Bitcoin Stock-to-Flow: Price forecasting tool or just a theory?

Since its launch in 2009, this digital asset has become the subject of extensive analysis by researchers. BTC prices have experienced impressive surges, approaching the $126,000 mark, but also undergone astonishing declines. This volatility led trader PlanB to develop the Stock-to-Flow model to decode the underlying规律 behind Bitcoin’s price. Is this model truly effective or just a mathematical formula with a large margin of error?

What is Stock-to-Flow and how does it work with Bitcoin?

Stock-to-Flow (S2F) is an indicator measuring the ratio between the stock of an asset and the flow of new production over a period. Originally applied to scarce commodities like gold or silver, where rarity determines value.

When applied to Bitcoin, how does this model work?

In the case of BTC, Stock-to-Flow is calculated by dividing the total circulating supply of Bitcoin by the amount of Bitcoin mined annually:

S2F = Total BTC in circulation / BTC mined per year

This formula allows investors to determine the time needed to produce the current amount of Bitcoin at the current issuance rate. Theoretically, when the S2F ratio increases (meaning the new issuance decreases), Bitcoin’s price should rise correspondingly. This is why the Bitcoin halving event becomes extremely significant.

Halving: a key factor impacting the S2F model

Bitcoin halving is a programmed event occurring every 4 years, where the mining reward is halved. This event directly impacts the Stock-to-Flow model because it reduces the creation of new Bitcoin by 50%.

According to PlanB’s prediction before the 2024 halving, BTC price is expected to be in the range of $40,000-$50,000 at that time. After halving, the S2F model forecasts Bitcoin could approach the $500,000 mark by 2025. This forecast is based on weekly moving averages and PlanB’s S2F curve.

Important note: The current Bitcoin price is 88.56K USD, indicating the market has surpassed some of the model’s previous predictions.

Historical accuracy of Stock-to-Flow

Looking at Bitcoin’s S2F chart, it can be seen that BTC’s historical price has closely followed the forecasted curve, although there are exceptions due to sharp rallies or drops. Many long-term investors trust this consistency and view S2F as a decision-support tool.

However, past performance does not always predict future results. The S2F model has notable limitations:

• Does not account for fundamental factors: It relies solely on scarcity theory, ignoring market psychology, regulatory pressures, or macroeconomic changes.
• Ignores black swan events: Events like economic crises or regulatory shifts cannot be predicted by a linear formula.
• Short-term accuracy is limited: This model is more suitable for long-term investors and less useful for daily or weekly traders.

Expert opinions: Divided views on S2F

The cryptocurrency community holds diverse opinions on the Stock-to-Flow model:

Supporters: Adam Back, CEO of Blockstream, believes S2F remains within a reasonable margin of error, despite its imperfections.

Critics: Vitalik Buterin (co-founder of Ethereum) points out that the link between halving and price increases is not consistent enough to ensure the model’s reliability. Alex Krüger, a renowned crypto economist, considers using S2F to predict prices as meaningless. Cory Klippsten from Swan Bitcoin suggests PlanB is trying to confuse the community with this model. Nico Cordeiro of Strix Leviathan fund even describes S2F as a “chameleon” – an animal that changes color to adapt.

How to effectively use the S2F model in your investment strategy

If you want to leverage Stock-to-Flow while managing risks, remember:

1. Don’t rely solely on S2F: It’s just one tool in your analysis toolkit, not an absolute prophecy.

2. Combine with technical analysis: Use indicators like RSI, MACD, or support/resistance levels to confirm signals from S2F.

3. Consider fundamental analysis: Keep an eye on regulation news, Bitcoin adoption, or macroeconomic events.

4. Focus on long-term investing: S2F performs better for investors viewing Bitcoin as a scarce asset over the long haul, not for short-term traders.

5. Manage your psychology: S2F can help you stay calm during volatility, as it provides a theoretical basis to trust long-term hypotheses.

Conclusion: S2F is a tool, not a prophecy

Stock-to-Flow has demonstrated its value in explaining long-term Bitcoin price trends. But past accuracy does not guarantee future results. The cryptocurrency market is maturing, and factors influencing prices are becoming more complex.

Instead of viewing S2F as a magic formula, consider it as one of many tools to understand the market. When combined with technical analysis, fundamental insights, and proper risk management, you will gain a more comprehensive view of Bitcoin’s potential in upcoming market cycles.