The Stock to Flow model (SF or S2F) is a method for measuring the abundance of a particular resource. The Stock to Flow ratio is the quantity of resource present in the reserves divided by the quantity that is produced annually. It takes into account these two factors and is used to predict the value of a given commodity over time. For this reason, in fact, S2F is generally applied to natural resources such as gold or silver. For consumer goods and industrial products, however, the Stock to Flow ratio is usually lower. The reason is that their value typically comes from their destruction or consumption, the inventors (the stock) are usually only sufficient to cover the demand. These assets don't necessarily have a high value as possessions, so they tend to perform poorly as an investment asset.
Application of the model to Bitcoin
Those who know how Bitcoin works, will certainly understand why it might make sense to apply the Stock to Flow model. Essentially, this model treats bitcoins as limited resources, like gold. In fact, these resources have the peculiar and common characteristic of maintaining or increasing their value over time. According to those who believe in the Stock to Flow model, Bitcoin is a very similar asset. It is scarce, relatively expensive to produce and its maximum supply is limited to 21 million. Furthermore, the issuance of supply of Bitcoin is defined and is halved approximately every four years and for this the flow is predictable. All this means that a correlation is created between the S2F model in reduction and the price of the asset that tends to grow.
As can be seen from the image, Bitcoin's price is expected to rise over time. In particular, as we have already seen in the past, after each Halving there follows a bullish cycle that leads a single BTC to increase in value exponentially. PlanB, in its tweets, shows how the price follows the forecast of the model over time. You can follow @s2fmultiple on Twitter for more info.
Limits of the S2F model
This model has some limitations or shortcomings. First, it is based on assumptions such as the fact that scarcity should increase the value of the commodity. This is not always true, also because we do not know the future demand for bitcoin, which remains the only unknown. Furthermore, bitcoin is a relatively young asset because it has been on the market for about 10 years and has done few price cycles, creating an average on only 2 or 3 points does not make it very reliable.
If you liked this article leave me a like and use one of my referral links below. ?? And follow me on Twitter: @lucasgaio_
Coinbase, buy here your BTC and get 10$ bonus
Binance, Trade with 10% discount fees
Tradingview
Get a $10 cashback reward when you buy eGold
FTX, 5% discount fees
