Bitcoin Stock-to-Flow: Scarcity-Based Valuation and Its Limits
Summary
The document explains the Bitcoin stock-to-flow model, which compares the existing supply of an asset with the amount newly produced each year. Originally used to discuss precious metals, the approach was applied to Bitcoin by PlanB in 2019. Because Bitcoin has a capped supply and scheduled halvings, the model treats scarcity as a driver of long-term value. The text illustrates the calculation using Bitcoin supply and issuance figures, then describes how halvings affect the ratio.
It presents the model’s appeal as a supply-focused framework whose forecasts have appeared aligned with some halving-related price movements. Its limitations are substantial: it does not incorporate changing demand, market volatility, or unexpected economic shocks, and its optimistic assumptions can make forecasts unreliable. The document also notes public criticism, including concerns that the model rests on dubious assumptions. It offers no systematic performance test or evidence that the ratio predicts prices reliably, and concludes that it should be considered alongside other indicators rather than used alone for investment decisions.
Key ideas
- Stock-to-flow divides an asset’s existing supply by its annual new issuance.
- Bitcoin’s capped supply and issuance halvings make scarcity central to the model.
- The model has been associated with halving-period price forecasts, but the document provides no formal predictive test.
- Its framework omits demand shifts, volatility, and unexpected economic events.
- The document advises against relying on stock-to-flow as a sole investment signal.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.