What is Stock to Flow Model? The stock-to-flow pricing model was created by anonymous Twitter user PlanB, who claims to be a Dutch institutional investor with a legal and quantitative finance background that manages around $100 billion in assets.
The key principle that underlines it is the notion of scarcity. The notion that assets that are more scare should be more valuable. Those things that are rarer usually command a premium in price to those that are more common. It comes down to that old economic principle of supply and demand. Holding demand equal, a lower supply implies a higher price.
Based on this, PlanB could obtain a theoretical price of Bitcoin based on historical levels of the SF ratio and its price.
The Stock to Flow Model & Bitcoin
Based on the regression analysis by PlanB, he was able to come up with this formula which depicts the liner relationship.
Bitcoin is a unique asset here in the sense that its SF ratio can be extrapolated out into the future. That is because Bitcoin supply and supply growth is hard coded into the protocol.
The price has mapped the model pretty damn well over the past 9 years. Yes, there are periods where it seems to either be over or underpriced, but like some sort of celestial force, it comes back in line.
Stock to Flow Been Wrong?
The last time that Bitcoin lined up with the stock-to-flow model was back in March of this year. This was when Bitcoin was at 61k.
Since that time though, it has continued to diverge away from the model predicted price and things have gotten progressively worse. We are now at a place where the theoretical value of Bitcoin should be 111k but the price is closer to 34k.
This is a greater divergence than we had back in 2019 and 2018. PlanB has also begun to change his tone to the model around whether it could really be accurate. This has also been confirmed by polls that he has asked of his followers.
There are some that think this presents a unique opportunity to pick up cheap Bitcoin. Yet, there are others that view this as more evidence that you can’t rely on a model like this to price an asset like Bitcoin.
Wrong Bitcoin Assumptions?
One of the best critiques that I have seen of the model is by a chap called Nico Cordeiro who is the chief investment officer and fund manager at Strix Leviathan.
Gold has ranged in market capitalisation all the way from 60 billion to 9 trillion dollars all where the SF ratio was close to 60.
What this shows us is that the Gold price is driven by many other factors that are not really related to the ratio itself.
He also tries to make the argument that Plan B’s stock to flow model has implementation errors that lead to spurious regression.
Chance of $100k Bitcoin in 2021?
Bitcoin Price Prediction: While the stock-to-flow model has its shortcomings and some of the assumptions are bold, it makes sense on practical level. Scarcity is a quality that people value in particular assets.
Bitcoin is perhaps one of the scarcest assets on earth. That is precisely because of its limited supply. But, you also have to consider the demand side of the equation as that will also impact on the price.