories (the stock) are generally simply there to meet demand since their worth derives from being destroyed or consumed. These assets do not perform well as investments because they are not valuable as possessions.A rapid increase in price may occur in rare circumstances where a future scarcity is anticipated, but often supply is sufficient to meet demand.

A resource's value does not automatically increase because of its scarcity. For instance, there are now 190,00 metric tons of accessible gold, so the metal is not scarce. Considering the limited and stable yearly output in relation to the current stock, the stock-to-flow ratio shows that it is valued.

What is the stock-to-flow ratio of gold?

Gold's stock-to-flow ratio has historically been the highest among precious metals. I'm curious, however, about the precise sum. By dividing the entire supply of 190,000 tons by the required processing capacity of 3,200, we get a stock-to-flow ratio of 59. It would take around 59 years to mine 190,000 tons of gold at the present pace of production.

It's important to remember, however, that forecasts of annual gold production are just that: forecasts. If annual output (the flow) increases to $3,500, the stock-to-flow ratio falls to.54.

So long as we're adding things up, let's figure out how much all the gold ever mined is worth. The value of this situation is analogous to the value of cryptocurrencies on the market. Using an average price of $1500 per troy ounce, the total worth of all gold is close to $9 trillion. A single football stadium could hold all of this if it were compressed into a cube.

While the overall value of the Bitcoin network peaked at about $300 billion in late 2017, it is now worth roughly $120 billion.

Bitcoin and Stocks to Flow

If you are familiar with Bitcoin's inner workings, you will see why it could make sense to apply the stock-to-flow concept to Bitcoin. In the model, bitcoins are compared to other rare assets like gold and silver.

"Store of value resources" is a common term for gold and silver. Since they are scarce and change hands rarely, their value should be stable over the long run. In addition, it is difficult to greatly boost their supply in a short period of time.

Bitcoin is a comparable resource, according to proponents of the stock-to-flow methodology. There can only ever be 21,000,000 of these made, and they're expensive to make. The protocol-level definition of Bitcoin's supply issuance also ensures a constant and predictable flow. Another phenomenon you may have heard of is the Bitcoin halving, which occurs every 210,000 blocks and reduces the quantity of new bitcoins being added to the system by half (roughly four years).

Bitcoin And Stock Flow Model

The model's backers argue that the combination of these traits creates a rare digital resource with deeply attractive attributes that will ensure the asset's value is maintained throughout time. Assume further that stock-to-flow has a statistically significant correlation with market value. The model predicts that when Bitcoin's stock-to-flow ratio decreases, its price will rise dramatically.

PlanB's essay Modeling Bitcoin's value with scarcity is often cited as the inspiration for applying the stock-to-flow model to bitcoin.

What is the stock-to-flow ratio of bitcoin?

There are currently over 18 million bitcoins in circulation, with an annual supply of approximately 0.7 million added.As of this writing, Bitcoin's stock-to-flow ratio is about 25. The ratio will rise to the low 50s after the next halving in May 2020.

See how the yearly moving average of Bitcoin's stock-to-flow ratio has correlated with its price over time in the chart below. The BTC price line is color-coded to show when each halving occurred.

The limitations of the Stock-to-Flow model

Stock-to-flow is a novel approach to assessing scarcity, but it overlooks certain key factors. All models are only as good as the data they use. To begin with, Stock to Flow makes the presumption that scarcity, as quantified by the model, should drive value. Stock-to-flow naysayers argue that the cryptocurrency is useless if it just has one redeeming feature—its limited quantity.

Gold's limited supply, steady supply, and widespread availability make it a more reliable store of value than paper currencies, which are vulnerable to inflation and devaluation.

This model suggests that Bitcoin's volatility should likewise diminish over time. Coinmetrics's database of past prices proves this to be true.

Consideration of an asset's volatility is necessary for determining its value. It's possible that the valuation model will be more accurate if volatility is foreseeable to some degree. Bitcoin, though, is infamous for its extreme price swings.

Bitcoin's value has always been determined by the open market, even if market volatility is decreasing. This indicates that consumers, dealers, and speculators mostly self-regulate the price on the open market. When combined with its limited liquidity, this makes Bitcoin more volatile than other investments. Consequently, this is something the model may not be able to take into consideration either.

This model is vulnerable to a number of outside influences, including economic "Black Swan" catastrophes. In any case, it's important to remember that this is true of pretty much every model that attempts to forecast the price of an asset using past data. One of the defining characteristics of a black swan occurrence is its unexpectedness. Unknown occurrences cannot be accounted for by using past data.

Conclusion

Stock-to-flow analysis considers how much of a resource is presently on hand in proportion to how quickly it can be put to use. It's usually used in reference to commodities like gold or silver, but there's considerable speculation that Bitcoin fits the bill as well. Bitcoin might be seen as a limited supply of cyber currency in this context. This line of thinking suggests that Bitcoin's unique selling points should make it a durable asset. However, the model's reliability depends on the accuracy of its assumptions, and it may not take all factors into account when determining Bitcoin's worth. Coincidentally, Bitcoin has only been around for a little over 10 years as of this writing. Arguments might be made that a bigger data collection is required for long-term valuation methods like stock-to-flow to provide useful results.

Bitcoin And Stock Flow Model

FAQs

What is the bitcoin stock flow?

The ratio of fresh supply to total supply may be calculated using a stock-to-flow model. Investors use Bitcoin's stock-to-flow ratio to forecast the currency's value.Bitcoin is unique in that the rate at which it is being created is independent of its value.

Why is the stock-to-flow Bitcoin valuation model wrong?

The second issue is that the outcomes of today's value are dependent on yesterday's value since the model is autocorrelated. After making that correction, the R-squared (R2) statistic becomes null. Stock-to-flow makes no sense and cannot be utilized as a pricing model, according to the scientific method.

Is there a correlation between Bitcoin and the stock market?

When bitcoin volatility is taken into consideration, there is a weak correlation between cryptocurrency and stock prices. The value of cryptocurrencies is affected by many of the same forces that move stock markets. To the average investor or trader, cryptocurrency is like another stock, and as a result, its price movements closely mirror those of the stock market.

That's all for today, see ya tomorrow! If you want more, be sure to follow our Twitter (@croxroadnews)

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.

You May Also Like

External Links

Links From Our Sponsors

If You Like Our Content And Want To Help Us To Make It Better, You Can Buy Us One (Or More!) Coffee CLICKING HERE

Reply

or to participate.