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Santiment: Why Bitcoin’s Stock-to-Flow Model Might Work Even Better Than We Thought

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The Article

For the sake of brevity, this article will skim over the methodology behind Bitcoin’s Stock-to-Flow ratio (SF for short). For a detailed introduction to the metric, I suggest reading the original Medium article published by PlanB. If you’re interested in up-to-date predictions of Bitcoin’s Stock to Flow model, you can also head over to Digitalics live chart for a real-time overview.

Also, if you’re interested in up-to-date Stock to Flow charts for Bitcoin, Ethereum or any ERC-20 coin, you can find them live on Sandata, along with 150 other on-chain and social metrics developed by Santiment, like daily active addresses, on-chain trx volume, exchange flow, whale activity and much more!

Instead, this article will add to a specific sub-argument of the Stock-to-Flow framework: namely, that the SF model for gold provides strong validation and statistical support for Bitcoin’s own SF model and its mouth-watering $100k post-halvening prediction.

Even more than PlanB assumed in his original analysis.

But first, a quick glossary:

If you didn’t click on that PlanB’s article yet, the Stock to Flow ratio is a method for evaluating rare commodities like gold, or cryptocurrency. The ratio consists of 2 parameters:

  • “Stock”, or the total existing (already mined) supply of a commodity, divided by
  • “Flow”, or the amount of new commodity being created (mined) each year.

In case of gold, for example, the SF ratio is an assumption (based on yearly mining trends) of how many years it will take for the total amount of existing (mined) gold to double.

The cornerstone premise of the Stock to Flow ratio is that an asset’s value is dictated by its scarcity. In theory, then, higher SF values bode well for the price of the commodity, because it means that it will take longer for its current supply to double – making the asset rarer, and in turn, more valuable.

Simple enough, right?

The Stock to Flow Model for Bitcoin

Since the ‘extraction’ process of Bitcoin and gold even bears the same name (mining), it didn’t take long for people to draw parallels between the two asset classes, and start leveraging the SF ratio for valuating BTC.

A simple regression model was used to fit the Stock-to-Flow values to BTC, and explain Bitcoin’s price over time based on its supply and mining trends (i.e. scarcity)

The result has been a surprisingly accurate model that seems to do extremely well in explaining Bitcoin’s value from 2009 onwards:

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

The above screenshot, taken from PlanB’s article, shows Bitcoin’s price over time (multicolored circles) plotted against the Stock to Flow model’s prediction of Bitcoin’s price over time (unbroken black line), based on the amount of BTC in existence.

The model’s accuracy to date has been impressive, but what’s much more exciting for BTC hodlers is what – allegedly – comes next. According to the formula, the price of Bitcoin should balloon to almost $100k after the next halving, making this basically every BTC bull’s favorite predictive model.

If you too are long on BTC, you’ll love our addendum to PlanB’s analysis, because:

The SF model may be even better than we thought

A good model fit can be explained by a lot of things. If you just try enough model variations and pack them with enough features, while fine-tuning all relevant parameters, you’re almost certain to end up with a ‘working’ framework sooner or later. In reality, what you’re doing is trimming the edges of a square to have it fit through a circle hole.

This is why the SF model is so notable: in his analysis, PlanB validates the model’s predictive powers by showing that it works almost just as well for other relevant assets. Namely – gold and silver.

Given its SF ratio, the current value of gold – and its value over time – lies fairly close to what the SF model actually predicted. The below figure shows PlanB’s visualization of the linear SF model, with gold inserted as a big yellow dot:

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

This is incredibly important because it shows that the model’s parameters can also work in the real world.

At the moment, however, there is one big caveat. The values on the above graph are plotted on a log scale, meaning that the actual total value of gold is still pretty distant from what the SF model predicts, which brings into question the model’s prediction for Bitcoin by proxy.

Here’s the issue – while the SF model predicts something like $2 trillion in gold’s total value based on its current SF ratio, the actual current total value of gold is about $7 trillion, as shown on the graph. Quite the discrepancy, right?

And this is where our humble addition to the SF model comes in. The main reason why I believe the Stock-to-Flow model might actually be even more precise than even PlanB posited.

The total value of gold shown in the above graph (~$7 trillion dollar) is an accurate estimate of the total gold supply in the world. And that’s the issue – it is the estimate of the TOTAL amount of gold in existence – including jewelry and gold used for industrial purposes – and NOT the amount of gold used as an INVESTMENT in the ‘store of value’ sense.

In my opinion, the total value of gold used only as SOV would fit the SF model – and its underlying premise – much better than all the mined gold in existence.

Gold has many different purposes outside of being a private investment. You can’t use Bitcoin for jewelry or as a conductor in the industry which already accounts for half of gold’s usage. Hence it only makes sense to compare Bitcoin’s SF ratio to the portion of total gold that is actually used as private investment as well.

We can calculate this number pretty easily using data from gold.org, which separates total above-ground stocks of gold by:

1.) Jewellery: 92,043 tonnes, 47.6%

2.) Private investment: 41,279 tonnes, 21.3%

3.) Official Holdings: 33,230 tonnes, 17.2%

4.) Other: 26,921 tonnes, 13.9%

5.) Below ground reserves: 54,000 tonnes

Using only the value of gold currently held as private investment, we get an updated current total market value of $1.7 trillion – MUCH closer to the ~2$ trillion prediction made by the SF model. And if we argue that the same percent of new gold is used as an investment, the Stock to Flow ratio should theoretically stay the same.

Illustration of what gold’s stock to flow ratio ratio would look like with gold as private investment

In other words – the Stock-to-Flow model for gold may work a lot better than previously thought. Assuming that’s true, our upgraded version of gold’s SF model is a strong vote of confidence for Bitcoin’s SF model as well.

Silver on the other hand, boasts a total value of about $300 billion according to PlanB’s analysis. Again – this is the total amount of all the mined silver in existence, including industrial silver used in everything from conductors to consumer electronics (the biggest share), silver in jewellery and more.

A much minor portion of silver is used as private investment (coins and bars) – according to some sources, that number is about 14.8% of silver’s total supply:

Percent of the total global silver demand by category

This would put the total value of silver used as private investment at about $44.4 billion, which mirrors the approximations of a few other sources as well.

As for the ‘flow’ part, The Silver Institute puts the percent of silver in coins and bars at around 10-20% per year. Acknowledging that these are still relatively rough estimates, it seems reasonable to assume that the Stock-to-Flow ratio of silver used as private investment should be relatively close to the overall Stock-to-Flow ratio of all silver.

Using only the value of silver currently held as private investment, we get an updated current total market value of ~$40 billion – again, much closer to the current value of Silver predicted by the SF model.

STF model with adjusted gold and silver

By proxy, these updated, ‘on-the-spot’ valuations for gold and silver provide further validation for other predictions made by the Stock to Flow model. And this is where it goes from ‘good’ to ‘possibly incredible’ for Bitcoin. Come the next halving, Bitcoin’s Stock-to-Flow ratio will raise from around 25 at the moment, to approximately 54 – a hair below that of gold’s current SF ratio of 62.

For the sake of argument, let’s assume that BTC bridges this 8-point gap due to the halvening hype. Assuming, then, that a similar SF ratio of gold and BTC would result in similar total values, that would mean an expected BTC market cap of $1.7 trillion post halvening.

Divided by ~18 million coins in existence, this would lead us to a per-Bitcoin price of around $94k – almost the exact post-halvening value currently predicted by the model.

So what can we take away from this? Well, the Stock to Flow model is still far from an exact science. However, based on historical data and the model’s predictive prowess to date, we can at least infer that the price of BTC appears to react to scarcity so far.

More so, fitting the gold’s SF model with SOV gold instead of its total ‘above-ground’ stocks allows us to inch much closer to the model-predicted market value of gold, further validating the ratio’s effectiveness in case of other assets, i.e. Bitcoin.

This small add-on to PlanB’s outstanding analysis makes the SF model – and what it presupposes about the future of Bitcoin – that much more exciting.

P.S. If you want to explore this topic further, Sandata has up-to-date Stock to Flow charts for Bitcoin, Ethereum and all ERC-20 coins, along with 150 other metrics developed by Santiment. It’s one of the most comprehensive platforms for analyzing on-chain and social data for cryptoassets on the market – check it out here!

This article was originally posted by Jan S on Santiment.

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