Bitcoin Price Analysis Using the Stock-to-Flow Model: A Comprehensive Overview

History and Context of Bitcoin

Since its launch in 2009, Bitcoin has become a symbol of a new decentralized economic system. This pioneering cryptocurrency possesses unique characteristics: fully transferable, transparent transactions, and predictable issuance schedule. Over the years, Bitcoin has not only become the largest cryptocurrency by market capitalization but also reached impressive peaks, with prices exceeding $69,000. However, Bitcoin’s journey is not solely about growth. The cryptocurrency market operates in distinct cycles, alternating between bullish and bearish phases, resulting in extremely high volatility.

Why Do Investors Need Predictive Models?

The high volatility of Bitcoin presents a significant challenge: how to forecast future price directions? This is a question that most investors care about, especially when trying to determine the optimal time to buy or hold. Therefore, a groundbreaking analytical tool has emerged in this field: the Stock-to-Flow model, or S2F. This tool is designed to help investors grasp Bitcoin’s long-term price trends based on fundamental economic principles.

How the Stock-to-Flow Model Works

Stock-to-Flow is a quantitative method based on the ratio between the current supply (stock) and the new supply created over a period (flow). Originally applied to scarce commodities like gold or precious metals, where stock represents the total existing amount and flow indicates the annual production.

When applied to Bitcoin, this model has been adjusted by the renowned trader PlanB, recognized as the developer of the Bitcoin Stock-to-Flow version. In the context of BTC, the formula is expressed as:

S2F Ratio = Total circulating BTC supply / New BTC issued annually

According to this model, every 4 years—a cycle related to the Bitcoin halving event—the S2F ratio increases significantly, leading to a forecasted rise in BTC’s value, with an upward trend nearly tenfold. The linear nature of S2F allows analysts to estimate the time needed to accumulate the current amount of Bitcoin at the current mining rate.

The Role of Bitcoin Halving in the S2F Model

Halving—a event occurring every 4 years—is a key factor that determines the behavior of the Stock-to-Flow model. This event halves the mining reward, thereby reducing supply pressure and increasing Bitcoin’s scarcity. This technique directly impacts the S2F formula: when the new BTC issuance decreases by 50%, the denominator of the ratio drops, causing S2F to rise sharply. This explains why Bitcoin’s price often increases significantly after halving events.

A notable forecast from PlanB suggests that at the April 2024 halving, BTC price could fluctuate between $40,000 and $50,000, based on both the S2F model and the 200-week moving average chart.

The Reliability of the Stock-to-Flow History

Through previous market cycles, the Stock-to-Flow model has shown a high correlation with Bitcoin’s actual price. The comparison chart indicates that BTC’s price has consistently tracked the S2F curve, except during rapid bull or bear runs. This makes the model useful for long-term investors who are more interested in overall trends than short-term fluctuations.

Current S2F forecasts expect Bitcoin to maintain a stable price around $50,000 until before the 2024 halving. After this event, with reduced BTC issuance, the model predicts the price could reach nearly $500,000 by 2025.

Limitations of the Stock-to-Flow Method

Although S2F shows a correlation with BTC price, it still has significant limitations. The model only considers scarcity, ignoring many other important factors. Specifically:

• Does not account for fundamental indicators like adoption rate or network health
• Ignores the impact of “black swan” events or macroeconomic volatility
• Does not reflect market psychology or other on-chain factors
• Its linearity cannot predict sudden turning points

These limitations mean the model may not perform well in abnormal market conditions or when fundamental changes occur in Bitcoin’s mechanism.

Expert Opinions

The cryptocurrency expert community holds varied views on the value of S2F:

• Adam Back, (CEO of Blockstream), believes the model remains within the margin of actual error but is not entirely dismissible.

• Vitalik Buterin, (Ethereum co-founder), is a strong critic but also admits that the lack of consistent correlation between halving and price increases is not enough to completely dismiss S2F.

• Cory Klippsten, (Founder of Swan Bitcoin), suggests that PlanB may have overhyped the effectiveness of this model.

• Alex Krüger, a well-known cryptocurrency economist, is among the harshest critics, claiming that using S2F to determine future prices is useless.

• Nico Cordeiro, (Strix Leviathan), compares the model to a chameleon, implying it changes depending on the situation.

How to Effectively Use This Model in Investment Decisions

Stock-to-Flow should not be the sole tool investors rely on. Instead, it works best when combined with other methods:

• Technical analysis: examining price patterns and market momentum
• Fundamental analysis: assessing network health and adoption
• Sentiment analysis: monitoring investor psychology and emotional swings

Combining these factors creates a more comprehensive trading strategy. Particularly, S2F is more suitable for long-term investors who view scarcity as a primary driver of Bitcoin’s price rather than short-term traders.

Current Bitcoin Data

As of now, Bitcoin is trading at $89.02K, with a circulating supply of 19,967,340 BTC out of a maximum total supply of 21,000,000. These figures show that Bitcoin has captured nearly 95% of the total expected supply, making a thorough understanding of the S2F model even more important.

Conclusion: When Should You Apply S2F?

The Stock-to-Flow model has proven useful in forecasting long-term Bitcoin price trends. However, investors must understand that past performance does not guarantee future success. Using S2F as part of a comprehensive analysis toolkit will provide deeper insights into the Bitcoin market and potential opportunities ahead.