Bitcoin (₿) is a cryptocurrency invented in 2008 by an unknown person or group of people using the name Satoshi Nakamoto. A whitepaper was published where the following is stated:
The root problem with conventional currencies is all the trust that is required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies shows that this trust has been breached many times.
To solve that inherent problem, Nakamoto set a monetary policy based on artificial scarcity at bitcoin’s inception that the total number of bitcoins could never exceed 21 million.
Now that we understand why scarcity for a store of value asset is important, we can define stock to flow as the ratio of the total stock of an asset (stock S) and its annual production (flow F):
Stock-to-Flow = S / FIt indicates how many years are needed, at the current production rate, to produce the current stock. For the commodity type stores of value, 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.
PlanB introduced this model to Bitcoin in order to see the relationship between Bitcoin’s supply-side mechanics and its market price. According to PlanB’s stock-to-flow model, there is a statistically significant relationship between Bitcoin’s stock-to-flow and the market price of bitcoins:
The likelihood that the relationship between stock-to-flow and market value is caused by chance is close to zero.
He described gold’s stock to be 185.000 tons, and its flow to be 3.000 tons per year. Hence, gold’s stock-to-flow ratio at that time was 185.000 / 3.000 = 61.67, or 62 when rounded up. Obviously that ratio evolves over time:
When the gold price is relatively high, gold mining is more viable, incentivizing miners to do so. As a result, the flow increases and stock-to-flow ratio decreases. When the gold price is low, mining is less viable, especially in less efficient mines with a high production cost. If these close down or reduce their production, gold’s flow decreases, increasing its stock-to-flow ratio again.
New bitcoins are created roughly every ten minutes and the rate at which they are generated drops by half about every four years until all will be in circulation. In 2009, 50 bitcoins were created on average every 10 minutes when a new block of transactions was mined. The halving is an event that is programmatically scheduled, every 210,000 blocks or roughly 4 years. Its effect is to cut in half the reward attributed to the miner.
| Date | reward (₿) | …per block | …per hour | …per day | …per year |
|---|---|---|---|---|---|
| 28-Nov-2012 | 25 | 150 | 3,600 | 1,314,000 | |
| 09-Jul-2016 | 12.5 | 75 | 1,800 | 657,000 | |
| 11-May-2020 | 6.25 | 32.5 | 900 | 328,500 | |
| 10-Mar-2024 (est.) | 3.125 | 16.25 | 450 | 164,250 | |
| 09-Jan-2028 (est.) | 1.5625 | 8.125 | 225 | 82,125 | |
| etc… |
While we don’t know exactly when blocks are mined, Bitcoin’s stock and flow are completely predictable on a per-block basis
As we see from the chart above, it is interesting to note that:
- It is wiser to buy Bitcoin when it trades below the stock-to-flow line.
- The all time high is two thirds of the time reached between 900 and 1,000 before the next halving.
- The bottom is reached between 400 and 600 datas before the next halving
- The price tends to increase systematically after the halving to reach the model line
Although it cannot be regarded as investment advice, it remains interesting to keep an eye on it to see if Bitcoin is overbought or oversold from that perspective. Some cristisms were made about this model, and it was suggested to also look into a rainbow chart for Bitcoin. We will explore it in a coming post…