Bitcoin Stock-Flow (S2F) Model: Scarcity-Based Price Analysis and Investment Application

Since 2009, Bitcoin has revolutionized the digital currency world, positioning itself as the first fully digital, transferable, transparent, and predictable currency. Especially during its rapid rise to $69,000 in November 2021, it attracted mainstream attention and played a significant role in the crypto space. However, Bitcoin’s price movements are characterized by cyclical fluctuations of rises and falls. In this environment of uncertainty, the Stock-to-Flow (S2F) model provides an important analytical framework for investors to understand Bitcoin’s value proposition.

What is S2F: The Basic Model Measuring Bitcoin’s Scarcity

The Stock-to-Flow (S2F) model is a mathematical method used to measure the scarcity of an asset. Originally developed for analyzing the value of precious metals like gold and silver, this model has become an important tool in Bitcoin analysis in recent years.

The core logic of the S2F model is quite simple. Stock represents the total amount of Bitcoin currently in circulation, while Flow indicates the amount of new Bitcoin mined each year. The ratio of these two values (Stock ÷ Flow) reveals Bitcoin’s level of scarcity. A higher S2F ratio suggests that the asset is more scarce and potentially more valuable. The high S2F ratio of precious metals like gold is a fundamental indicator of this principle’s validity.

How S2F Works in Bitcoin: Halving Cycles and Supply Dynamics

Due to Bitcoin’s design, the maximum supply is limited to 21 million coins. This structure gives Bitcoin a deflationary characteristic and forms the basis for applying the S2F model to Bitcoin.

The most significant factor affecting Bitcoin’s S2F ratio is the halving event, which occurs approximately every four years. During halving, miners’ rewards are cut in half, significantly reducing the new Bitcoin supply. As a result, while the stock remains fixed, the flow decreases, causing the S2F ratio to increase. Since the 2024 halving, the rate of new supply on the Bitcoin network has slowed considerably.

The model’s assumption is that increasing scarcity can theoretically drive up the price. This principle aligns with the supply-demand dynamics observed in gold and other precious metals. Bitcoin’s design has brought this scarcity principle into the crypto world.

Bitcoin Price Forecast: Past Performance of the S2F Model

PlanB, the creator and one of the most well-known advocates of the S2F model, predicted significant price increases following halving events. For example, he forecasted that after the 2024 halving, Bitcoin could reach $55,000, and in longer-term predictions, he suggested Bitcoin could potentially rise to much higher levels. Institutional investment firms like ARK Invest have estimated a valuation of $1 million by 2030.

Historical data shows that the S2F model has demonstrated a notable correlation with Bitcoin’s price movements. Charts prepared by LookIntoBitcoin indicate that Bitcoin’s price generally follows the S2F trend after halving events. However, this correlation can break down during major market volatility.

Currently, Bitcoin trades near $67,000, with its all-time high reaching $126,000. While the S2F model partially explains these price dynamics, it has failed to account for all market movements.

What Do Experts Say About S2F: Supporters and Critics

The validity of the S2F model remains a debated topic within the crypto community. Supporters argue that, given Bitcoin’s fixed supply, scarcity-based valuation makes sense. Adam Back, CEO of Blockstream, has stated that halving events reduce flow and increase the S2F ratio, which could incentivize price increases.

Critics, however, point out significant limitations. Ethereum co-founder Vitalik Buterin described the S2F model as “not looking very good right now,” criticizing its oversimplification of supply and demand. Cory Klippsten, founder of Swan Bitcoin, warns that followers of the model might be misled into false predictions, while prominent trader Alex Krüger has dismissed S2F-based price forecasts altogether.

Nico Cordeiro, Chief Investment Officer at Strix Leviathan, emphasizes that the model does not fully account for market demand and broader economic conditions, highlighting the need for a more comprehensive analytical framework.

How to Incorporate the S2F Model into Your Investment Strategy: Practical Guide

Using the S2F model in investment decisions requires discipline and a multi-faceted approach. While it can serve as a guide for long-term investors, it should not be relied upon solely.

Steps to Follow:

1. Learn the Fundamentals of S2F: Understand how stock, flow, and the ratio are calculated to reduce errors when applying the model.

2. Analyze Historical Data: Observe how Bitcoin has responded to past halving events, but always remember that past performance does not guarantee future results.

3. Diversify Your Strategy: Combine the S2F model with technical analysis, fundamental analysis, and market sentiment factors. No single model explains all market movements.

4. Monitor External Factors: Regularly follow regulatory changes, technological developments (such as Lightning Network scaling solutions), and macroeconomic trends.

5. Set Risk Management Rules: Use stop-loss orders and appropriate position sizing to protect against potential failures of the model.

6. Develop a Long-Term Perspective: The S2F model is unreliable for short-term trading. Long-term strategies that tolerate volatility tend to perform better with this model.

7. Review and Update Regularly: The crypto market is dynamic. Periodically review and adapt your strategy based on new information.

Limitations of the S2F Model: Setting Realistic Expectations

Despite its widespread use, the S2F model has important limitations:

1. Lack of External Factors: The model primarily focuses on scarcity and does not sufficiently consider technological advancements, regulatory environments, economic cycles, and market sentiment, all of which can significantly influence Bitcoin’s price.

2. Past vs. Future: Given Bitcoin’s complex and often unpredictable nature, past success of the S2F model does not guarantee future accuracy.

3. Overemphasis on Scarcity: While scarcity is a key factor, other factors such as network utility, adoption rates, and technological improvements also impact price independently.

4. Risk of Misinterpretation: Novice investors may over-rely on S2F forecasts, ignoring its limitations and making poor decisions.

The Future of Bitcoin: Perspectives in Light of S2F

While the S2F model offers a framework to understand Bitcoin’s scarcity-based valuation, the future of Bitcoin is not solely dependent on this model. Its long-term value will be shaped by market dynamics, technological innovations, increasing institutional adoption, and international regulatory developments.

The ongoing relevance of the S2F model depends on continued acceptance and adaptation by the crypto community. However, arguments for Bitcoin reaching even higher values beyond 2030 are based not only on scarcity but also on increased utility and widespread acceptance.

Frequently Asked Questions About the Bitcoin Stock-to-Flow (S2F) Model

1. How exactly does the S2F model work?

The S2F model calculates the ratio by dividing the current Bitcoin stock (total supply) by the annual flow (new supply). A higher ratio indicates increased scarcity, and halving events raise this ratio, creating expectations of price increases.

2. Has the S2F model accurately predicted Bitcoin’s price?

The model’s performance has been mixed. It has captured some halving-related price trends and general tendencies but has failed to explain all market fluctuations. It predicted the $69,000 peak in 2021 but was less accurate afterward.

3. How will future halving events affect S2F forecasts?

Future halvings will reduce new Bitcoin flow further, increasing the S2F ratio. Theoretically, this could make Bitcoin more scarce and potentially increase its value. However, actual price effects depend on technological developments, regulatory environments, and market behavior.