I realized I have never posted about the seminal Stock-to-Flow modeling done by PlanB earlier this year. This is content that is simply MUST READ for anyone interested in Bitcoin.
In this paper, PlanB quantifies Bitcoin’s scarcity using stock-to-flow, and then uses stock-to-flow to model bitcoin’s value. His model finds a statistically significant relationship between bitcoin’s stock-to-flow and market value, and has an approximately zero probability the relationship is random. This model gives us an extremely useful tool for predicting bitcoin’s value in the future because bitcoin’s stock is determined by a simple algorithm and is therefore highly predictable.
Stock-to-flow is the ratio of a commodity’s outstanding stockpile (stock) to the amount of the commodity produced in a year (flow). Bitcoin has an asymptotic supply schedule, meaning production of new bitcoins is front loaded and tails off over time. The majority of bitcoins have already been produced (~18M) and over time fewer and fewer will be produced until we reach the fixed hard-cap of just under 21M bitcoins in 2140. This emission schedule results in a larger and larger stock-to-flow ratio over time—the stock grows slowly towards 21M while the flow declines towards zero.
His model shows that scarcity, measured by stock-to-flow, directly drives market value of a commodity. The more scarce the commodity, the higher the value. Statistically speaking, his model shows that over the course of Bitcoin’s existence, 95% of the variance of bitcoin’s market value is predictable from its stock-to-flow ratio. This is astounding considering the general volatility in the bitcoin price, big price moves due to fundamental events such as major exchange hacks and government regulation, and major market manias and crashes.
Interestingly, previous commodity moneys such as gold and silver also fit nicely with the model based on stock-to-flow. It seems the stock-to-flow model may have also figured out how to value commodities such as gold that don’t have cash flows and therefore cannot be valued using traditional valuation models.
As a reminder, we are approximately 6 months from the next bitcoin block reward halving, which will cut the flow in half and thus cause the stock-to-flow ratio to double. As PlanB notes, this predicts a price of $55,000 per bitcoin after the halving in May 2020. This does not even factor in a parabolic price move similar to what has occurred after previous halvings in which the bitcoin price spikes to multiples of the stock-to-flow implied price. The current price of bitcoin is ~$7200 today.
If you liked this article and want to learn more, here are a few podcasts with PlanB in which he discusses the stock-to-flow model further.
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