Measuring Scarcity with Bitcoin Stock-to-Flow Model

 

The Bitcoin Stock-to-Flow (SF) model was popularized by a pseudonymous, Dutch Institutional Investor named @100trillionUSD on Twitter.

It explains price action using a ratio traditionally used for scarce assets like Gold, Silver, and Platinum.

While most people think of Digital Assets such as Bitcoin as a means of exchange, acting as a store of value and a hedge against inflation is currently its most proven use case.

And that use case will grow stronger by the day as more corporations add Bitcoin to their balance sheet and legendary investors such as Stanley Druckenmiller continue to add it to their personal portfolios.

As we know, a store of value is anything that both retains and increases its value over long time frames. In the case of Bitcoin, this price action is due to its relative scarcity.

In other words, as a store of value becomes less abundant and more difficult to obtain, the higher the price.

For example, Gold has been around since money was first invented and has withstood the test of time both as a means of exchange and a store of value.

Gold is successful as a store of value because it has a proven track record. It’s difficult to find, and mine and its price have increased over time, especially during uncertain market conditions.

While we do have estimates, we don’t truly know how much gold is left on the earth, and we don’t have a way to measure its true scarcity or lack of abundance. But the new supply is fairly constant.

Bitcoin, on the other hand, halves its new supply every 4 years. Bitcoin programmatically creates scarcity in an immutable manner. Without getting lost in the technical details, suffice it to say that we know exactly how many Bitcoin will ever be created and the rate at which they will be introduced to supply.

In fact, a key feature of its blockchain is to not only record transactions but to periodically decrease new supply during what’s called “the halving.” The rate at which new Bitcoins are introduced will halve approximately every 4 years until it reaches zero. This is drastically different from gold on the supply side.

Take this dwindling supply-side and match it with the exponential growth of demand, which is underway, and you can see the next logarithmic move up in price action. The next valuation plateau for this halving is projected at approximately $250,000 per Bitcoin.

It’s the first time in monetary history that an asset scarcity can truly be measured and planned for, all on open-source ledgers that are not subject to monetary policy or political whims.

There will only be 21 million Bitcoins ever produced, and more is lost every passing day. Bitcoin is the first digital asset ever that cannot be forged, duplicated, or copied.

Key Takeaways

  • The Stock-to-Flow (SF) is a way to measure Bitcoins scarcity and price action after every halving.
  • Supply is halved. Demand grows exponentially.
  • The “Halving” is programmed into Bitcoins codebase, causing the supply to be cut in half every 4 – years while doubling the mining cost overnight.
  • Bitcoin is a better store of value than gold due to its measured scarcity and rapidly diminishing supply.
  • SF post-halvening target: $250-500k BTC-1

Measuring Scarcity with Bitcoin Stock-to-Flow Model

 

According to Bitcoin Stock-to-Flow (SF), scarcity is the primary reason Bitcoin has value, and the diminishing supply leads to an increase in price after every halving.

The Stock to Flow ratio is defined as “The amount of a commodity held in inventories divided by the amount produced annually. It is a measure of abundance.”

By applying the Stock-to-flow (SF) ratio to Bitcoin, we can predict upcoming price action post halving and plan accordingly.

What is the Halving?

 

The Halving is the number of coins that Bitcoin miners receive to secure the Bitcoin network. The reward gets cut in half every 210,000 blocks, which equates to roughly every 4 years. This essentially cuts the profit of mining Bitcoin in half overnight.

Would you start a business in an industry if they told you the profit of doing business would be reduced 50% every 4 years?

There aren’t many businesses that could survive this, and most entrepreneurs would look elsewhere unless what they were selling made up for that loss. However, miners operating costs mean that the price they will sell their Bitcoin tends to rise sharply after these cuts in profits.

With Bitcoin, the price has risen sharply with each halving, allowing miners to cover both rising and fixed costs to stay in business.

It’s more than doubled in price over its history, allowing miners to stay in business and investors to hedge against inflation.

Bitcoin is the best-performing asset of the last 10 years, and the underlying fundamentals grow strong with each halving as more daily active users join its network.

How does Bitcoin Stock-to-Flow predict price Action?

 

To put it simply, the Stock-to-Flow (SF) model historically equates to growth in price starting around 100 days post halving due to the cost of mining bitcoin going up and the supply being cut in half.

This is classic supply and demand at work: The fewer bitcoins created and the harder it becomes to extract them, the more valuable the Bitcoins that already exist are.

The stock is the size of the existing stockpiles, while the flow is the yearly production.

Bitcoin has a fixed supply, and there will never be more than 21 million ever created. The Bitcoin Stock-to-Flow ratio supports the hypothesis that scarcity drives value and that price increases after each halving event.

This effect is multiplied by the fact that some Bitcoins are lost every day due to transactions sent to wrong wallet addresses or private keys being lost.

More people than ever are incentivized to hold their bitcoin instead of spending it.

There is currently amounting supply problem as large companies such as Square and Paypal purchase most of the new Bitcoin created daily.

What Else Affects Bitcoins Price Post Halving?

 

Bitcoin is now widely accepted as a hedge against inflation due to its proven history of sharp price increases post halving. Additionally, more institutional investors have accepted it as a replacement for Gold.

Additionally, corporations seek out treasury management solutions and are interested in creating a Bitcoin strategy to add it to their balance sheet.

Because the supply will continue to be cut in half every 4 years, and more investors are interested in buying and holding, it will drastically reduce the flow of Bitcoin onto the market.

Bitcoin also has a powerful network effect as more users believe and accept it as a key part of the monetary ecosystem.

While historically, Bitcoins’ rise in price has been driven largely by psychology and speculation, its underlying fundamentals as the network grows are too strong to deny.

Paul Tudor Jones just recently came out and said that the $500 billion market cap for Bitcoin is all wrong “In a world where you’ve got a $90 trillion equity market cap, and God knows how many trillions in fiat currency.”

When you analyze all the data, it points to a severely undervalued Bitcoin with significant room to grow and integrate itself into the world’s monetary system.

Is Bitcoin Stock-to-Flow an Accurate Predictor of Future Price?

 

The Bitcoin Stock-to-Flow ratio was widely accepted and celebrated by the Cryptocurrency community when it was first released in 2019.

However, there is some debate about whether or not it’s an accurate predictor of price due to what’s called a “Chameleon Model.”

Like all models, Bitcoin Stock-to-Flow (SF) is based upon assumptions about the world around us at that particular point in time.

New variables come into play, and some are no longer relevant, impacting the accuracy of models.

As we all know, past results are not representative of future returns, but some patterns continue to show up over time.

With Bitcoin, this pattern has been mapped and measured with its last 3 halvings.

While you can argue against specific price predictions, such as the one from Citibank that has Bitcoin reaching $318,000, no one can deny the underlying strength of Bitcoin fundamentals, especially if it overtakes Gold.

More people are buying into Bitcoins narrative as a replacement for Gold than ever before.

Gold’s market cap sits at $9 trillion while Bitcoins is roughly $600 billion and data supports a strong indication that it’s here to stay and has a lot of room to grow.

According to a study from Blockchain Capital:

  • 1 in 3 Americans say they’re likely to buy Bitcoin in the next 5 years
  • 41% of Americans think it’s likely that most people will be using Bitcoin in the next 10 years
  • 1 in 3 Americans expect Bitcoin to exist longer than the Euro

Bitcoin is especially accepted by the younger generation (aged 18 – 34) according to the following data points from the same study:

  • 38% to own $1,000 of Bitcoin to $1,000 of government bonds (30% increase over Spring 2019)
  • 35% prefer to own $1,000 of Bitcoin to $1,000 of stocks (27% increase over Spring 2019)
  • 33% prefer to own $1,000 of Bitcoin to $1,000 of real estate (24% increase from Spring 2019)
  • 31% prefer to own $1,000 of Bitcoin to $1,000 of gold (22% increase from Spring 2019)

Bitcoin is currently adding 1 million new wallets per month, moving $1 billion in value worldwide per day, and is being held in 100 million wallets.

When looking at those data points, Bitcoin is currently undervalued compared to Gold and has massive upside potential whatever price you think it will hit in the near future.

This article is for informational purposes only and does not constitute an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. This does not constitute a recommendation or take into account the particular investment objectives, financial situations, or needs of investors. There is not enough information contained in this document to make an investment decision.