Stock to Flow Ratio is the amount of a commodity held in inventories divided by the amount produced annually. It is a measure of the abundance of the commodity. The higher the stock to flow ratio, the more scarce a commodity is and vice versa.
The S2F ratio of an asset is calculated by dividing the current supply by the number of new units of that asset produced in a given period. Bitcoin S2F equals its supply divided by the number of new coins per given period.
Bitcoin stock to flow model (S2F) predicts bitcoin’s future price and has been popularized by a pseudonymous Twitter account (PlanB).
The bitcoin S2F model compares the correlation between the prices and the stock to the flow of gold and silver to argues the same for bitcoin.
It states that certain precious metals have maintained a monetary role throughout history because of their unforgeable costliness and low rate of supply.
For example, gold is valuable both because new supply (mined gold) is insignificant to the current supply. It is impossible to replicate the vast stores of gold around the globe. PlanB then argues that this same logic applies to Bitcoin, which becomes more valuable as new supply is reduced every four years.
Plan B’s argument invariably implies that the value of bitcoin would keep increasing as its supply decreases and therefore increasing its scarcity which is a measure of S2F.This model seems all good on paper; however, when tested against reality, this model fails.
The problem with this model starts from first assuming that scarcity denotes value.
Just because a commodity is scarce, it doesn’t always mean it is valuable. It is the demand for a commodity that determines the price. For example, there are plentiful reserves of crude oil, but the demand is so high that the price has not fallen until recent, when the demand fell.
Secondly, the model uses gold as an example; however, the S2F of gold is not the only determinant of the price of gold; the S2F of gold is sometimes uncorrelated to gold's price.
The S2F model doesn’t account for the prices of other cryptocurrencies. It also fails to explain why metals like to clarify why palladium(S2F=0.4) and platinum (S2F=0.4) are often worth more than gold despite having tiny stock-to-flow ratios.
Conclusively, the S2F model attempts to predict the price of bitcoin looks good. Still, there are many problems with the hypothesis, from using gold’s S2F ratio as a price determinant where its S2F doesn’t determine gold’s price. These, among other factors, make the Bitcoin S2F model not reliable.
This was written in September 2020 . I am just posting this to look for feedback and counterargument.