No matter how much you want the Bitcoin stock-to-flow or SF model to work, the truth is it will diverge hugely from the predictions it made. The SF model had been promoted by a Dutch institutional investor going by the pseudonym PlanB. It was widely acclaimed and received tremendous popularity, inspiring thousands to pin their hopes on the Bitcoin. But accuracy of this model came under scrutiny.
According to PlanB’s paper, precious metals like gold/silver have maintained a key monetary role over the years since their supply was low and they could not be forged. The argument was that the Bitcoin will follow the same path. It will keep becoming valuable because its supply will keep coming down every four years because of the halving event. Similar to gold, Bitcoin owns a big stock of existing coins compared to the yearly flow of newly-mined coins.
Gold stocks increase slowly if compared to its existing stock. This indicates that if gold mining were to stop, it will take 65 years to use up the existing stockpile. Since its stock-to-flow ratio is higher than other metals, gold is the most valuable. Bitcoin too has a high stock-to-flow ratio because volume of newly mined coins is much less compared to the existing stock. The hypothesis therefore is, as Bitcoin’s SF rises, its prices will also rise.
The model offered a rather optimistic forecast for the Bitcoin arguing that within a year’s time, its prices will shoot up to $100,000. Charlie Morris, CIO of BytTree, has put forward his theories to debunk this belief. SF models have been used over the years to predict prices of silver and gold. When applied to the Bitcoin, it assumes that its flow will come down progressively while the stock-to-flow will go up. Morris however believes that Bitcoin prices are not dictated by the supply side. Since its supply is fixed, it is the demand side which decides the price.
According to Morris, the model over exaggerates the fact that newly-mined coins are alone available for sale. The truth is anyone owning Bitcoins can sell it. He also suggested that role of miners has reduced over the years as has been proved by the ratio of revenues to market cap. At one time, miners would earn almost 50% of the market capitalization annually and impacted the prices of Bitcoins. But the situation is different now. Their economic footprint has been steadily coming down even though they continue to play a key role.
Morris brings forth another counter argument for the PlanB model stating that it does not consider Bitcoin adoption and actual use. Bitcoin has been a strong network which continues to thrive. It has existed without a CEO but boasts of high security. It has been growing and its applications increasing; while many reasons may impact its price, S2F is not. Incidentally prices of the Bitcoin have been lagging behind what had been forecasted by the model.
According to PlanB, Bitcoin mining rewards are cut down every 4 years; so, Bitcoins S2F ratio should jump every 4 years. One would think that the cutting down of supply is boosting a price surge. Now, if gold supply were to come down, it can be expected by the same logic that its prices will skyrocket. This happens because jewelers, banks, and investors fight over its fixed supply. If the S2F ratio was indeed the right indicator for prices, then gold analysts would make use of this every time.
For the Bitcoin to live up to its predictions, its energy usage problem must be resolved. Until that time, this model holds no value.