What is Stock to flow?
The stock-to-flow model is generally used for natural sources, such as precious stones. In short, this model shows the connection between the total supply of this resource, versus the annual quantity that enters the market. We can compare it with the relation of “scarcity”, or “supply and demand”. The greater the stock-to-flow, the less resource enters the market each year when compared to the maximum supply. Consequently, the more valuable the asset becomes as a store of value.
But calm down, I’ll explain it better! This model is super important for anyone who invests in Bitcoin in the long term. What’s more, for those who want to understand why we say that one day, Bitcoin will cost $ 1 MILLION!
Bitcoin is a store of value
The stock-to-flow model treats Bitcoin as commodities, that is: as gold or silver. As it is very difficult to increase the amount of precious stones available in nature and on the market, this type of asset retains value over time because they are scarce (rare). This means that their price only increases as they become increasingly rare! For this type of commoditie, we call it “Store of Value (SoV)”.
Bitcoin is the first scarce digital asset that exists! That’s because as you will read below, there is a limited amount of BTC currencies that can exist.
Stock-to-flow model in practice
Let’s abbreviate the word stock-to-flow for S2F, which is how you can find it on the Internet as well. The best way to explain it is to show, right away, what kind of model this is.
Below, we have the chart model that shows us the ratio of total supply x quantity entering the market. You can follow here on this site, which is the official site, inclusive! Let’s interpret it in parts:
S2F chart elements
Follow me here with what each piece of this graph represents. Read here and follow the graph there, ok?
Left sidebar, written: BTC PRICE (USD)
On this axis, we have the variation of Bitcoin in dollars, which ranges from $ 0.1 to $ 1,000,000. Today, as I write this text, it is 01/05/21 and we are there with two price markings: the colored line and the dark red line, which hit exactly the same price: US $ 31,800.
Right sidebar (colored), written: DAYS UNTIL NEXT HALVING
Here the things is going crazy, because you need to know what Bitcoin Halving is. I will migrate a text I had here on the website explaining what this event means on the Bitcoin Blockchain. But in short, just to give a level of understanding in this text, I will give an explanation:
What is Bitcoin Halving?
Halving is an event scheduled to happen every 4 years or so. This event is automatic, happens automatically in the Bitcoin Blockchain and was designed to occur since the Genesis block. It turns out that for every block of the Blockchain that is mined, miners earn a reward in BTC. And every 4 years, when Halving happens, that reward is cut in half.
- By 2009, the reward was 50 BTC per block mined;
- In 2012, when the first Halvening took place, the reward dropped to 25 BTC / block;
- In 2016, in the 2nd halving, we decreased by 12.5 BTC / block;
- And in the 3rd halving, now in May 2020, the reward dropped to 6.25 BTC / mined block.
Halving and Stock-to-flow model
“Okay, but what does the reward for mining have to do with the price of Bitcoin? And with stock-to-flow?”
Hey … Those who put Bitcoin coins on the market are the miners. Just as gold is found in mines by miners before going to the store!
If mining is getting less Bitcoins, then there are fewer coins entering the market. And that, one day, will be zero! After all, the maximum supply of BTC on the market is 21 million coins. For you to have an idea, we have already mined more than 18,500 BTC. We are almost done with mining this cryptocurrency!
THEREFORE … this colorful bar in the Stock-to-flow model is a legend for you to see when we are approaching the next event.
Dark red line in the middle of the chart
This line is the price predicted that the stock-to-flow model makes. This line is drawn according to:
- The time for the next halvening;
- The total amount of Bitcoins that may exist (21 million);
- And the amount of Bitcoin coins that have already been mined and are in circulation.
With this data, it is possible to make this price prediction. Note that by the end of 2021, Bitcoin is predicted to hit $ 50,000 (today, we’re at $ 31,800).
Colored line in the middle of the Stock-to-flow chart
This line is the actual Bitcoin quote. So the red one is what was predicted and the colored one, in addition to showing how long for the next halvening, also shows the true values that Bitcoin reached in a given period.
So if you look over there in December 2017, you’ll see that the prediction (red line) was that Bitcoin would cost $ 5,500. But in fact, “Digital Gold” came to hit, the historic top at the time, the $ 19,000! The colored line fills the red line as we arrive at the dates.
Can the chart go wrong? Is obvious! I just gave an example in which the forecast was quite different from the real one. Therefore, we have the last element of divergence that I comment on in the next topic.
See marked in black on the side as the real value (colored) was different from the estimated (red line). And in purple, we have the divergence between the predicted and the real.
Red line on the bottom horizontal axis of the graph
It is the variation between what the Stock-to-flow model predicted and the true quote that Bitcoin reached. Although there are divergences, note that over time, the price of Bitcoin has indeed kept pace with forecasts. Now oscillating for less, now for more, but always following the forecast.
The more the real price deviates from the forecast, the greater the oscillations in that horizontal line of the graph, which I marked up there in purple.
Who created the Stock-to-flow model for Bitcoin?
Look, guys, the “Stock to flow model” has been around for a long time! However, the S2F chart adapted to Bitcoin, was created by a user called Plan B, who does not know much about him, as he surfs anonymously, presenting only this nickname “Plan B“.
However, the creator of the entire website (www.lookintobitcoin.com), which has several live charts to devise Bitcoin trading and hodling strategies, was the economist, trader, investor and researcher Philip Swift. In the image below, see that there is more than one type of chart to analyze the price of Bitcoin!
Bitcoin price could reach $ 1 million
If you have doubts about this, know that you don’t have to! The price of Bitcoin can reach US $ 1 million! And that is why so many people buy Bitcoins for HODL, which is to keep for a long time. Look at the graph that by March 2021, we can already have Bitcoin for more than $ 55,500!
But now it’s up to you: homework to see if you have learned to read this chart correctly or not! I’m going to ask you two questions and answer them here in the comments or on social media, ok?
- According to the Stock to Flow (S2F) chart, what is the predicted price for Bitcoin in December of 2021?
- And in what month and year will Bitcoin cost $ 1 million?
Comment here in the text or leave it on the social networks that I want to see if you learned to read this graphic or not!
A super virtual kiss in each one of you who have read this far! ♥
JG