The mysterious Stock to Flow Model

The mysterious Stock to Flow Model

Satoshi Nakamoto posted the bitcoin white paper on 31st October 2008, created the bitcoin genesis block on 3rd January 2009, and released the bitcoin code on the 8th of January 2009. That is how an adventure that results in a $130 bln market now started 11 years ago.
Bitcoin is the scarcest virtual object the financial sector has ever seen. It is scarce like Silver & Gold and might be sent over the internet, radio, satellite, and may other communication channels.
This virtual gold has value. But how much value? We are trying to examine its scarcity and value using the stock-to-flow ratio as a scientific method.

The SF (stock/flow) chart for popular assets

The ‘Stock-to-flow’ is a range that shows what number of years, at the current manufacturing rate, are required to gain the current stock. The higher the number, the better the price.

Gold has the very best SF of 62, as it takes sixty-two years of manufacturing to get modern-day gold stock. Silver takes 2nd place with SF 22. Those high SFs make them monetary goods.
All other different commodities have SF barely better than 1. existing stock is typically identical or lower than every year in production, making production a very crucial factor. It is almost not plausible for commodities to get a higher SF, because as quickly as anyone accumulates them, fee rises, manufacturing rises, and the charge falls again. It is challenging to avoid this trap.

However, Bitcoin currently has a stock of 18.137 mln coins now and supply of 0.657 m/yr, which means that its SF is way over 27. That places Bitcoin in the financial goods category like Silver and Gold. Bitcoin’s market cap at present-day amounts to $130 bln. As you all probably already know, the supply of bitcoin is capped. New bitcoins are created in every new block. Blocks are created every 10 minutes (on average). At the same time, a miner finds the hash that satisfies the PoW required for a legitimate block. The first transaction in each block incorporates the block praise for the miner that discovered the block. The block praise includes the charges that people pay for transactions in that block and the newly created cash (referred to as subsidy). The subsidy started at 50 Bitcoins and is halved every 210,000 blocks (about 4 years). That’s why ‘halvings’ are very crucial for Bitcoin value and SF. Halvings also propel the supply growth rate (in bitcoin context usually called ‘monetary inflation’) to be stepped and not smooth.

BTC USD stock-to-flow with deviations.

How does all this affect Bitcoin price

As previously mentioned, it is not feasible to copy or forge Bitcoins, and the total supply is strictly limited. All transactions are written in “‘ the blockchain,” transactions cannot be undone or deleted. It is like a financial institution account in which you may make deposits. Still, you keep custody of all your funds at all times, not like in a bank where you are just a money provider. Also, that is where “shortage” comes into play. The dictionary definition of scarcity is when something is tough to encounter in nature or inside the lab. Once something is scarce enough, it can be used as money. Stock to float is defined as a correlation between production and current stock that is out there.

SF = stock/flow

The stock-to-float is the quantity that we get while we divide the overall inventory by yearly production. It tells us how many years are required, at the current production rate, to produce what’s within the contemporary inventory. For example, gold has a production price of around 3.000 metric tonnes, and the current inventory in the entire international is expected to be 185.000 metric tonnes. If we put that during the preceding formula:

  • 185.000 / 3.000 = ~62

At the present day manufacturing rate, we’d need 62 years to dig out all the gold that’s presently in circulation. The higher the number, the more the scarcity. Now, let’s see how this relates to Bitcoin. There are over 18 million bitcoins currently in circulation (January 2020), and 1.800 Bitcoins are generated each day (657.000 consistent with year). So, if we put the one’s numbers in inventory to drift formula:

  • 18.137.000 / 657.000 = 27,6

That needs over 27 years of contemporary Bitcoin production to produce the current stock. This quantity is tons smaller than gold. However, Bitcoin has something that gold does not – the halvings.

Bitcoin halving is a system of dividing the wide variety of generated rewards consistent with a block, which keeps the total supply of Bitcoin so that it does not exceed 21 million. Block rewards are the primary engine of Bitcoin mining and, therefore, the main energy in the back of the operation of the network. Bitcoin halving happens every 210,000 blocks and decreases the reward for fifty percent every time in a geometrical progression. The initial block reward in 2009 became 50 Bitcoins, the new Bitcoin reward is 12.5 coins, and the method is anticipated to lead to 2024 with all Bitcoins being issued. The subsequent Bitcoin halving is predicted to show up in May 2020 and lowers the praise to 6.25 coins. Bitcoin halving is a crucial part of Bitcoin and most other cryptocurrencies, as it’s far the primary set of rules of emission management and a part of what makes Bitcoin efficaciously maintained without any authority.

Why are halvings important

Bitcoin halving occasions are maintained until the reward for miners reaches 0 BTC. Since Bitcoin’s cost representation has 8 decimal places, after the thirty-third halving, the cost of the reward hits exactly zero BTC. 33 halving occasions every four years adds as much as 132 years total. The remaining Bitcoin to be mined into existence may be mined in the 12 months 2140. There is the 21 millionth Bitcoin to come into existence, and after that, it might not be possible to create anymore. From then on, Bitcoin will become genuinely ‘deflationary,’ since “printing”/”minting”/”mining” new cash will no longer be possible. If owners hold on losing their non-public keys, as they currently are, then the supply would deflate with the aid of that lost-keys ratio.

At the time of the subsequent halving event, around May 2020, Bitcoins may be produced for 900 BTC/day and, by using that time, there may be around 18.375.000 Bitcoin in circulation. The S/F will go to 52, that’s much towards Gold. The following halving, in 2024, will boost that quantity to 113 and remember – gold has stock to go with the flow of “only” sixty-two and it does now not have halving activities. Now evaluating Bitcoin’s dynamic inventory-to-flow with Gold’s, that is stock-to-glide of 62 is not probable in increase. As an idea to experiment, try to imagine what would happen to the price of Gold if it were to be halved one day?

Flaws of the Model

The main weakness of the S/F model is that it does not consider the Bitcoin demand. Bitcoin is still a digital asset that is barely used around the world, acting mainly as a store of value and means of manipulation. The situation is dynamic, though, making it highly possible for Bitcoin to be fully regulated in the upcoming years.

Some aspects need to be considered too. Silver, gold, countries with negative interest rate (Europe, Japan, US soon), countries with predatory governments (Venezuela, China, Iran, Turkey, etc.), billionaires and millionaires hedging against quantitative easing (QE), and institutional investors discovering the best performing asset of last 10 yrs – all of those will most probably fuel the next big Bitcoin move, perhaps happening in front of us in 2020.

However, there are some other threats that undermine the halvening narrative. 4C-Trading did correctly envision the infamous 2018 crypto crash due to the derivatives market. The after-halvening scenario may easily follow that suit and BTC could even stumble after the halvening as, for the first time, there is a robust derivative (futures, options) market for bitcoin. Most firms looking to speculate on bitcoin will trade a derivative, not the underlying.

Closing arguments

A statistically tremendous relationship between stock-to-flow and market fee exists. The likelihood that the relationship among stock-to-go with the flow and market price is triggered by risk is near zero.

The history of the halving suggests another probable Bitcoin surge scenario. The predicted market price for bitcoin after May 2020 halving is $1trn, which translates in a bitcoin rate of $55,000 with S/F 50 after May 2020 halving.

That is quite spectacular. We will be able to evaluate this prediction in 2020 or 2021, probably. Currently, Bitcoin is sitting near $8672 at the time of this writing, so It still has quite a bit of ground to cover to reach its predicted $55,000 and $100,000 price targets.

Disclaimer: Any information found on this page is not to be considered as financial advice. It would help if you did your research before making any decisions.

sources:
https://digitalik.net/btc/
https://medium.com/@100trillionUSD/modeling-bitcoins-value-with-scarcity-91fa0fc03e25

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