Thriller Coin Talk - S3EP11: Bitcoin Stock to Flow Ratio

Bitcoin, Stock-to-flow Model:

Stock-to-flow Ratio:

Stock-to-flow Ratio for a commodity is defined as it’s years of inventory relative to annual supply. While the economic utility of a consumable good is created when it is destroyed or used up, the utility of investment assets lies in their possession and later resale. Industrial commodities therefore have low stock-to-flow ratios, this is to say, inventories usually only cover consumption demand for a few months. If there were no inventories at all, supply would have to correspond exactly to production and demand exactly to consumption. However, if there are inventories, consumption can temporarily exceed production. Since inventories of consumable commodities are as a rule very low, prices will rise quickly in anticipation of a future supply shortage and bring consumption into balance with production. As opposed to this, the price stability that comes with having a huge pile of inventory gives platinum, gold and silver a new monetary aspect. The demand driven by the store-of-value use case for gold, for instance, far outstrips that from actual industrial use cases.

Similar to gold, Bitcoin also exhibits a very high stock-to-flow ratio due to its low issuance relative to its current supply. One of the reasons why Bitcoin is often referred to as “Digital Gold” is because of its high stock-to-flow ration which is comparable to Gold’s. Moreover, Bitcoin’s stock-to-flow ratio will only increase with time, and soon surpass Gold’s, as the block rewards are reduced by half at the end of every halving cycle, resulting in diminishing future issuance. After the upcoming halving event, 84% of all bitcoin would have been mined.

The hypothesis in this study is that scarcity, as measured by SF, directly drives value.

What is very interesting is that gold and silver, which are totally different markets, are in line with the bitcoin model values for SF.

This gives extra confidence in the model. Note that at the peak of the bull market in Dec 2017 bitcoin SF was 22 and bitcoin market value was $230bn, very close to silver.

Because halvings have such a big impact on SF, I put months until the next halving as a color overlay in the chart. Dark blue is the halving month, and red is just after the halving. Next halving is May 2020. Current SF of 25 will double to 50, very close to gold (SF 62).

The predicted market value for bitcoin after May 2020 halving is $1trn, which translates in a bitcoin price of $55,000. That is quite spectacular. I guess time will tell and we will probably know one or two years after the halving, in 2020 or 2021. A great out of sample test of this hypothesis and model.

Coin Talk:

Bitcoin Descending Triangle Car is referring to on the show.

Resources:

PlanB Medium Article

https://medium.com/@100trillionUSD/modeling-bitcoins-value-with-scarcity-91fa0fc03e25

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