There are many predictions about the future price of Bitcoin. In fact, no one knows whether the price of Bitcoin will go up or down tomorrow, even the longtime experts in the market.
However, there is a model that allows to predict the Bitcoin price in the long term quite accurately, in accordance with what has happened in traditional markets such as gold or silver. That is the Stock-to-Flow model and it works based on Bitcoin’s total supply of 21 million coins, and its inflation-mitigation mechanism.
What is the Stock To Flow Pattern?
Stock To Flow (S/F) has 2 important concepts: Stock and Flow. Where Stock is the reserve and Flow is the flow. These are two extremely important concepts in the field of System Dynamics. The field of application is often macroscopic and has high complexity and volatility.
Formula to calculate Stock To Flow
In the case of Bitcoin, Stock is the amount of Bitcoins that have been created and are in circulation, and Flow is the number of Bitcoins born in a period of time. And S/F is calculated by the formula as below:
S/F = Stock / Flow
Usually the inflation rate is calculated using the Flow/Stock formula (ratio of the amount that increases to the amount available). Meanwhile S/F expresses a new element: Scarcity.
Below is information on some S/Fs of commonly seen assets:
Gold has an S/F = 62, which means that it takes 62 years of mining to create the same amount of gold that is in circulation. Silver has an S/F of 22. From this we see that this high S/F ratio makes gold and silver a commodity with the characteristics of money.
However, Palladium or platinum has an S/F of approximately 1. This means that the total amount of goods in circulation is equal to or less than the total annual new supply. Suppose that if someone hoards it in large quantities in a short period of time, the price of this commodity will skyrocket, but this price spike stimulates an increase in the productivity of its production which leads to an increase in the price of the commodity. new output enters the market, and eventually prices fall again when supply and demand become in balance. This is almost impossible to change.
In the case of Bitcoin, you can calculate S/F by taking the total circulating Bitcoin of 18.2 million and dividing it by this year’s supply of about 0.7 million so S/F = 26. This S/F ratio helps Bitcoin rank into commodity groups like gold and silver. That is not counting the case in the next 4 years, from May 2020, the Bitcoin supply is halved, meaning the production supply is 0.35 million, the S/F number will be even higher.
This halving event is known as the Bitcoin Halving and is very important in terms of Bitcoin’s inflation and S/F ratio. The diagram below shows Bitcoin’s inflation over time, the folding of the graph caused by the aforementioned halving event.
Stock-to-Flow and the Value of Bitcoin
The basic hypothesis of this study is the effect of a commodity’s scarcity (measured in S/F) on its price. This is evoked after referring to the scarcity table above with the total market value of the respective precious metal.
S/F is calculated for the period from December 2009 to January 2019 (a total of 111 data points). The number of new monthly blocks is queried directly from the blockchain. With the number of blocks generated monthly and the number of new Bitcoins created per block at that time, we can calculate the flow and stock, ie the S/F. In addition, since there is about 1 million BTC lost, i.e. no longer in circulation, it will be excluded from the calculation by omitting the first 1 million BTC in the calculation process.
The price of Bitcoin is referenced from many different sources but all started as early as July 2010. Before July 2010, there were 2 events about the first price of Bitcoin (1309 BTC priced at 1 USD in October 2009, the first quote of 0.003 USD/BTC on BitcoinMarket in March 2010 and finally the Bitcoin event. Pizza with 10k BTC for a $41 pizza) is also added for interpolation data.
Besides, the S/F data of gold and silver will also be included as a standard. (Gold: S/F=62, total value of $8.5 trillion. Silver: S/F=22, total value of $208 billion)
With a market value of $10,000 to $100 billion, it’s clear that using logarithms to scale down the graph makes it easier to see.
In the graph above, we see that the positions of the arranged points match the linear regression line (black diagonal). This shows a strong association between S/F and total capitalization.