What is S2F?
Cloudbet explains stock-to-flow analysis - the $100k bitcoin price model that’s divided the crypto community.
If the model is accurate, bitcoin is on course to reach $100,000 per coin within two years. Just hodl and you’ll be rich. If the model is wrong, it demonstrates the fallacy of using back-tested data to predict future events and will prove a source of lasting embarrassment to its creators. Is stock-to-flow (S2F) analysis the ultimate price-prediction model, or is it wishful thinking from bitcoin bagholders? We examine the case for and against the highly controversial S2F model which has been making waves in community circles.
Understanding stock-to-flow (S2F)
Commodities such as gold and oil are understood in terms of supply and demand. The discovery of a major new oil field, or the crash-landing of a gold asteroid into earth would have a corresponding price impact. Gold’s relative scarcity, after all, is the reason why it’s so coveted. Because there are existing inventories of commodities such as gold and oil, price rises tend to occur in anticipation of future scarcity.
To determine the stock-to-flow ratio for an asset, you divide the total produced by the annual production. This ratio, measured in years, is what it would take to replenish current supply. Gold’s is around 62 years, while silver's stands at 22 years.
Could an S2F model be applied to bitcoin, analysts wondered? After all, it contains many of the same characteristics as gold: scarcity, a gradually diminishing supply curve, auditability, fungibility, divisibility, and extraction through mining. Given that bitcoin’s issuance rate is predetermined and unchanging, and its circulating supply is known, it’s possible to calculate BTC’s S2F ratio. That number currently stands at 52 years, giving bitcoin an S2F ratio that’s pretty close to gold's.
But what does this have to do with $100k BTC price predictions, and why are bitcoiners so divided over the significance of S2F?
Time for Plan B
Crypto trader Plan B is the chief proponent of BTC's S2F model. He’s assembled a repository of articles supporting the assertion that BTC will reach record highs as demand increases and scarcity kicks in. Comparing bitcoin’s properties to those of gold, he quotes Nick Szabo’s words: “What do antiques, time, and gold have in common? They are costly, due either to their original cost or the improbability of their history, and it is difficult to spoof this costliness."
Bitcoin’s unforgeability places it in the same bracket, many cryptocurrency fans believe - not least Plan B, who points out that “Bitcoin is the first scarce digital object the world has ever seen.”
Plan B’s original model calculated a price of $55,000 per BTC following the cryptocurrency’s May 2020 halving, when the block reward for miners was slashed. That price prediction has yet to pass, but that doesn’t mean it’s been invalidated: should bitcoin rocket to $55k and beyond in the months to come, S2F advocates will feel vindicated. For now, with bitcoin trading for less than a fifth of that price at press time, it’s a case of wait and see.
“A statistically significant relationship between stock-to-flow and market value exists,” insists Plan B, undaunted - his latest red dot hit on 1 June “The likelihood that the relationship between stock-to-flow and market value is caused by chance is close to zero.”
Sheer 'hopium', or serious science?
Haters gonna hate, and detractors gonna detract, and when it comes to Bitcoin’s S2F, both exist in spades. Critics haven’t minced their words in picking apart the “hopium” or blind optimism they see in S2F. One analyst described it as being about as accurate as astrology, while bitcoiner Eric Wall went further, crafting a detailed takedown of everything he believes to be wrong with Plan B’s methodology. Other high profile S2F detractors include Vitalik Buterin.
Many of the arguments put forward by Wall are highly technical, but include new evidence suggesting there is no meaningful relationship between the value of gold and its S2F. If the model doesn’t hold up for gold, then surely it won’t work for bitcoin?
Eric Wall mocked Plan B’s S2F chart and published his own “rainbow chart” to show that anyone can create a pretty graph that extends upwards using log scale.
Acknowledging some errors in his original model, Plan B updated his thesis, publishing a revised model known as S2FX. It provides an estimated price of $288k per BTC sometime between now and 2024. $288k feels like a long way off, but then so does 2024. In other words, there’s still plenty of time for the dream to become reality. The clock is ticking, though, and it should be noted that the bitcoin options market judges there to be a less than 1% chance of BTC reaching $30k by the end of 2020. In the meantime, there’s plenty of sniping between the pro- and anti-S2F camps as the model is picked apart and iterated on.
So who’s right?
Bitcoin S2F has many high-profile bitcoiners backing it, who remain adamant that the stock-to-flow theory holds water. Max Keiser has described it as a “valid and vital analysis of bitcoin price,” adding that “the arguments ‘debunking’ S2F for BTC appear to be just random word-salad by attention seekers.”
Plan B is convinced that the numbers don’t lie, and has doubled down on his $180k+ per coin prediction. However, the general consensus within the crypto industry is that correlation between bitcoin’s price and its stock-to-flow is weak at best. Plan B and his supporters face an uphill task if they are to convince the masses that bitcoin is headed to the moon.
Of course, if S2F is right, and bitcoin is on course to shatter all-time highs due to its pre-programmed scarcity coupled with organic demand, its proponents don’t need to do anything other than hodl and wait for the prediction to be fulfilled.
What’s more, the very act of proclaiming that bitcoin is headed to six figures may in itself attract more people to buy BTC in hope. If enough retail investors believe S2F to be true, it could become a self-fulfilling prophecy.