Stock-to-flow models compare an existing amount of stock with the flow of production and are used by analysts to make financial forecasts. The calculation divides current stock by yearly production (flow) to get an estimate of how long it would take to achieve the stock. For example, if the current stock of gold is 185 tonnes and it is produced at 3 tonnes a year, the stock-to-flow is approximately 62 years.
Due to its scarcity, Bitcoin’s stock-to-flow model is comparable to commodities like gold, silver, and platinum even though it doesn’t have a physical form. The way that these commodities retain value over long periods of time making them excellent stores of value.
As an example of a digital asset that benefits from this same scarcity, Bitcoin is often referred to as digital gold. Some critics note Bitcoin’s non-physical form as a lack of intrinsic value. However, the dedicated network of users that maintain the blockchain could be considered a modern version of intrinsic value.
In order to control supply, Bitcoin is created through the process of mining. Miners are computers that are awarded small amounts of Bitcoin for adding transactions to the blockchain. They are essentially a globally distributed network of computers that run the Bitcoin blockchain. Over time, the reward is reduced as the network grows, in an event called a halving. Bitcoin halving events are hard-coded into the Bitcoin algorithm to occur after every 210,000 blocks are mined.
In the case of Bitcoin, stock-to-flow models take into account the amount of Bitcoin produced through mining and the halving events which affect this production. They attempt to predict how Bitcoin’s value will increase over time based on both historical and upcoming ‘halving’ events.
By evaluating the current stock of a commodity against the flow of new production, one can achieve a stock-to-flow ratio. In Bitcoin’s case, this would be the amount available compared to the amount mined in a specific time period.
If a commodity achieves a high stock-to-flow ratio then it is likely used as a store-of-value (SoV) rather than an industrial material. The more scarce the commodity, the higher the ratio, making it a better store-of-value.
Image courtesy of digitalik.net
Bitcoin stock-to-flow models are usually shown in logarithmic format with a chart of the actual price for comparison.
When viewing a Bitcoin stock-to-flow chart, you will see the price generally follows the ratio line over time. The ratio line is commonly displayed as an average over 365-days so the line is far smoother than the actual price action. However, many graphs also show 30-day or even 10-day increments which more accurately reveal discrepancies.
The Bitcoin price line is often highlighted with a colored gradient to show the number of days left until the next halving. This helps us to see how the price tends to react before and after halving events. We can clearly see that the price of Bitcoin increased significantly following both of its previous halving events.
Stock-to-flow charts can also be revealing when compared to other similar assets. In an analysis by Medium user Plan B, we see a distinct correlation between BTC and the growth of silver and gold over time.
The analysis identifies specific clusters of Bitcoin price data points as the asset moves between phases of its evolution. When adding the value of silver and gold, Plan B’s graph reveals a similar trajectory for the price of BTC over time.
Stock-to-flow price models are one of the most accurate ways to see a graphical representation of the growth of an asset. Bitcoin’s stock-to-flow model is particularly interesting due to the unique way in which the supply is controlled. The fact that it so closely mimics the activity of commodities like gold indicates its strength as a store-of-value. It also gives us an incredibly clear and reliable image of Bitcoin’s price trajectory going forward.
Disclaimer: The author of this text, Robin Trehan, has an undergraduate degree in Economics, Masters in international business and finance, and MBA in electronic business. Trehan is Senior VP at Deltec International www.deltecbank.com. The views, thoughts, and opinions expressed in this text are solely the views of the author, and not necessarily reflecting the views of Deltec International Group, its subsidiaries, and/or employees.
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