Stock-to-flow model possibly invalidated as Bitcoin price loses $30K

As the price of Bitcoin (BTC) continues to struggle around the $30,000 mark, the widely accepted stock-to-flow (S2F) model to price Bitcoin, coined by Twitter user and unnamed Dutch investor, Plan B, is now the farthest from its estimates.

The model was popularized by the Twitter pseudonym more than two years ago in March 2019 and in the midst of a minor bull through Q1 2019. It’s considered to be one of the leading quantitative valuations for the first-ever scarce digital currency to exist. The model presumes that scarcity of certain assets or commodities drives its price.

The S2F model is an attempt to price Bitcoin in a way similar to scarce commodities like gold, silver, etc. The essence of it is that assets like Bitcoin, gold and silver have only limited supply injections in a certain period of time when compared with commodities like oil, copper and steel, where the supply flow is higher and considered to be theoretically limitless.

Since Bitcoin has a maximum supply limited to 21 million tokens and considering the time- and energy-intensive mining process, there is only a certain number of new Bitcoin that can come into circulation in a certain timeframe. The premium cryptocurrency had fit right into this model, until now. Johnny Lyu, CEO at KuCoin Global, a cryptocurrency exchange told Cointelegraph:

“The model creator tried to predict the continuously surging Bitcoin price based on its scarce nature similar to gold in that it also has a high stock-to-flow ratio. Therefore, the hypothesis is: As Bitcoin’s stock-to-flow rises, so will its price.”

He went on to say that models like these are usually built on historical data and that while some periodic trends can help identify the general direction of the market, specific trends can often be difficult to track in advance.

Deflection from S2F Model at an all-time high

According to the S2F model, BTC’s price is supposed to be $88,531 on July 20, which is nearly three times the current price. In fact, earlier this year, PlanB suggested that Bitcoin could hit $450,000 before the end of this year in the best-case scenario, and $135,000 in the “worst-case scenario.“ Furthermore, the model predicts that Bitcoin is expected to hit its much-awaited $1 million mark in July 2025.

However, in a PlanB Twitter poll on June 21, 41% of respondents thought that Bitcoin will remain under $100,000 this year.

This is compared to the 16% that believed the same back in March this year when Bitcoin was exchanging hands at $55,000. PlanB went on to say that Bitcoin prices deviating from the S2F model make even him feel “a bit uneasy.”

The model, as the name would suggest, uses the stock-to-flow ratio to value Bitcoin. This ratio is defined by the current number of Bitcoin in circulation at a given time and the incoming flow of newly mined Bitcoin. As evident in the chart describing the model, historically, Bitcoin has traced the price estimates in a fairly accurate fashion at most times.

As pointed out by the chief investment officer of Moskovski Capital, Lex Moskovski, the negative S2F deflection — the ratio between the market price of Bitcoin and the S2F ratio — is now the highest it has ever been in the history of the token. He went on to say that for believers in the S2F model, this is a great time to buy Bitcoin as this price drop could be perceived as an unexpected dip.

Lennix Lai, director of Financial Markets at cryptocurrency exchange OKEx, spoke with Cointelegraph on the limitations of the S2F model, saying:

“Despite its limited predictions, the S2F model only had limited power over Bitcoin price prediction because it assumes the production of Bitcoin will be limited. While its simplicity makes the concept easier to understand, PlanB debuted the Bitcoin S2F model back in 2019, demand back in the time is a different story to now, in which demand has a direct influence on its intrinsic value.”