Bitcoin (BTC) is usually considered a digital commodity, with strong economic fundamentals to be a long-term Store of Value (SoV) due to having a programmed and limited supply inflation through mining, that is halved every four years.
Interestingly, the stock-to-flow model used by economists to evaluate gold, silver, platinum, and other SoV commodities was also started to be applied to Bitcoin by a Twitter (now X) pseudonymous influencer called PlanB (@100trillionUSD).
According to price projections created by the well-known influencer and broadly reproduced by analysis platforms such as Coinglass, one Bitcoin should be worth $51,692 by September 14, 2023. However, 1 BTC is priced at $26,400 by press time. A value close to two times lower than the model’s ‘fair value’.
What is the stock-to-flow model, how it works, and what are its limitations to Bitcoin?
Notably, the description of how the stock-to-flow model works already suggests a few limitations in its applicability to Bitcoin’s price predictions.
“[The stock-to-flow model is] used to evaluate the current stock of a commodity (total amount currently available) against the flow of new production (amount mined that specific year).
For store of value (SoV) commodities like gold, platinum, or silver, a high ratio indicates that they are mostly not consumed in industrial applications. Instead, the majority is stored as a monetary hedge, thus driving up the stock-to-flow ratio.
A higher ratio indicates that the commodity is increasingly scarce – and therefore more valuable as a store of value.”— Coinglass
When used for commodities, the model only takes into consideration the ratio between the stocked supply and the supply increase over the years. It also ignores demand projection for the commodity, which is essential for price calculation, as even a very rare product can suffer losses if there is no demand for it.
Bitcoin deviations from the stock-to-flow model
Interestingly, the effects of a higher or lower-than-expected demand can be seen in the chart, during the moments when the price of Bitcoin is registered to be higher or lower than the model’s projection, respectively.
Currently, Bitcoin is going through one of the longest and highest bearish deviations from the model’s projections since the first 2 years of inception.
All things considered, the stock-to-flow model must be used with caution by investors, and could eventually fail, as the right amount of demand must exist in order to give value to Bitcoin long term. Nevertheless, the BTC price has been following its trend most of the time since 2011.
Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.