More and more groups of investors are interested in Bitcoin. The latest price rally has confirmed this interest. Compared to the price a year ago, the crypto asset has increased more than nine-fold. It has almost doubled since the beginning of the year.
While Bitcoin owners enjoy these courses, value investors and other investors are still struggling to evaluate Bitcoin and other cryptocurrencies. Opinions have been divided on an appropriate valuation method for Bitcoin for a long time. The crypto asset generates neither interest nor cash flow, which is why a model quantitative assessment is difficult. The so-called stock-to-flow model is intended to remedy this.
The search for the valuation model
There are now numerous valuation approaches. Probably the most prominent attempt was launched by a Twitter user with the pseudonym PlanB. His model is based on the so-called stock-to-flow figure. This guideline value measures the relationship between the existing supply of any raw material – gold, silver, platinum, oil, or even Bitcoin – to its annual new creation or production.
In this sense, the stock-to-flow ratio is first and foremost an economic concept. This was used by PlanB to model the Bitcoin price in order to be able to make statements about future price developments. After initial criticism, the pseudonymous financial analyst duplicated and published an adapted version of his stock-to-flow model. With “price predictions” of up to $ 288,000 by the end of 2024, he made music in the ears of Bitcoiners.
But even his adjustments failed to convince critics. These insisted on the flaws and incoherence of his model. Others believed that the model coherent with its own revisions, thereby compelling made to have. The debate about the usefulness of applying the stock-to-flow model to Bitcoin, therefore, remains fiercely competitive.
Stock-to-flow: tautology of money
Which statements can actually be derived from the stock-to-flow ratio? The economics of monetary theory, where the stock-to-flow issue has its origin, is quite clear in this regard: the ratio measures the “hardness” and thus the suitability of a thing as money. Because money is by definition the most salable good and therefore has the highest exchangeability.
In economic terms, this is expressed in the fact that money has the least decreasing marginal utility compared to other goods. So you are happy about every additional unit of money, while at some point you will feel saturation with other goods. The reason for this is precisely the high marketability of money, which is universally exchangeable for all other goods.
The more salable and thus exchangeable a thing, the more worthwhile it is to keep it. This shows the tautology of money: A good is hoarded because it is easily exchangeable and it is simply exchangeable because it is easy to hoard. There are prominent attempts in monetary theory to resolve this circular argument. Ultimately, it is always paradoxical market processes that resolve these contradictions in practice, in that cause and effect are often unclear, but nevertheless fuel each other.
Scarcity is relative
The ability to hoard money is thus expressed in a high stock-to-flow ratio, as large amounts of it are hoarded and relatively few new units come into circulation. The “perfect” money also shows rising marginal costs in production. That means: the more you want to produce, the more costly the additional production becomes. This fact is often referred to as scarcity.
A high stock-to-flow ratio can be translated into everyday language as follows: Due to a high stock, i.e. inventory, it can be assumed that all units of a good that have ever been created are potentially still available somewhere. That is because the good can probably not be consumed or consumed, but any stock is a potential offer (see gold). At the same time, the flow can only be expanded with difficulty due to rising marginal costs in production.
Based on this, one can conclude that goods with a high stock-to-flow ratio are only relatively scarce. There is actually no such thing as an absolute scarcity. Because scarcity is determined by the ratio between supply and demand determined. The supply or sales volume, in turn, results from new production (flow) and existing stocks (stock). If scarcity prevails, supply and demand are not in “equilibrium”. What is meant is that the stock of the said good is heavily hoarded and not offered on the market. Because the flow component is difficult to influence, it is hardly possible to put more flow on the market by creating a new one in order to compensate for the “scarcity”. This expresses the hardness of a good with a high stock-to-flow ratio.
A high stock-to-flow ratio is necessary but not a sufficient condition for the money. A high stock-to-flow ratio is also a required characteristic for a good to serve as hard money. At the same time, the key figure does not say anything about how the market participants rate the said well.
Stock-to-flow: Monetization is followed by stability
But what does this have to do with Bitcoin? Bitcoin’s high stock-to-flow ratio is an indication of its hardness as money. Due to its high divisibility, uniformity, durability, portability, and “scarcity”, the crypto asset also has those properties that make it suitable money. It is these facts that currently make people discover Bitcoin as monetary.
This discovery process is far from over. The more people discover Bitcoin as a monetary alternative, the higher the price is likely to rise. The fact that the stock-to-flow model, in whatever version, can correctly predict future price development based on past data points is by definition excluded. Past results can never be converted into future income with absolute certainty.
Ultimately, that is probably not the intention behind such models. Rather, they serve to give investors ( hopeful ) indications. It can also be assumed that the model is confirmed here and there in the sense of a self-fulfilling prophecy, as the past correlation shows.
The following should be exciting to observe: In money theory, a high stock-to-flow ratio should gradually translate into low volatility. Due to high stocks, the probability is higher, ceteris paribus, that negative supply shocks or positive demand shocks can be compensated for in the price. Potential supply in the form of stocks can leave the hoard at any time and have a stabilizing effect on the price.
Examples and counterexamples are provided by oil and gold. The stock-to-flow ratio of crude oil is very low, hence the large price fluctuations when it comes to distortions on the supply side. In the case of gold, on the other hand, the high stock-to-flow ratio has a price-dampening effect. For Bitcoin, this could mean in concrete terms: Once its monetization phase, which follows an S-shaped curve, is “completed”, the Bitcoin price should also become less volatile due to the steadily growing stock-to-flow ratio.
Does Bitcoin’s high stock-to-flow ratio prophecy in the long term, so price stability? In any case, a correct interpretation of monetary theory and its concepts would suggest that. Use this crypto technical analysis to get more accurate numbers regarding the future prices of bitcoin
