Imagine you're a child who loves collecting rare stickers. Some stickers are common and easy to find, while others are incredibly rare and much more valuable. Now, let's think about Bitcoin as one of those rare stickers. This is where the concept of scarcity comes into play, and a fascinating model called the "Stock-to-Flow" (S2F) helps us understand why Bitcoin might be considered so valuable.
What is the Stock-to-Flow Model?
The Stock-to-Flow model is a way to measure the scarcity of a particular asset. It was originally created by a financial analyst who goes by the pseudonym "PlanB". He used this model to predict Bitcoin's price by examining its scarcity.
In simple terms, the S2F model compares the current stock (total amount available) of an asset with its flow (the amount produced each year). For example, if we think of gold, the stock is all the gold ever mined, and the flow is how much gold is mined each year.
How Does S2F Apply to Bitcoin?
Bitcoin is like digital gold. There will only ever be 21 million Bitcoins, which makes it scarce. To create new Bitcoins, miners solve complex puzzles, and this process gets harder over time, slowing down the production rate. This means the flow of new Bitcoins decreases over time, making Bitcoin scarcer and scarcer.
The S2F model uses this concept to predict Bitcoin's price. It suggests that as Bitcoin becomes more scarce, its price should increase. If we look at the chart below, we see Bitcoin's price (in colourful dots) closely following the S2F model (in grey). We will discuss colours of dots in future. For now, we are trying to understand its concept. This has happened consistently over the past decade.
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Stock2Flow on Coinglass[/caption]
Bitcoin vs. Gold in S2F Terms
Let's compare Bitcoin and gold using the S2F model:
- Gold: Gold has been around for thousands of years. There's a large stock of gold already mined, and each year, a relatively small amount is added to this stock. This gives gold a high S2F ratio, indicating it is very scarce.
- Bitcoin: Bitcoin, although only around since 2009, also has a high S2F ratio. The stock of Bitcoin is increasing at a slower rate because the creation of new Bitcoins is halved approximately every four years (an event known as "halving").
In terms of S2F, Bitcoin's ratio is expected to surpass that of gold in the future, making it even scarcer. This is one reason why many believe Bitcoin's price will continue to rise over the long term.
The Results and Future of Bitcoin's S2F Model
So far, the S2F model has been remarkably accurate in predicting Bitcoin's price. This accuracy has made it a popular tool among Bitcoin investors. However, it's important to remember that no model can predict the future with 100% certainty. Factors such as government regulations, technological changes, and market sentiment can all influence Bitcoin's price.
Looking ahead, the S2F model suggests that Bitcoin's price will continue to rise as it becomes more scarce. If the past is any indication, and if Bitcoin continues to follow the S2F model, we might see significant price increases in the coming years. As per S2F the price can increase to $400K till Q3 of 2025 but again, no model can predict the future with 100% certainty.
Summary
In summary, the Stock-to-Flow model is a useful tool for understanding the value of scarce assets like Bitcoin. Created by PlanB, it compares the current stock of an asset with its flow to measure scarcity. Both Bitcoin and gold have high S2F ratios, but Bitcoin's is expected to surpass gold's, potentially driving its price higher in the future.
While the S2F model has been accurate in the past, always remember that investing in Bitcoin, like any investment, comes with risks. It's an exciting space, but it's crucial to stay informed and cautious as the landscape evolves.
