Since the Bitcoin has been generated, strategists use different methods for predicting its price, and most of those methods are derived randomly.
Stock-to-flow is one of those methods which was developed in January 2019, by pseudonymous Dutch institutional investor who goes by the name of Plan B on Twitter. To determine the BTC price, this model uses the number of coins that are in circulation and the issuance rate.
In a time span of one year, this model has gained a lot of fans around the world and also has inspired those people who gamble on the future of Bitcoin.
The strategist can use this model to calculate the current circulation of Bitcoin with the total number of digital assets that are mined during a specific time period.
Bitcoin halving also plays an important role in this S2F model because after this process it is hard for miners to stock the crypto inventory.
Bitcoiners did not use the S2F model for Bitcoin the same way it was being used earlier for gold. Regarding this Plan B has stated that Bitcoin is a first scarce digital object in the world which is not only scarce like gold and silver but also an object which could be sent over the internet, radio etc.
Stock-To-Flow Chart Is Based On Scarcity
We all know the total supply of Bitcoin is 21 million and trying to copying or forging it is not really possible, that is because its whole of the transaction is recorded in the blockchain. And even if a person plans to spend coins from someone else’s Bitcoin address then also it is not possible, because to have access to that address the person needs private keys. That is the point scarcity comes in the picture.
In simple terms, scarcity means something which is very difficult to be found in nature or in the labs.
While relating Bitcoin’s S2F with scarcity, Plan B published a paper, which explained how its value is determined.
‘Modeling Bitcoin Value With Scarcity’ is Plan B’s paper which stated that there are some of the precious metals which who have been able to maintain their monetary role since the time they have been developed. This has happened because those metals have unforgeable costliness and a very low rate of supply.
Plan B explained the low rate of supply as scarcity. And to measure this scarcity Plan B used a metric popularly known as Stock-to-flow.
Later the premise has been translated int the hypothesis, “…that scarcity, as measured by SF, directly drives value.” Eventually, Plan B plotted S2F model of Bitcoin against the USD market capitalization, and gold and silver. Thereafter, Plan B used the logarithm of Bitcoin’s S2F metric as the independent variable and USD market capitalization as the dependent variable, to run a linear regression.
With that regression, an equation was formed .i.e., USD Market Capitalization=3.3*In(SF)+14.6.
The paper claimed that there is a statistical relationship between USD market capitalization and SF values. Also, the two data points, gold and silver, which were chosen randomly are in line with the trajectory of Bitcoin and were presented as further evidence of the hypothesis.
Plan B Used Stock-To-Flow For Bitcoin’s Price Prediction
When the S2F model was out, Plan B predicted that after the halving the price of each Bitcoin would be around $55,000. He also claimed that by the year 2020, the market capitalization of Bitcoin will be $1 trillion which in March 2019, was $72 billion. To predict the price for the year 2020, Plan B referred to the earlier halving sessions that happened in the year 2012 and 2016. When the two halvings were completed the Bitcoin experienced a surge in its market and Plan B expected that same would happen in the next halving.
Regarding it, he has said, “Halving will be make-or-break for S2F model. I hope this halving will teach us more about underlying fundamentals & network effects”.
The model predicted that by April 2020, the Bitcoin would reach near $30,000 but we all are aware that by that time it didn’t even touch 10k. This happened because of the mid-march crisis, which suddenly struck the Bitcoin market.
Stock-To-Flow Is Not As Reliable As Other Price Prediction
After Plan B’s prediction regarding Bitcoin, many of the skeptics came out and invalidated his theory.
While reviewing Plan B’s prediction the Seattle-based crypto hedge funds stated that the econometric models of S2F are very simple.
Basically, stock-to-flow is not a reliable model for bitcoin prediction because it works as the same way it works for gold and silver. Other forecasters predict the price while evaluating the previous performance of Bitcoin, but the S2F model totally depends on the scarcity.
Stock-to-flow predicted that BTC would reach $55,000 after halving but its prediction went wrong. Its creator uses the logarithm to forecast the value of Bitcoin, but its prediction could not be trusted.
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