As global markets come to a virtual halt, the architect behind bitcoin’s stock-to-flow prediction model recently reaffirmed that the number one digital currency is still on track for fresh all-time-highs

Indeed, bitcoin’s leading indicator has predicted that the number one cryptocurrency is still set climb to unseen levels sometime after the May halving event, despite its recent doldrums in price-action.

S2F and the crypto crunch

It’s true, the insane dump on the 12th of March will be remembered as one of bitcoin’s worst days in recorded history. Headlines all over the financial press showed rampant fear across all markets as everything nose-dived, most likely in response to the corona virus outbreak. Many believed that bitcoin would be a suitable hedge against markets, but it might be that the traders jumped the gun with high expectations.

However, all is not lost – far from it. Indeed, bitcoin’s network, hashing power, and sound money properties were there before the euphoric rises and subsequent market crashes, and will continue to be there long after. While some have posited the prospect of miner capitulation, suggesting more downside may be in the works, the fact remains that the mining community will adapt towards more favourable jurisdictions should these fears be realised.

Naturally, bitcoin’s immutable properties cannot change and will continue to have long-term effects on bitcoin’s price. Put simply, the stock-to-flow ratio measures bitcoin’s scarcity in order to predict the future price. Since Bitcoin’s inception, the model has been highly accurate and according to PlanB’s estimates, should see bitcoin anywhere between $50,000-$100,000 sometime during 2021.

Breaking down stock to flow

Bitcoin’s stock-to-flow ratio hypothesis was first posted in March 2019 by PlanB. The basic idea is that bitcoin is scarce and that this scarcity gives bitcoin value. Indeed, only 21 million bitcoin will ever be mined in total, 18.2 million of which are already in circulation. Scarcity can also be seen in light of the concept of unforgeable costliness, which is the original cost of mining a bitcoin or precious metals. In fact, an immense amount of electricity, expensive mining farms, labour, and time are required to mint fresh bitcoin, giving the digital asset this permanent property. For instance, a study from September found that mining a bitcoin costs between $5,100 and $8,500. When the block halving event comes to pass, this unforgeable costliness will literally double, enforcing the claim of scarcity in the process. With less than 60 days until the next halving, the clock is ticking and the game is on.

One method to measure scarcity of any commodity is visa-vie the stock-to-flow ratio, which is the circulating supply of said commodity divided by the yearly production, i.e. the stock divided by the flow. Putting it all together, the stock-to-flow ratio is a projection of how many years it would take to double the circulating supply of a commodity.

Naturally, the phenomenon can be found elsewhere. In fact, gold has a stock-to-flow ratio of 62, the highest among precious metals. This is to say that it takes 62 years to double the gold supply. Similarly, silver has a stock-to-flow ratio of 22, making it more available than gold but still relatively scarce compared to palladium and platinum which have stock-to-flow ratios of 1.1 and 0.4 respectively. On the other hand, commodities are not scare and can increase their stock-to-flow ratio. For example, if the price of platinum rises, then production will increase and thus pressure the market to return to its previous levels. Simply put, non-scarce commodities have stock-to-flow ratios near or below 1.

At the time of writing, bitcoin’s stock-to-flow ratio stands at 26.9, which is calculated by dividing 18,211,000 bitcoin by the 657,000 coins mined each year. According to this model, bitcoin is already more scare than silver, with its next target being gold. In early May of this year, the block halving will surge to 56, bringing it closer to gold’s scarcity. Fast forward to 2024 and bitcoin’s stock-to-flow will have spiked to 120, making it much scarcer than precious metals.

Understanding the mechanism behind the model

Delving deeper into the mechanics behind Satoshi’s bitcoin, PlanB found that there was a statistically significant relationship between the model and the market cap of a commodity. As one can imagine, a higher stock-to-flow ratio is associated with a higher market cap. As such, PlanB anticipated that the upcoming halving would have a multiplier effect on bitcoin’s price, as in previous halving events. This power-law relationship coincided with previous block halvings, which is to say that a relative change in one quantity leads to a proportional change in the other quantity, irrespective of the initial sizes. More specifically, PlanB found that with each cycle, bitcoin’s stock-to-flow ratio doubles, and the coin’s market cap surges by an order of magnitude. Notably, another revised efficient market hypothesis model projected bitcoin to be priced at $100,000 post-halving.

This statistic wasn’t pulled out of thin air. Instead, a Twitter user by the name of bitstein created a Twitter bot called the S2F Multiple which automatically calculates the bitcoin price forecast over the next decade based on this ratio. Upon glancing at the model, one can see how apart from three occasions when the currency broke higher than the model’s projections, bitcoin retained its trajectory within the probability bands.

Trading bitcoin

If one is willing to assume that buying and selling bitcoin and other cryptocurrencies carries above-average risk, there are several regular and margin exchanges available to enter this marketplace. Regular exchanges are typically used for beginners and allow simple purchasing of cryptocurrencies. For those who are more advanced traders familiar with margin trading like those from FX and other traditional markets, there’s also the possibility to leverage trade using bitcoin as collateral. The latter is riskier and should only be used by highly experienced traders and investors. That said, there are plenty of tutorials which show users the ropes on how to trade bitcoin.

Perspective is no guarantee

While the model isn’t useful for predicting bitcoin’s price at any given time, it allows bitcoiners to get a better understanding about how bitcoin’s fundamental monetary policy might affect the market. Needless to say, while PlanB has stated that the model is indifferent to black swan events, the reality is that nobody can be completely certain even if all the theorising and modelling is accurate. At the same time, bitcoin’s properties aren’t going away and the trillions of dollars in liquidity injections only serve to bolster arguments for sound money in a prospective free-market economy.

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