What is Stock to Flow?

Bitcoin’s value continues to be a hot topic of discussion, with various models attempting to explain its price movements.

One such model is the Stock-to-Flow (S2F), which draws attention to Bitcoin’s scarcity as a key factor in its valuation.

But what exactly is the S2F model, and how does it apply to Bitcoin?

Here’s an overview.

Understanding the Stock-to-Flow Model

The Stock-to-Flow model (S2F) is a metric used to evaluate an asset’s scarcity.

It compares the current stock of an asset to the flow of new production.

This ratio is widely discussed in the context of Bitcoin due to its capped supply and predictable issuance schedule.

Here’s how the ratio works:

  • “Stock” refers to the total existing supply of the asset.
  • “Flow” represents the new supply created each year.

For example, in the case of gold:

  • Stock: Approximately 200,000 metric tons
  • Flow: Around 3,000 metric tons mined annually

The S2F ratio for gold would be about 66.67, meaning it would take nearly 67 years to reproduce the current gold supply at today’s rate.

Applying the S2F Model to Bitcoin

Bitcoin’s fixed supply of 21 million coins and halving events (where the issuance of new coins is reduced every four years) make it an intriguing asset for the Stock-to-Flow model.

After the 2020 halving:

  • Bitcoin Stock: Approximately 18.5 million BTC
  • Bitcoin Flow: About 328,500 BTC mined per year

This results in an S2F ratio of approximately 56.3, placing Bitcoin’s scarcity close to that of gold.

The model suggests that as Bitcoin’s supply growth slows with each halving, its scarcity increases, potentially impacting its value.

For comparison:

  • Gold’s S2F ratio: ≈ 66
  • Silver’s S2F ratio: ≈ 22
  • Bitcoin’s projected S2F ratio after the 2024 halving: ≈ 112

View live stock to flow chart ->

Critiques and Limitations

While the S2F model offers a way to quantify Bitcoin’s scarcity, it has faced criticism.

Key concerns include:

  1. Scarcity versus utility: The model focuses primarily on supply, but factors like Bitcoin’s adoption, use cases, and overall market demand are not considered.
  2. Historical data and future predictions: While the model shows some correlation with past price movements, predicting future performance in such a volatile and evolving market is challenging.
  3. Oversimplification: Financial markets are influenced by numerous factors—regulatory changes, technological advancements, and shifts in public perception—that the S2F model does not account for.

These critiques highlight the complexity of market behavior and the limitations of relying solely on scarcity metrics to understand asset value.

Common Questions about Stock-to-Flow

  1. Who introduced the S2F model for Bitcoin? A Dutch investor known by the pseudonym “PlanB” popularized the model in 2019.

  2. How well has the S2F model predicted Bitcoin’s price? While there has been some correlation, experts remain divided on the long-term accuracy of the model.

  3. Are there other models for analyzing Bitcoin’s price? Yes, models like the Network Value to Transactions (NVT) ratio and Metcalfe’s Law are also used to assess Bitcoin’s value.