What is the Stock Flow Model of Bitcoin for its Price Prediction?

• The Stock Flow model is used to predict the future price of an asset based on its current and annual supply.
• The SF ratio of Gold and Bitcoin is 62 and 59 respectively. 

Gold and silver are precious metals, but have we ever wondered what makes them precious? Their extraordinary physical and aesthetic parameters are some factors along with their scarcity. They are not easy to mine/produce and it is not easy to double their rate of production. Products like soda, chips, or pencils can be easily produced and it is easy to double their production rates. Fiat currencies, on the other hand, are controlled by the government and have limited supply.

Bitcoin is similar to gold and silver. It has a limited supply and mining requires extensive computational power which exhausts huge amounts of electricity, making Bitcoin mining pretty expensive. Along with their scarcity, the Bitcoin protocol limits the Bitcoins that will be awarded to block validators. Bitcoin uses halving, a protocol under which the mining reward for a block is halved every four years. The next halving will occur in 2024 making the reward equal to 3.125 BTC.

All these factors contribute to the unforgeable costliness of Bitcoin and the stock-flow model helps in predicting the future price of Bitcoin, which can help investors consider their options while considering cryptocurrencies. 

What Is the Stock-Flow Model?

This model takes into account the existing stock/supply of an asset and compares it with the current annual production rate. This method was traditionally used for metals like gold. Let us look at the stock-flow model for gold. 

Nearly 187,000 metric tonnes of gold have been mined till now, which is the stock and the current production rate is 3000 tonnes yearly which is the flow. Now, the SF ratio for gold becomes

SF =  187000 / 3000 = 62.3

This value indicates that it will take 62 years to produce the gold which is in supply now with the current production rate. This makes gold a scarce metal. The higher the SF ratio, the higher its scarcity is reflected in its price.

On similar notions, we can calculate the SF ratio for Bitcoin as well. At the time of writing, the current supply of Bitcoins is 19,401,043 (approx 92%), which becomes the stock. Now the number of blocks produced each day is fixed to 144 and each block gives a reward of 6.25 BTC. Thus, each day 900 BTC and annually 328500 BTC are minted. 

The SF ratio then becomes,  

           SF = 19401043 / 328500 = 59.059 

Bitcoin SF Plot

This model was proposed and popularized by a former Dutch investor who goes by the pseudonym of PlanB. Although this model has performed well, historically, there exist some challenges with this model. The model is based on mathematics and does not account for the volatility and price fluctuations of Bitcoin. 

During price dips, investors and token holders may panic and start selling their tokens, decreasing the price. The movement of whale accounts can also fluctuate the price of Bitcoins. Strict regulations imposed on cryptocurrencies by governments can also affect the price, and such black swan events are not considered in the stock-flow model. 

The years 2011 and 2013 showed divergences, whereas the model remained fair from 2015 till 2021. 

Final Thoughts

There are models like the Elliott Wave Theory Model and The Fulcrum Index. The Greater Fool Theory predicts that the price of Bitcoin will ultimately become zero as there’s no underlying value in it. The last BTC will be mined in the year 2140. Although cryptocurrencies have become a storehouse of value for investors now, time can only predict which model will be correct. It will then determine Bitcoin’s true value.