A Guide on What Is Bitcoin Stock to Flow (S2F) model and How to Use It?

Within the last few months, the bitcoin price has been quite a rollercoaster ride for investors. Bitcoin price has bounced from a high of $47,000 to trading at just around $16,000.   

What’s the next price target for bitcoin? To get a reliable answer to this challenging question, experts consult the bitcoin stock-to-flow model.  

BTC S2F, or bitcoin’s stock-to-flow model, is among the most popular models employed by a wide range of investors and traders across the cryptocurrency industry. The S2F model is extensively used to speculate on Bitcoin’s future prices. But what is it?

What is (S2F) the Stock to Flow model?

The stock-to-flow model is a widely accepted method of pricing commodities. The S2F is a model that enables investors and traders to determine assets or commodities’ possible future prices by quantifying asset scarcity in the market.  

The S2F model relies on two major attributes: stock and flow. The term “stock” reflects the total existing supply of a commodity. The term “flow” reflects the new supply of the commodity that is produced each year.  

Calculating and assessing the attribute’s value help determine the commodity’s relative abundance in the market and the price.  

The S2F model yields a number that depicts the years the asset or commodity will take to attain the current stock (supply) at the existing production rate. 

If the stock-to-flow ratio for a commodity is on the higher end, then the commodity will be considered more scarce.

Understanding Bitcoin Stock-to-flow Model

Assets such as stocks, commodities, and cryptocurrencies are extremely volatile. Investors and traders often find it difficult to make informed investment decisions, especially in the highly volatile asset category. In volatile markets, the SF or S2F model help investor and trader make informed decisions.  

There is a strong relationship between scarcity and value. As an investor or a trader, you can witness the scarcity-value relationship at play in fiat currency, gold, silver, bitcoin, and other asset markets. 

Gold, silver, bitcoin, and other scarce assets are tough to replicate, can’t be easily faked at scale, and usually have a fixed supply in the market. On the other hand, widely-sold consumable goods such as shampoos, monitors, cartridges, etc., can be easily produced at scale without friction. 

Technically, it is very difficult and astronomically expensive to mine gold and bitcoin. This property of gold and bitcoin makes them an ideal example of the term “unforgeable costliness” – coined by Nick Szabo.  

The term “Unforgeable costliness” refers to the difficulty involved in the asset production process. The Bitcoin mining process consumes an enormous amount of energy as well as a serious amount of computing power. On the other hand, mining gold is also equivalently expensive. When reserve runs low, it often leads to the extraction of low-graded materials – which is not that valuable in the market. 

When price charts are referred to, it is often found that the stock-to-flow ratio and bitcoin prices are heavily correlated. This correlation in prices makes the SF model really popular among investors and traders – because the Bitcoin Stock-to-flow model helps them forecast future BTC price valuations.  

Bitcoin’s Stock-to-flow model is critically important because it helps predict the price of the world’s most scarce digital object. The supply of bitcoin is limited because only 21 million coins can ever be produced and circulated across the economy.  

According to recent estimates, the last bitcoin should be put into circulation around 2140.  The Bitcoin Stock-of-flow model leverages the fact that bitcoin is scarce and in limited supply – which means the value will increase over the long term.

Calculating the Bitcoin Stock-to-flow ratio

The Bitcoin Stock-to-flow model help determines bitcoin’s future rate with surprising accuracy when compared to other asset class and commodities such as gold, silver, and other precious metal, which heavily rely on less precise mining or supply estimates from the respective producers.  

The Bitcoin Stock-to-flow model takes into consideration the fact that approximately 19.2 million bitcoins have already been mined out of 21 million bitcoins. To mine each block, currently, the miner receives 6.25 BTC as a reward. Since a new block is mined every 10 minutes, we can say that the annual flow of bitcoin is 328,500 BTC. 

According to above mention figures, the existing Bitcoin-stock-to-flow ratio is: 

19,171,050/ 328,500 = 58.35 

This can translate into the fact that it will take 58 years to mine the total BTC supply, excluding the maximum supply and halving.  

The term “halving” refers to an event when the rate of newly mined bitcoins setting foot into circulation is cut by half, increasing the scarcity in the market. According to experts, the upcoming halving is scheduled for 2024, so BTC’s Bitcoin stock-to-flow ratio will increase to 124. In 2024, when the halving event occurs, each block reward for mining Bitcoin is expected to become 3.125 BTC.

Factors that impact the Bitcoin Stock-to-flow model

Bitcoin outperformed most investors’ expectations in the year 2020 and 2021. The bitcoin price followed a steep upward trajectory thanks to the Covid-19 pandemic and its accompanying fiscal stimulus from the fed – the biggest growth drivers. The growth in Bitcoin prices is heavily attributed to supply-side dynamics. On the other hand, gold and silver, with centuries of price data and monetary value in society, also exploded in terms of price. Numerous investors employing the Bitcoin stock-to-flow model have experienced significant losses in the short term. The experimental nature of the technology and only a decade’s price data make bitcoin price prediction extremely difficult on the world stage. Still, the Bitcoin Stock-to-flow model is among the best tools most investors and traders have in their arsenal to mark future trajectories.

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