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(BTC) is generally considered a digital asset with strong economic fundamentals due to its programmed and limited supply inflation, halving through mining every four years.
- By September 14, 2023, Bitcoin should be worth $51,692. However, at the time of writing, 1 BTC is priced at nearly half of the model’s ‘fair value,’ at $26,500.
- Given all these factors, the Stock-to-Flow (S2F) model should be used cautiously by investors, and there should be the right amount of demand to appreciate Bitcoin in the long term.
The S2F (Stock to Flow) model examined on Bitcoin shows that the BTC price is not at the level it should be: How accurate is this model?
What Does the S2F Model on Bitcoin Indicate?
Bitcoin (BTC) is generally considered a digital asset with strong economic fundamentals due to its programmed and limited supply inflation, which halves through mining every four years, making it a long-term Store of Value (SoV).
Interestingly, the Stock-to-Flow (S2F) model, which economists use to evaluate commodities like gold, silver, platinum, and other SoV assets, has also been applied to Bitcoin by Twitter (now X) phenomenon PlanB.
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According to widely duplicated price projections created by a well-known influencer, a single Bitcoin should be worth $51,692 by September 14, 2023. However, at the time of writing, 1 BTC is priced at nearly half of the model’s ‘fair value,’ at $26,500.
What is the Stock-to-Flow model, how does it work, and what are its limitations for Bitcoin?
The explanation of how the Stock-to-Flow model works already demonstrates some limitations in its applicability to Bitcoin price predictions.
Coinglass explains the S2F model as follows: “[The Stock-to-Flow model] is used to evaluate a commodity’s current stock (the total amount currently available) against the new production quantity mined in that year. A high ratio for Store of Value (SoV) assets like gold, platinum, or silver shows that these are mostly not consumed in industrial applications. Instead, they are stored primarily as a form of monetary protection, which increases the stock-flow ratio. A higher ratio indicates that the asset is becoming scarcer over time, making it more valuable as a store of value.”
When applied to commodities, the model only takes into account the ratio between the stockpiled supply and the increase in supply over the years. It also ignores the demand estimate required for price calculation because even a very rare product can suffer harm without demand.
Deviations from the Stock-to-Flow model for Bitcoin
Bitcoin shows interesting effects when the price is recorded higher or lower than these expectations at times when the model’s projection is above or below the price.
Currently, Bitcoin is experiencing one of the longest and highest deviations from the model’s projections since its inception years.
Considering all these factors, the Stock-to-Flow model should be used cautiously by investors, and there should be the right amount of demand to appreciate Bitcoin in the long term, and as a result, the model may occasionally fail. However, the price of BTC has mostly followed its trend since 2011.