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What is the Stock-to-Flow model and what it is criticized for?
The Stock-to-Flow model was proposed by an anonymous PLANB analyst in an article by Modeling Bitcoin Value with Scarcity (“Modeling Bitcoin value, taking into account a limited issue”), published in 2019.
The author reports that he was an institutional investor with 25 years of experience, and previously worked in the financial and legal sector. PLANB interests also include investment strategies and blockchain analysis. In another publication, the trader mentions that he controlled multi -billion dollar assets. It is not known about who Planb is.
How the Stock-to-Flow model works?
The model has the idea of a researcher Nika Sabo, according to which precious metals and collecting items are in constant deficit due to the high cost of their creation. This approach Planb used for bitcoin.
For the asset, the SF parameter is calculated, equal to the ratio of the stock of the asset to the influx. This is the value of the proposal grown. The supply corresponds to the total volume of reserves, and the influx is equal to the volume of annual production or production.
Consumables, ferrous metals and consumer items are characterized by a low reserve ratio to the influx, and more rare objects and precious metals have a high indicator.
Products and materials with low SF are not rare. With an increase in prices for them, manufacturers will significantly increase production and eliminate the deficit. For rare objects, it is difficult to increase production, or this is associated with high costs.
The author uses a concept for gold and silver, the production volume of which was 1.6% and 4.5% of the reserve. Increasing the need for these metals will lead to an increase in value, since there is no way to significantly increase production and satisfy demand.
At the time of the publication of Stock-to-Flow, the Bitcoin emission was 17.5 million, and the influx due to mining-0.7 million per year. SF of the first cryptocurrency was 25. The influx is determined by the reward for the block. It was originally equal to 50 bitcoins, but every 210,000 blocks, or about once every four years, payments are halved in half. This event is called halving.
Reducing the Blok award determines the values of the influx and sf. Planb calculated the monthly SF values for Bitcoin from December 2009 to February 2019 and received 111 points.
The schedule uses a logarithmic scale, which clearly visualizes the size of $ 10,000 to $ 100 billion. Time until the next halving is shown using a color gradient. The dark blue corresponds to the month in which the reward for the block decreased, and red-the next month after the event.
According to the Planb model, he predicted that the market capitalization of bitcoin after the 2020 halving will be $ 1 trillion, and its price will exceed $ 55,000.
How phase transitions complement the Stock-to-Flow model?
The author supplemented the Stock-to-Flow concept with the concept of phase transitions, which excludes the temporary factor. Substances undergo transformations, which endows them with new properties. For example, there are four phase states of water: solid, liquid, gaseous and ionized.
The US dollar also underwent transformations: a gold coin; banknote, backed up by gold and unsecured banknote. Its properties were significantly different in different phases.
Planb applied a concept for bitcoin. The author compares the first cryptocurrency with water and the US dollar, which have different properties in each phase. The perception and area of use of bitcoin changed over time.
The attitude to the first cryptocurrency was transformed smoothly, but Planb highlighted four phases:
- Proof of the concept. The first phase began with the publication of Whitepaper, which was followed by the launch of the Bitcoin network.
- Payment. The beginning of the phase is associated with the overcoming of Bitcoin value of $ 1, after which its gradual acceptance of a payment fund on the Internet began.
- Digital gold. After the first halving bitcoin, its price approached the cost of ounce of gold. These events led to the transition to the third phase.
- Financial asset. Exceeding the volume of transactions $ 1 billion per day, which took place after the second halving, marked the transition to the fourth phase. The latter characterizes the mass adoption of bitcoin in the financial sector.
In one of the other works, Planb identified four clusters (points groups) on the schedule of the Stock-to-Flow model, which correspond to the Bitcoin phases he invented. The initial Planb forecast involved an increase in the cost of cryptocurrency to $ 55,000.
When the SF parameter in BTC becomes equal in gold, bitcoin will go to the fifth phase. This will lead to an increase in the cost of the first cryptocurrency to $ 288,000, and its capitalization will be $ 5.5 trillion. According to the assumption of the analyst, the forecast can be realized until 2024.
How the Stock-to-Flow Deflection indicator works?
Subsequently, we developed a technical indicator Stock-to-Flow Deflection shows the ratio between the price of bitcoin and its cost found by the corresponding model. Parameter values are designed for the entire period of the existence of cryptocurrency.
If Stock-to-Flow Deflection takes a lesser of one, then bitcoin is underestimated. If the parameter exceeds a unit, a drop in the cost of cryptocurrency is predicted.
Some traders use this indicator in trading. They buy bitcoin if its cost is lower than the estimated one, and open short positions when the first cryptocurrency, according to the indicator, is overestimated.
What is the Stock-to-Flow model criticize?
Several years have passed since the publication of the concept, for which it could not be realized completely. Investment Director of Strix Leviathan Nico Cordero believes that the Stock-to-Flow model is fundamentally wrong, since when calculating SF chose arbitrary data for gold and silver.
The analyst suggests that Planb could choose the data for the best correspondence of the model. As a result, it was possible to obtain linear dependence in logarithmic coordinates for gold, silver and bitcoin. The critic draws attention to the lack of interconnection between the capitalization of goods and precious metals, expressed in US dollars and an increase in their production.
Cordero calculated SF for gold over the past 115 years. Its results demonstrate the lack of communication between the capitalization of precious metal and the calculation parameter. The cost of all gold reserves changed from $ 60 billion to $ 9 trillion with an almost constant value of SF, equal to 60.
In the study, criticism notes that the price of precious metal increases primarily when the purchasing power of the US dollar falls. Due to inflation, the cost of the American currency since 1915 has decreased by 25 times, which explains the growth of gold value.
According to Niko Cordero, Stock-to-Flow is built exclusively according to historical data. There are prerequisites for this, since according to the results of modeling by 2045 the cost of one bitcoin will exceed $ 235 billion.
Stock-to-Flow was also criticized by Huobi analysts. In their opinion, the latter does not take into account macroeconomic factors, for example, the normalization of the FRS monetary policy and an increase in the discount rate.
What is the future of the Stock-to-Flow model?
Planb managed to predict an increase in the cost of the first cryptocurrency up to $ 55,000. Moreover, he complemented the original model. At the same time, although the model is supposed to be used for other assets, in addition to cryptocurrency, most of them have a low SF parameter.
By 2022, many professional cryptocurrency analysts stopped using Stock-to-Flow. Even the creator of Ethereum Vitalik Buterin joined criticism. He noted that the model does not work well in this period of time. According to Buterin, all models that predict the inevitable increase in the value of assets are harmful.
The author of Stock-to-Flow and its adherents agree that the exponential increase in the price of bitcoin will stop. Planb admits that in the future the model may be less relevant. However, it still implies an increase in the cost of bitcoin due to underestimation and deficiency.