Bitcoin and the Stock-to-Flow Model: Predictions, Flaws, and S2FX

The Stock-to-Flow (S2F) model is designed to determine the value of scarce assets. While often used to measure the sufficiency of natural resources, anonymous crypto analyst PlanB proposed that Bitcoin is also a scarce asset, thereby establishing the S2F model as a tool for predicting Bitcoin’s price.

The S2F Model and Bitcoin

The Stock-to-Flow model equates BTC to scarce commodities such as silver or gold. The prerequisites for this comparison include the following properties of the first cryptocurrency:

1. Mining difficulty.
2. High purchase price.
3. Limited issuance.
4. Predictable volume as defined by the protocol.
5. Reduced growth rate of BTC supply due to halving events.

According to S2F enthusiasts, the combination of these properties in a single digital resource makes Bitcoin a promising long-term asset. They are also confident that Stock-to-Flow statistical data allows for the prediction of BTC’s value.

Mathematically, the S2F model is straightforward, based on a stock-to-flow correspondence. In Bitcoin’s case, “stock” refers to all mined coins, while “flow” is the number of coins mined annually. Thus, the S2F for Bitcoin is the ratio of the total number of mined coins to the number of BTC produced each year. Proponents of the theory suggest that the ratio of stocks to flows is constantly increasing, and the value of BTC will grow accordingly.

S2F Model Shortcomings

The S2F model’s methodology is limited to predicting the future price of an asset. Applying the Stock-to-Flow model to Bitcoin ignores important factors such as:

1. Volatility: BTC price volatility is extremely high. Without estimating the asset’s volatility, S2F model predictions cannot be accurate.
2. Unpredictable events: Unexpected economic events cannot be included in the S2F model, yet economic shocks cause significant fluctuations in BTC value.
3. BTC Demand: The S2F forecasting model completely ignores asset demand, while BTC’s market value is formed by calculating both supply and demand. When considering only market supply, the S2F model cannot provide accurate price predictions.

The S2F Model Predictions for BTC

Many analysts attempting to predict the future value of BTC use the S2F model. For example, DecenTrader analysts applied the Stock-to-Flow model in June 2021 to predict new all-time highs for BTC by the end of the year. Their predictions were partly correct.

However, this forecasting model is constantly criticized. Many crypto enthusiasts do not view it as a tool for accurate value predictions. For instance, Stanford University professor Paul Pfleiderer described the S2F model as “built on assumptions with dubious connections to the real world,” possessing more credibility than it deserves. Additionally, Level39, an author for Bitcoin Magazine, argues that S2F is “scientifically invalid and has fundamental issues.”

Not all predictions based on S2F came true in 2021, which significantly undermined the model’s credibility. Here are a few S2F-based forecasts:

1. PlanB announced that BTC would exceed $47,000 in August 2021. The prediction generally held true, as the value of BTC fluctuated between $47,000 and $48,000 during the month.
2. In September, the analyst predicted a decline of BTC to $43,000, which also proved accurate.
3. PlanB expected BTC to be worth $63,000 in October, a prediction that came to pass.
4. In November, the crypto analyst suggested a further rise in BTC’s value up to $98,000; however, the model failed this time as the value fell short of surpassing the $63,000–$67,000 range over the course of the month.
5. Forecasts for December completely failed. Prices did not rise above $50,000–$53,000, despite a prediction of $135,000.

Although the author admitted the collapse of his model at the end of 2021, PlanB stated in February 2022 that S2F points to an estimate of $100,000 per BTC by 2023. This new forecast provoked a series of heated discussions within the cryptocurrency community.

S2FX: BTC S2F Cross Asset Model

In April 2020, PlanB expanded his theory and highlighted another analysis method. The theory was called the “BTC S2F Cross Asset Model” (S2FX). The essence of the S2FX model is to evaluate different assets by applying a common formula.

The S2FX model is built on Stock-to-Flow principles, making it possible to view BTC and S2F from a different angle. Specifically, the author introduced the notion of phase transitions, removing the time factor from calculations.

These phase transitions became a starting point for BTC, with the asset’s price beginning to grow after passing through them. PlanB identified four phase transitions:

1. Publication of the Bitcoin White Paper.
2. BTC parity with the USD price.
3. The first halving and parity with the price of gold.
4. The second halving.

The subsequent quantitative evaluation of BTC phase transitions and their comparison with similar phase transitions of other scarce commodities allowed the author to construct a cross-asset model. As a result, he was able to derive a universal formula for predicting the value of BTC.

According to the S2FX model, the next phase transition of BTC will occur due to the halving in 2024, allowing the asset to reach a value of $288,000.

Despite criticism of the original Stock-to-Flow model and its failures at the end of 2021, its supporters remain confident that BTC will reach the $100,000 mark next year, as forecasted by S2F. Well-known crypto analyst Matthew Hyland is convinced that after the S2F model is proven correct, the S2FX cross-asset model will be able to demonstrate its efficiency, but only after the transition to the next phase in 2024.