If you had purchased $1 worth of Bitcoin in 2010 when 3 Bitcoins could be bought for $0.01 (1 cent, at that point 16kobo in the Nigerian currency). At its last all-time high in Dec 2017, your $1 investment would have been worth $5,835,000 (2,129,775,000 Naira in Nigeria’s currency) and today after about 85% correction. It would be worth $1,061,100 (387,301,500 Naira in Nigeria’s currency). What now, you would say, what caused such a phenomenal increase in Bitcoin’s price? And where can we expect the price to be in a couple of years down the road.

Bitcoin is deflationary

One of the reasons Bitcoin has seen such a huge price appreciation is because it is a deflationary asset. It is deflationary in that its supply is fixed and the supply cannot be increased any further. When the last Bitcoin will be mined in the year 2140, only a total of 21 million Bitcoins will ever be in existence. In an inflationary economic environment such as ours in which the currency supply can be increased at the press of a button. A deflationary asset like Bitcoin begins to absorb the excess liquidity and thus see huge price increases. The other reason why Bitcoin, as become the phenomenon that it as become, is because of its stock to flow ratio

The Bitcoin Stock to Flow ratio

First off, we need to define what the stock to flow ratio of an asset is. The stock to flow ratio of an asset is the amount of the asset held in reserve divided by the amount produced every year.

The higher the stock to flow ratio of an asset, the more desirable that asset is as a store of value. A high stock to flow ratio implies that very little of the asset is produced yearly that dilutes the amount already held in reserve.

Stock to flow ratio: Gold vs. Bitcoin

To put this point in proper perspective, we will compare Bitcoin’s stock to flow ratio to that of the traditional store of value asset- Gold

Gold has a stock to flow ratio of 63.7. this figure is arrived at by dividing the stock of gold which is roughly 172,000 tons by the annual production rate of about 2,700 tons

In the case of Bitcoin. Presently, there are about 17,000,000 Bitcoins already in existence. When Bitcoin first came into being in 2009 the block reward was 50 Bitcoins. That means that when a miner authenticates a transaction the reward for doing so was 50 Bitcoins. But, there is a brilliant function that Satoshi built into the bitcoin protocol. That function is called the HALVENING. Every 210,000 blocks or roughly after every four years, the block reward is halved! The first halving occurred in 2012 and Bitcoin reward dropped from 50 to 25 with a stock to flow ratio of about 15. keep in mind we already stated and explained above that the higher the stock to flow ratio of an asset, the more desirable the asset is as a store of value asset. Bitcoin’s next halvening took place in 2016, its block reward dropped to 12.5 bitcoins (for the block reward) and its stock to flow ration increased to around 25.

The next halvening is expected on the 25th of May 2020. This will take the block reward down to 6.25 Bitcoins and push the stock to flow ratio to about 42. Because of this halvening that happens every four years which reduces the flow of Bitcoin that dilutes existing stock by half. By 2024 when the next Bitcoin halvening occurs, Bitcoin stock to flow ratio will be 100 and by 2035 the stock to flow ratio of Bitcoin will be a staggering 400!!!

The Bitcoin Phenomenon

The idea of an electronic money that is censorship resistant, that solves the trust and double spend issues without any centralized institution or entity controlling it and that is non-confiscatable and deflationary is yet to take hold on the general population’s consciousness. The ramifications and scope of the enormous price increase that is coming for Bitcoin and the cryptocurrency space, in general, has not been comprehended yet.

The next couple of years would be very exciting once as cryptocurrency’s new economic paradigm begin to gradually usurp our current debt-based economic model