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The Bitcoin Stock-to-Flow Model forecasts Bitcoin reaching astronomical heights. But is it real? And how does the S2F model project these prices?
What is the Bitcoin Stock-to-Flow Model?
The Bitcoin Stock-to-Flow Model is a bitcoin valuation model based on scarcity.
It is a linear regression model that attempts to forecast the value of Bitcoin based on its stock-to-flow ratio, or the amount of bitcoin in its existing stockpile divided by its yearly production.
S2F = stock / flow
It was created by the pseudonymous PlanB, a Dutch institutional investor that described himself as a “gold bug” before discovering Bitcoin.
S2F models have historically been used to price store-of-value assets like gold and silver.
He found a statistically significant relationship between S2F and Bitcoin’s market value, a value trajectory that also correlates to the price discovery of gold and silver, even though precious metals and digital currencies are completely separate asset classes.
Ok, S2F and Bitcoin appear to be correlated. So what?
PlanB’s model estimates Bitcoin’s market value to reach $5.5 trillion between 2020-2024, translating to a BTC price of $288K.
Update: The model failed to reach its price target in December 2021 and has since been invalidated. Although, some argue that the model has always been invalid because it’s autocorrelated (more on this later).
Understanding the Bitcoin Stock-to-Flow Model
The price of most assets is determined by supply and demand. However, we know the scarcity of some assets better than others.
The BTC S2F model has worked so well because bitcoin’s scarcity is algorithmic and predetermined.
At any given time, we know the exact Bitcoin stockpile and the exact flow rate today, tomorrow, and in 2032. This transparency and predictability differentiate BTC from every other asset.
To further explain why knowing bitcoin’s scarcity is important, let’s categorize three asset classes based on their scarcity.
#1. Semi Scarce: Apple Stock
This uncertainty is why S2F and AAPL don’t mix well — we don’t know when Apple executives will choose to increase its supply or the degree that they do.
#2. Store-of-Value Scarce: Gold
Gold is store-of-value scarce. Based on historical data, we can reasonably predict how much gold’s supply will increase year-to-year — somewhere between 1-3%.
This preserves the purchasing power of gold and benefits those who hold it. Historically, gold has been the best monetary good candidate because it has a high stock-to-flow value.
However, it’s unclear how new mining technologies or space exploration could impact supply fifty years from now.
#3. Absolute Scarcity: Bitcoin
We know Bitcoin’s supply rate with absolute certainty because it has a programmatic supply and halving schedule.
From 2020-2024, 6.25 new bitcoin will flow into circulation every 10 minutes (on average).
From 2024-2028, the amount of new bitcoin entering circulation will be halved, and miners will be awarded 3.125 BTC every 10 minutes.
So on and so forth until the year 2140, when all 21 million have been minted, and the flow falls to zero.
Stock-to-Flow Special Considerations
The supply side is known in the Bitcoin S2F model — all that is left to forecast is demand. Knowing the supply doesn’t matter if no one wants what’s being supplied.
So, how should we think about future demand?
While the past is not indicative of the future, a conversation between legendary investors Stanley Druckenmiller and Paul Tudor Jones speaks to the belief of the Bitcoin community.
Here’s Stanley Drunkenmiller:
“Paul Tudor Jones called, and he said, ‘Do you know that when bitcoin went from $17,000 to $3,000 that 86% of the people that owned it at $17,000 never sold it?’ Well, this was huge in my mind. So here’s something w/ a finite supply & 86% of the owners are religious zealots. I mean, who the hell holds something through $17,000 to $3,000? And it turns out none of them — the 86% — sold it.”
New information could surface that undermines Bitcoin, but a lot of the FUD has already been sorted out. Everything but the kitchen sink has tried to kill this thing. If Bitcoin was going to die, it would have happened by now.
The Lindy Effect is setting in — Bitcoin’s life expectancy increases with how long it has lasted.
It’s reasonable to assume that demand will too.
Updating the Bitcoin S2F Model
PlanB’s original BTC S2F model was published in 2019. It was based on monthly S2F and price data, thus classifying it as a time series model.
A year later, PlanB updated the S2F by removing time and adding silver and gold to the model, creating a new model he calls the “BTC S2F Cross Asset (S2FX) Model.”
S2FX attempts to capture abrupt phase transitions that Bitcoin might experience, and the resulting market value increases as a result.
Bitcoin’s market value has significantly increased each time its narrative changed, from “Proof of Concept” to “Payments” to “E-Gold” to “Financial Asset.”
PlanB explains how water has entirely different properties depending on its phase (or state). He then describes how phase transitions in the US Dollar have fundamentally changed it — going from gold coins to paper backed by gold to paper backed by nothing.
“Although we keep calling it Dollar, the Dollar has totally different properties in these three phases.”
When revisiting the original S2F chart, Plan B noticed four Bitcoin clusters that could potentially indicate phase transitions.
Each cluster represents Bitcoin as a different asset. Then, he added silver and gold stock-to-flow numbers to create a real cross-asset model.
The six assets form a perfectly straight line, indicating a significant relationship between S2F and respective market values, which was also supported by statistical significance tests.
The $288K price target comes from estimating the fifth BTC cluster based on its S2F ratio. Given that the asset will have a stockpile of 19M BTC in 2020-2024, its S2F will be 56.
Plug 56 into the natural function, and you’ll get $288K.
Bitcoin Stock-to-Flow Criticisms
#1. Efficient Market Hypothesis
According to PlanB, the best argument against S2F comes from the Efficient Market Hypothesis (EMH).
Since the model is based on publicly available information, like bitcoin’s supply rate, the analysis and conclusion must be already priced in.
S2F exists in the middle of the EMH spectrum; it’s not a univariate model based only on price, but it doesn’t capture all the available information that could accurately price it instantaneously.
It’s a semi-strong version of EMH that relies on multivariate data. But this is semantics. The following questions are more important to consider:
- Is S2F publicly known? If so, to what degree?
- Is S2F priced in? If so, to what degree?
- Is the 2028 halving priced in, and how would you know?
- Is the 2040 halving priced in?
If everyone knows bitcoin’s supply rate is going to be cut again in 2024, aren’t market participants factoring that into today’s price? We’re not really sure how they could.
Historically, the psychological effects ofhalvings send BTC soaring after each one.
Today, 900 new bitcoin will enter the supply. Will the severity of those effects increase or decrease when that number falls to 100 BTC per day? 10 per day?
#2. S2F is Autocorrelated & Was Invalid From the Start
The “stock” component is captured on both axes of the chart.
“Stock” is accounted for on the y-axis in market value, and again on the x-axis in stock-to-flow, so of course there’s a correlation.
This violates a lot of rules in the world of statistics.
Bitcoin Stock to Flow FAQs
Is Bitcoin stock-to-flow real?
The Bitcoin stock-to-flow model is real and has since been invalidated (while some argue it was invalid from the start). The creator has updated the original model to attempt to capture value spikes as Bitcoin transitions from one phase to the next.
How is Bitcoin stock to flow calculated?
Bitcoin stock to flow is calculated by dividing the amount of bitcoin in circulation by its yearly production. The model takes this ratio and applies historic price data to create a logarithmic chart that forecasts prices for the future.
What will Bitcoin be worth in 2030?
According to Fidelity’s stock-to-flow model, BTC will be worth $10,000,000 in 2030. This isn’t necessarily Fidelity’s price target for BTC — they’re just sharing data projections based on bitcoin’s annual inflation rate and price data.
Bottom Line: Bitcoin Stock-to-Flow Model
The S2F and S2FX models are interesting ways to model scarcity.
However, using them to calculate price targets for BTC does not seem statistically honest.
This article is for informational purposes only, and it is not intended to be investment advice. Read our editorial guidelines and cryptocurrency research methodology and framework to learn more about how we researched the Bitcoin Stock-to-Flow Model.