In brief

  • Stock-to-flow is a ratio that measures a commodity’s outstanding stock against fresh market inflows.
  • For Bitcoin, this model has been used to predict astronomical price rises following the upcoming third Bitcoin halving.
  • While some Bitcoiners cling to this model as mathematical proof that “number go up,” others are certain that the halving is already “priced in.”

Is the price of Bitcoin hard coded to pump every four years? Some market analysts believe so.

It’s a theory that stems from Bitcoin’s so-called “stock-to-flow” modelan economic concept that is more commonly used to measure abundance (or availability) of precious metals such as gold and silver.

The theory is centered around the Bitcoin halving, set for mid-May, which will see Bitcoin’s mining rewards cut down the middle and therefore slow down the supply of Bitcoin and create greater scarcity. And the latest stock-to-flow model from its originators in the crypto world, PlanB, is predicting that the price of Bitcoin will skyrocket to $288,000 by 2024.

But even as some Bitcoin holders literally buy into this model, other analysts argue that Bitcoin’s price, like every other market asset, is driven by fundamentals and market demand. 

So who’s right?

A heated debate

Bitcoin’s design is rooted in mathematical certainty: the supply is hard-capped at 21 million, the inflation rate is predictable, and the network has built-in mechanisms such as the mining difficulty adjustment to manage how quickly new Bitcoins enter the ecosystem.

In Bitcoin, code is law. And perhaps the most important law is the one that controls Bitcoin’s inflation rate: the halving, which is set for May 12. On this date, the amount of Bitcoin entering circulation every block will be cut in half, causing what amounts to a small supply shock.

Stock-to-flow advocates point to the two prior halvings which saw Bitcoin’s price rip through its previous all-time-highs, and use gold and silver’s own stock-to-flow models as a touchstone. Stock to flow refers to the outstanding supply of a commodity (stock) when measured against how quickly new supply of that commodity enters the market.

While stock to flow as an economic concept is nothing new, it was more or less unknown in the world of Bitcoin until one anonymous quant ran the numbers. 

PlanB published “Modeling Bitcoin's Value with Scarcity” a little over a year ago, the seminal article in a blossoming theory that has captured the imagination of Bitcoin’s faithful. The article’s thesis, which sums up the stock-to-flow impact on Bitcoin’s price, is fairly simple.

In PlanB’s words: “this hypothesis … is that scarcity, as measured by S2F, directly drives value.” Put another way, Bicoin’s scarcity is just as calculated as any other metric if we factor in Bitcoin’s outstanding stock to the incoming flow.

Tracking blockchain and market trends from the earliest available data, PlanB uses the number of blocks each month and the value of each subsidy to calculate Bitcoin’s stock-to-flow rate. 

“Bitcoin currently has a stock of 17.5m coins and supply of 0.7m/yr = SF 25,” according to PlanB’s model. Put differently, this means that it would take 25 years for miners to mine enough Bitcoin during the current issuance to match Bitcoin’s outstanding stock.

This figure would put Bitcoin in the good company of its physical analogs, gold and silver, according to PlanB. Using the same formula, the stock-to-flow values of gold and silver are 62 and 22, respectively.

PlanB claims that gold and silver, in fact, corroborate this hypothesis, because their own stock-to-flow charts and price trajectories follow Bitcoin’s step-for-step.

Source: Modeling Bitcoin’s Value With Scarcity

Stock to flow vs. efficient market hypothesis 

When the next halving occurs, Bitcoin’s stock to flow will be up there with gold’s as its inflation rate will then drop below gold’s own (~1.3 percent vs 1.6 percent). PlanB’s post says that Bitcoin’s stock-to-flow value will double from 25 to 50 when the supply is cut in half, which will incentivize hoarding as Bitcoin becomes more scarce, hence the price rise.

On the other hand, critics of the stock-to-flow model, such as Coin Metrics co-founder Nic Carter, argue that this predictive model is akin to reading the stars for signs.

Instead, Carter points to the efficient market hypothesis, a market phenomenon wherein an asset’s price should reflect all available information. Markets don’t wait for (knowable) events to happen—they anticipate them,” Carter argued in a blog post earlier this year. 

“This means, if a weather forecast predicts that a hurricane will emerge and wipe out sugarcane plantations next week, speculators will bid up the price of sugar today, anticipating the supply shock.

All things being transparent on the Bitcoin network, the halving should be priced in and not have the explicit effect that PlanB believes it will, according to this counter theory.

With Bitcoin’s third halving fast approaching, we’ll get our answer soon enough.