The Bitcoin Stock-to-Flow (S2F) Model: A Comprehensive Guide

In 2009, Bitcoin's inception introduced the world to a decentralized economy of scale. It was the first of its kind, a fully digital currency that is transferable, transparent, and predictable. In the following years, the largest cryptocurrency by market cap entered the mainstream and soared in value, reaching an all-time high of over $69,000 in November 2021. 

However, with the highs came the lows. Bitcoin, as well as the rest of the crypto market, acted in a cyclic manner, with bull and bear markets overturning each other. Due to its volatility, predicting BTC’s future price is extremely difficult. Investors and those considering investing in Bitcoin are constantly concerned about the best time to invest and whether they will profit in their desired timeframe.

This is where the Stock-to-Flow (S2F) model, one of the most effective approaches for predicting Bitcoin trends, comes in. This article will explore the Stock-to-Flow Bitcoin model's accuracy, potential, and flaws.

The Stock-to-Flow (S2F) model is a method used to quantify the scarcity of a commodity, primarily used for assessing the value of precious metals like gold and silver and, more recently, applied to Bitcoin. The model is based on two primary concepts:

1. Stock: The total amount of the commodity currently available or the supply that has already been mined and is in circulation.

2. Flow: The rate at which new supply of the commodity is produced, or the amount of new production over a specific period (like a year).

The Stock-to-Flow ratio is calculated by dividing the stock (current supply) by the flow (annual production). A higher ratio indicates that the commodity is more scarce and, therefore, potentially more valuable. For example, gold has a high Stock-to-Flow ratio, implying its scarcity and value.

In the context of Bitcoin, the S2F model gains particular interest due to the cryptocurrency's unique supply characteristics:

1. Limited Supply: There's a maximum cap of 21 million Bitcoins that can ever be mined, making it a scarce resource.

2. Halving Events: Approximately every four years, the reward for mining new Bitcoin blocks is halved, effectively reducing the flow (new supply) by half. These Bitcoin halving events reduce the flow (rate of new Bitcoin creation), which in turn increases the S2F ratio, assuming demand remains constant or increases.

Learn more about Bitcoin halving 2024 and its potential impact. 

The application of the S2F model to Bitcoin suggests that as the flow of new Bitcoins decreases over time (due to halvings), while the stock (total supply) continues to increase, albeit at a slower rate, the S2F ratio will increase. According to the model, this increasing scarcity should theoretically increase Bitcoin's value over time.

Other Factors Affecting the Bitcoin Stock-to-Flow Ratio

The Bitcoin S2F ratio can also be influenced by other factors besides Bitcoin’s limited supply and halving events. These include: 

1. Changes in Mining Difficulty: Bitcoin's network adjusts the mining difficulty approximately every two weeks to maintain a consistent block time. Changes in mining difficulty can affect the rate at which new Bitcoins are created, thus impacting the flow.

2. Adoption and Demand: Increased adoption of Bitcoin, whether by individuals, institutions, or through broader acceptance as a payment method, can influence its demand. Higher demand with a steady or decreasing supply (per the halving schedule) can impact the S2F ratio positively.

3. Regulatory Changes: Government regulations around the world regarding cryptocurrencies can significantly impact Bitcoin's demand and supply dynamics. Stringent regulations or outright bans can decrease demand or make mining more difficult, whereas favorable regulations can boost adoption and demand.

4. Technological Advancements: Innovations in blockchain technology and Bitcoin’s network, such as improvements in scalability and security, can influence its adoption and usability, thereby affecting demand.

5. Crypto Market Sentiment: Investor sentiment, driven by various factors such as global economic conditions, technological developments, or geopolitical events, can cause fluctuations in Bitcoin’s demand. Market sentiment is often influenced by media coverage and public perception.

6. Competition from Other Cryptocurrencies: The rise of alternative cryptocurrencies (altcoins) with potentially superior technology or use cases can impact Bitcoin’s dominance and attractiveness to investors, thus affecting its demand.

7. Economic Factors: Macroeconomic factors such as inflation rates, currency devaluation, and financial crises can influence investment in Bitcoin as a potential hedge, affecting its demand.

These factors can affect the balance between the stock (existing supply) and flow (rate of new supply) of Bitcoin, thereby influencing the Stock-to-Flow ratio. It’s important to consider that the S2F model is one of many tools and does not account for all possible market variables. Hence, while it provides a framework for understanding Bitcoin’s potential value based on scarcity, it should be used in conjunction with other analyses and technical indicators.

If we consider the S2F model's predictive powers, we can see that it currently shows a steady price of just above $70,000 until the 2024 Bitcoin halving.

Bitcoin Stock-to-Flow Chart | Source: LookIntoBitcoin

Once the halving occurs and newly minted bitcoins are cut in half, the model predicts BTC’s price will reach a high of just under $800,000 by 2028. 

Fun fact: PlanB made a BTC price prediction, stating that its price at the April 2024 halving will most likely be between $40,000 and $50,000. This prediction reflects his 200 weekly moving average chart and his Bitcoin S2F chart. 

Knowing how to use the Stock-to-Flow model in crypto trading could be beneficial to nailing down your long-term investing strategy. Many investors consider the Stock-to-Flow ratio of Bitcoin when forecasting future prices and implement it in their investment strategies.

According to the model's history, as a cryptocurrency's Stock-to-Flow ratio increases, so will its price. This connection can support investing decisions. 

As we can see on the Bitcoin Stock-to-Flow chart, the price has followed the S2F line consistently, with a few outlier situations due to major bull or bear runs. However, long-term investors who do not care about the peaks and valleys of day-to-day trading appreciate this model's consistency. 

The S2F model has historically shown a notable correlation with Bitcoin's price. The model predicted substantial price increases following Bitcoin's halving events (which occur approximately every four years), and these predictions have been relatively accurate in the past. However, past performance is not always indicative of future results.

While it's a good idea to consider the Bitcoin Stock-to-Flow model when investing, it should certainly not be your only point of reference. The model’s short-term inaccuracy invalidates its use for traders. Still, it remains relevant for long-term investors who see scarcity as one of the main driving factors of BTC's price increase. 

Here are some steps and considerations for incorporating the Bitcoin S2F model into your investment strategy: 

1. Understand the Bitcoin S2F Model: Familiarize yourself with the basics of the S2F model, including how it calculates Bitcoin's scarcity by comparing the existing stock (total supply) with the flow (annual production).

2. Analyze Bitcoin's Historical Data: Look at the historical correlation between the S2F model and Bitcoin’s price. Note how Bitcoin’s price has reacted to past halving events, but also be aware that past performance does not indicate future results.

3. Diversify Your Investment Strategy: Use the S2F model as one aspect of your investment strategy. Don't rely solely on it. Combine this model with technical analysis indicators, fundamental analysis metrics, and sentiment analysis factors to create a winning strategy, as it covers all the elements that impact Bitcoin’s value. 

4. Consider Market Trends and External Factors: Stay informed about regulatory changes, technological advancements, and global economic conditions that could impact Bitcoin’s price. Be aware of the sentiment in the cryptocurrency market and among investors.

5. Manage Your Risks: Understand the risks associated with relying on a single model. The S2F model, like any predictive model, has limitations and uncertainties. Set clear risk management rules for your investments, including stop-loss orders and position sizing.

6. Long-term Perspective: The S2F model is more suited for long-term investing because it focuses on gradual scarcity over time. Be prepared for volatility in the short term, as many factors beyond the S2F model influence Bitcoin's price.

7. Perform Regular Review and Adapt Your Strategy: Regularly review and update your investment strategy. The cryptocurrency market is dynamic and evolves rapidly. Be prepared to adapt your approach based on new information or changes in market conditions.

While some investors favor the S2F model, others do not and even oppose it. Let’s see what influential people have to say about the famous model:

• According to Adam Back, CEO of blockchain technology company Blockstream and an early Bitcoin supporter, a model guides some reasoning for additional points and remains within realistic error margins. 

• Many people criticized the model, especially Ethereum co-founder Vitalik Buterin. While he disputes its future value, he also states that the lack of a consistent association between price rises and the halving process is insufficient to reject S2F. 

• Cory Klippsten, the Bitcoin exchange Swan Bitcoin founder, believes PlanB is attempting to confuse his followers with his S2F model.

• Alex Krüger, a well-known crypto trader and economist, is one of the model's biggest detractors. He said he believes that using Bitcoin's Stock-to-Flow ratio to determine future prices is nonsensical. 

• According to Nico Cordeiro, Chief Investment Officer of crypto quant fund Strix Leviathan, the S2F model is a "chameleon."

Although the Bitcoin Stock-to-Flow ratio has previously shown some correlation with the BTC price, the method has certain limitations in predicting future value changes of digital assets. 

For instance, the S2F ratios do not consider important factors such as on-chain or fundamental factors that could substantially impact Bitcoin's price.

As mentioned above, the linear nature of the model cannot take into account adoption rates, black swan events, macroeconomic events, etc. All it does is create a price model based on Bitcoin's scarcity.

While fairly accurate in the past, the linear price predictions of the model might not work best in the future — only time will tell. 

The future of Bitcoin and the relevance of the Stock-to-Flow (S2F) model in its valuation are subjects of ongoing debate and speculation in the cryptocurrency community. Increased adoption of Bitcoin as a store of value, medium of exchange, or investment asset could significantly impact its price. If Bitcoin continues to gain acceptance, it might follow the scarcity-driven value appreciation suggested by the S2F model.

Future halving events will reduce the flow of new Bitcoins, potentially increasing the S2F ratio. If the model holds, these events could lead to a higher valuation for Bitcoin. However, investor expectations and other market dynamics could also play a role in determining how Bitcoin’s value will fluctuate in the market.

The S2F model itself may evolve as more data becomes available, and researchers refine the model to account for new variables and market dynamics. The emergence of more comprehensive models that account for a broader range of variables could challenge the S2F model's relevance.

The Stock-to-Flow Model has proven helpful in forecasting long-term Bitcoin price patterns in the past. Because it simplifies the process of investing, many novice investors adopt the strategy, and those just starting with Bitcoin.

However, investors should not rely solely on the S2F model, as its past accuracy does not necessarily guarantee its future accuracy. 

Using the Bitcoin S2F model in conjunction with other tools at your disposal will help you create a better overview of the market and its future potential.