Explanation of the Stock to Flow Model as Bitcoin Pulls Back – Market Insights – TradeStation Market Insights

Bitcoin is having its worst week in over three months. Is it a bargain? Lets review a common valuation model for perspective the stock to flow model.

The Stock-to-Flow model attempts to value BTC in a way similar to other scarce assets like gold and silver. Its basic concept is that widely produced commodities like oil, wheat and copper arent good stores of value because new supply is always coming online. But only small amounts of new BTC, gold and silver are regularly introduced. This theoretically makes their value more stable.

Also known as S2F, the model quantifies scarcity by taking the total global supply of a commodity and dividing it be annual production. A higher value means that less new supply is entering the market. That translates into more scarcity and less inflation.

An unnamed Dutch investor using the moniker PlanB released the initial S2F model in on the website Medium in March 2019. Its gained widespread following as a paradigm for valuing BTC, which has appreciated more than 300 million percent from its launch in January 2009.

The cryptocurrencys S2F is now about 56 times. Approximately 18.5 million BTC currently exist, and roughly 900 new coins are created each day. That translates into about 328,500 per year.

In comparison, golds S2F is about 62 times. Thats based on about 185,000 tons of existing supply and 3,000 tons of annual production. Silvers S2F is about 22 times, according to PlanB.

The S2F model then looks at historical values of BTC and projects where it might go over time. This brings us to the most important part of the model: limited supply.

BTCs claim to fame is that only 21 million coins can ever exist. This is totally different from fiat currency created by central banks. Its somewhat different from precious metals because gold and silver production can increase over time. (Mining is relatively stable but not fixed.)

Satoshi Nakamoto designed Bitcoin to ensure that new supply will shrink over time. Every 210,000 blocks, or about four years, the reward issued to miners get cut in half. The last of these so-called halving events was in May.

As a result, the flow portion (denominator) in the S2F model gets smaller. That increases the S2F ratio, making BTC more scarce as time goes on.

Based on historical prices, the S2F model originally estimated BTCs total value should be about $1 trillion. That would translate into more about $55,000 per coin about 5 times its current value. PlanB updated the model on April 27, 2020, to include more calculations based on gold and silver. He or she then raised their price forecast more than fivefold to over $288,000.

Due to the limited historical record of cryptocurrencies like BTC, were not able to assess the effectiveness of PlanBs Stock to Flow model. And, none of this article should be viewed as a recommendation of any kind. We simply wanted to outline a key concept being used for the worlds biggest cryptocurrency at a time when more investors are considering blockchain assets.

Keep reading Market Insights for more news and education on cryptocurrencies. Next time well dig into Decentralized Finance (DeFi), a key activity associated with Ethereum the second-biggest crypto.

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Explanation of the Stock to Flow Model as Bitcoin Pulls Back - Market Insights - TradeStation Market Insights

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