Bitcoin Stock to Flow: Is the S2F Model a Good Bitcoin Price Indicator?

Bitcoin Stock to Flow: Is the S2F Model a Good Bitcoin Price Indicator?

If you have been following Bitcoin, you will have probably come across the Bitcoin stock-to-flow (S2F) model and wondered whether it makes for a good bitcoin price indicator. Read on to learn what the Bitcoin S2F model is, how it works, and whether it can accurately predict the price of bitcoin or not. 

What Is the Bitcoin Stock-to-Flow (S2F) Model?

The Bitcoin stock-to-flow model is a tool that attempts to forecast the price of bitcoin by comparing its current supply to its annual production rate.

The model was first published in March 2019 by pseudonymous bitcoin trader Plan B and has predicted the price of bitcoin correctly on several occasions.

Before bitcoin, the stock-to-flow model was used to predict the price of commodities and precious metals like gold and silver. This is because all these assets share one thing in common – scarcity

Gold, for example, has a limited supply due to the time-consuming and expensive process of searching and mining for it.

In the same vein, bitcoin is also a scarce asset because of its coin supply cap and how new units of bitcoin are minted. The production of new coins follows a process known as “mining,” which involves using expensive mining hardware and lots of electricity. Additionally, bitcoin’s maximum supply is capped at 21 million coins, with about 19 million already in circulation. Hence, the stock-to-flow model leverages the increasing scarcity of bitcoin to predict its price.

This has shown that the model shows a good level of accuracy with scarce assets. However, when tried on assets like fiat currencies that have an infinite and uncontrollable supply, the stock-to-flow model may be very inaccurate.

How Is Bitcoin S2F Calculated?

In the S2F model, stock refers to the existing stockpiles or reserves of an asset and flow refers to the annual rate at which it is produced. To get the stock-to-flow ratio of an asset, you will have to divide its existing supply by its annual rate of production.

The Bitcoin stock-to-flow ratio is obtained when you divide its current circulating supply by the annual rate of mining new coins.

Bitcoin currently has a supply of about 19 million and an annual flow of 328,500 BTC (based on the number of current block rewards). This data is obtained from the supply schedule, which is built into the code of Bitcoin. 

A block on the Bitcoin blockchain is mined approximately every 10 minutes, and miners receive a current block reward of 6.25 BTC in newly minted tokens for every block they mine. The Bitcoin mining difficulty algorithm ensures that around 144 blocks are mined daily, which gives a total of 900 blocks per day. Hence, the current bitcoin annual flow of 328,500 BTC.

By applying the S2F formula, the current S2F ratio will be 57.712. This signifies that it will take about 57 years to mine the total bitcoin supply without considering the halving events and supply cap. The model, therefore, suggests that the price of bitcoin can be predicted since we know the exact supply rate of bitcoin.

The S2F ratio changes with time as the supply rate of bitcoin reduces through halvings. Halving is a scheduled event on the Bitcoin blockchain that reduces block rewards every 210,000 (about four years) until the maximum supply of 21 million coins is reached. Hence, the S2F rate increases over time as annual flow reduces.

For example, the ratio was 25 in 2019 before the halving event of 2020. Currently, it hovers around 57.7. After the Bitcoin halving in 2024, it will climb to 124. Hence, a high ratio signifies a reduction in flow rate and an increase in the price of bitcoin.

Considering the price spikes that often occur at Bitcoin halving events, many investors use the S2F model as one of their bitcoin price forecasting tools.

How Accurate Has the Bitcoin S2F Model Been? 

The historical predictions of the stock-to-flow model have been fairly on target, especially in the first few years of its invention. In a chart published by Plan B in 2019, the price of bitcoin was a little below the price from the S2F predictions.

Plan B later published an article on Medium in 2019 stating that after the Bitcoin halving in 2020, the market capitalization of bitcoin would touch $1 trillion translating to a price of $55,000.

In the first few months following his predictions, the price of bitcoin was far from reaching such heights, trading at $11,118.92 as of July 2020, according to Statista. However, nine months after the article (February 2021 to be precise), the market capitalization of bitcoin skyrocketed above $1 trillion, with its price trading around $56,000.

This was the last time that the S2F predictions have been close to accurate.

Bitcoin Stock to Flow: Is the S2F Model a Good Bitcoin Price Indicator? - 1

A look at Plan B’s chart for 2021 and beyond shows the S2F model predicting that bitcoin should be trading at around $100,000 in 2022. But the accuracy is far from accurate as bitcoin is currently trading at around $30,194.17 (June 1, 2022), more than 70% below the S2F predictions.

This reveals that the S2F model has limitations in determining the price of bitcoin. The only variables used in the predictions of the Bitcoin S2F model are the supply of bitcoin and its relative scarcity without any consideration for demand.

But the basic law of Economics reveals that the two most important factors in pricing any asset are demand and supply. And as demand is determined by humans, it constantly changes as our preferences change.

Several factors can influence demand including regulations, market volatility, bitcoin news, perception, climate, etc.

For example, the price of bitcoin crashed in May 2021 following several concerns about the environmental impact of bitcoin’s method of reaching consensus. As a result, many people dumped their coins, and some countries like China banned the use of cryptocurrencies.

Additionally, other variables have come into play within the crypto market since the invention of the Bitcoin S2F model.

The crypto market is still young compared to other assets or financial markets, hence leaving room for significant changes. For example, innovations like DeFi made headlines in 2020, NFTs sent shocking waves across the entire crypto market in 2021, venture capitalists are pumping more funds into crypto projects and DAOs are looking to become the talk of 2022.

Taking the demand factor and changing market conditions into consideration, it’s safe to state that the price of bitcoin may not always follow the predictions of the Bitcoin S2F model.

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Is the S2F a Good Indicator for Bitcoin Investors?

Some investors have been utilizing the S2F ratio when making bitcoin investment decisions as it has fared quite well historically. 

In 2022, however, the price of bitcoin is quite far off from its Bitcoin S2F predictions. That again, we can’t say for sure what the remaining months of the year have in store for bitcoin.

A critical factor to consider for your bitcoin investment strategy is whether you are investing for the long-term or short-term. The S2F model has performed better when viewed in longer timeframes than shorter ones.

Although the S2F model is limited as it only takes two factors into account (current supply and annual production), keeping an eye on it may still prove to be useful for medium to long-term investors looking to add or reduce their positions. 

However, depending on it as the sole indicator to make bitcoin investment decisions is probably not a good idea.