The Stock-to-Flow Ratio model is used in relation to natural resources. Let’s take an example of one common commodity, such as gold. The World Gold Council was estimating more more than 190,000 tons of gold have ever been mined today. This amount is what we can call stock. On the other side, there are more than 2,500 tons of gold mined every year and this amount that we can call a flow.
So, can the S2F model be used on crypto assets such as Bitcoin, and if so, what is the effect on the price?
Understanding the Stock-to-Flow Ratio Model
The Stock-to-Flow (S2F) Ratio model will show the annual supply entering the market. A higher S2F ratio means less new supply, supporting long-term asset value.
However, certain consumer goods and industrial commodities usually have a lower Stock-to-Flow ratio. Since the main value is usually derived from consumption, the available supply (stock) is usually only able to cover demand.
As investment assets, these resources often perform poorly in the long term using the S2F model. In some general examples, prices may rise rapidly in anticipation of a future shortage of the commodity, but the production will also follow the market demand.
To understand how the Stock-to-Flow Ratio model works, let’s illustrate it on simple calculation. Gold has a total supply of more than 190,000 tons and is mined around 4,000 tons every year.
The formula used is S/F = SF, which means 190,000/4,000 = 47.5 years.
Basically, the higher the Stock-to-Flow number, the rarer the commodity is.
Bitcoin Stock-To-Flow Ratio
Bitcoin is comparable to a precious resource due to its scarcity and the high cost associated with its production. Moreover, its total supply is limited to only 21 million coins. Besides, Bitcoin issuance was determined by the difficulty level of the protocol, making the flow predictable with the Stock-To-Flow Ratio (S2F).
Additionally, Bitcoin also uses the halving method, where it’s happen every 210,000 blocks (roughly four years). At present, there are approximately 19.44 million bitcoins in circulation, and the new supply is mined at a rate of about 0.3 million or over 300,000 bitcoins per year until the halving in 2024.
Currently, the Bitcoin Stock-To-Flow Ratio is 57.5, and it’s predicted that in the next halving in 2024 will increase the rate to more than 120. This indirectly illustrates that Bitcoin is also a rare asset.
How Does the S2F Model Impact the Bitcoin Price?
The Stock-to-Flow (S2F) model greatly influences the Bitcoin price. This model measures how scarce Bitcoin is by comparing the amount already available (stock) to the new supply added each year (flow). A higher S2F ratio means Bitcoin is rarer, and history shows that such scarcity often leads to higher prices.
The S2F model has gained attention because it can help predict Bitcoin’s price changes. As the supply rate decreases due to halvings, the S2F ratio rises, making Bitcoin seem even scarcer. This has made many people believe that the S2F model contributes to Bitcoin’s long-term price growth.
The chart above illustrates the S2F model’s accuracy in Bitcoin trading, showing several price spikes during the halving process.
Conclusion
The Stock-to-Flow (S2F) Ratio model plays a critical role in understanding the scarcity and potential impact on prices of various assets, including Bitcoin. This model helps evaluate the balance between the existing supply (stock) and the new supply entering the market (flow).
A higher S2F ratio indicates a scarcer asset, which has historically been associated with higher prices. Overall, the S2F model provides valuable insights, but it should also be considered alongside other fundamental and market factors when evaluating Bitcoin’s price.
Personal Note From MEXC Team
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