Intermediate Series

What Is Bitcoin’s Stock-to-Flow Model?

With its prediction of bitcoin AU$1 million per coin by 2025, the stock-to-flow model has received a lot of attention. It then gained credibility as bitcoin's price has now roughly followed the model for over a decade.

While the stock-to-flow model has been traditionally applied to precious metals like gold and silver, bitcoin now being seen as ‘digital gold’ along with its fixed supply makes it a good fit for the model. The idea is simple: as bitcoin’s scarcity and demand continue to increase, so will its price.

Contents

  • Why does scarcity matter?
  • What is stock-to-flow?
  • What is bitcoin’s stock-to-flow?
  • What's the bitcoin price prediction based on the stock-to-flow model?

Why does scarcity matter?

As the stock-to-flow fundamentally measures the scarcity of an asset, we must first ask, why does scarcity actually matter? Like most economic questions, it comes down to a matter of supply and demand.

Usually, when the price of something rises, producers respond by making more of it. For example, when the demand for corn increases, the price increases and farmers plant more corn. When the crop is ready, the supply increases and the price drops.

Scarcity emerges when the amount of something cannot be easily increased. As it’s harder to mine gold than grow corn, gold is much more scarce. As Saifedean Ammous wrote in The Bitcoin Standard, “It is this consistently low rate of supply of gold that is the fundamental reason it has maintained its monetary role throughout human history.”

Satoshi Nakamoto, the pseudonymous creator of bitcoin, understood the importance of scarcity. He wrote, “Imagine there was a base metal as scarce as gold but with... one special, magical property: [it] can be transported over a communications channel.”

Well, that’s exactly what he created with bitcoin; a digital version of gold, except it’s even more scarce, and can be sent across the internet to anywhere in the world with the click of a button. It’s the perfect money for the digital age.

Moreover, bitcoin is the first commodity in history that has a fixed supply. As only 21 million bitcoins are going to be produced, when the demand rises, the price must rise as well. This is what makes bitcoin so exciting for investors.

Of course, bitcoin’s price will only continue to rise if demand grows as well. So do people really want a more scarce and digital version of gold that can be sent anywhere in the world instantly?

Well, there are over 100 million people using crypto and bitcoin is the leading asset. Not to mention, it’s been the best performing asset of the past decade.

What is stock-to-flow?

Stock-to-flow is a tool that helps measure how scarce a commodity is. It’s calculated by taking the existing amount of a commodity (the stock) and dividing it by the additional amount of the commodity produced over the year (the flow). Essentially, the more existing stock that exists compared to the new flow being produced, the higher the stock to flow—and the more valuable the resource.

Here are the key factors of the model:

  • Stock = The total amount of a resource that exists.
  • Flow = The additional amount of a resource produced annually.

The formula for calculating stock-to flow is:

  • Stock-to-flow = Stock / Flow

As an example, let’s calculate gold’s stock-to-flow:

  • Stock = 197,576 tonnes
  • Flow = 3,000 tonnes per year
  • 197,576 / 3,000 = 65.85

This means it takes 66 years of gold mining to double the amount of gold that’s already being held by people around the world. In comparison, silver has a stock-to-flow of 22. This helps explain why gold costs AU$79,107 per kilogram and silver only costs AU$1,1051.

What is bitcoin’s stock-to-flow?

Bitcoin’s stock-to-flow model was created by a pseudonymous Twitter user known as PlanB, although he claims to be a Dutch institutional investor with a legal and quantitative finance background that manages around $100 billion in assets. He has taken the traditional stock-to-flow model and used it to help predict the value of bitcoin. So far, his predictions have been on track.

Let’s calculate bitcoin’s stock-to-flow. From the year starting August 2020, the number of bitcoin in circulation increased by 900,000, from 17.9 million to 18.8 million.

This makes bitcoin’s current stock-to-flow:

  • 18.8 / 0.3 = 63

As you can see, at 63, bitcoin’s stock-to-flow is already approaching that of gold. “Around the year 2022, Bitcoin's stock-to-flow ratio will overtake that of gold”, wrote Saifedean Ammous. And this number is only going to get better for bitcoiners.

Every four years, the number of bitcoins produced by miners decreases by half. When bitcoin first launched, the reward was 50 bitcoins per block. In 2012, it halved to 25 bitcoins. In 2016, it halved again to 12.5 bitcoins. As of August 2021, miners gain 6.25 bitcoins for every new block mined.

Can you see where this is going? Bitcoin’s stock-to-flow is going to keep rising every four years, to the point where there is practically zero new supply. That means that bitcoin’s price will be entirely driven by demand. Naturally, this leads to some bullish price predictions.

What's the bitcoin price prediction based on the stock-to-flow model?

PlanB’s stock-to-flow price predictions for bitcoin uses over a decade of price data and supply data to inform the model. It’s created some bullish price predictions, which have proven accurate over the past year, including the recent all-time high.

Here are bitcoin’s price predictions using the stock-to-flow model:

  • Over AU$100k by the end of 2021
  • Over AU$1 million by 2025

It’s important to keep these predictions in perspective. As the CEO of Blockstream, Adam Back, said, “One should think about [PlanB's stock-to-flow] model like Moore's Law: it's just an observation and speculative projection an observed trend may continue.”

The key thing to take away from this model is that it shows how scarcity can affect the price. As bitcoin is the first asset with a fixed supply in history, its price will be completely driven by demand. So if bitcoin’s adoption continues to rise exponentially, so will its price.

If you’re interested in seeing what it’s looking like right now, here’s where you can see how bitcoin’s price is performing.