What is the Bitcoin Stock-to-Flow (S2F) model?

One of the best known long-term Bitcoin value tracking models is the Stock-to-Flow (S2F) model. This is a simple model in theory but complex in the number of variables it takes into account to generate the graph that you have surely seen in many places on the Internet. Interested in learning more about the Bitcoin Stock-to-Flow model? Read on to learn about its features and everything you need to know about the S2F.

CCreated in 2019 by the anonymous Plan B, Stock-to-Flow seeks to graphically display the Bitcoin revaluation behavior in a long period of time. Basically, S2F is a predictive model of the revaluation of Bitcoin, with time ranges that go year by year and that are usually drawn until the year 2028. That is, S2F draws a baseline of the possible price of Bitcoin year by year until reaching to 2028, and as time passes, it can be seen how the model is fulfilled with a certain margin of error, drawing a "rainbow" that takes into account the proximity of the next Bitcoin halving and its most immediate impact on it: less generation of coins and greater scarcity.

The idea behind Stock-to-Flow

But how is this model possible? What is Plan B based on for your generation? Well, the main idea comes from a simple formula:

SF = stock/flow

Or what is the same:

The scarcity of an asset is given by its existence (stock) and the flow of the asset in the markets (flow).

Basically, this formula tells us that the more scarcity (given by a low value SF), the higher the final value of an asset, while a greater existence (a SF with a high value) indicates that the value of the asset will be lower. 

Plan B, uses this formulation to generate the base of the Stock-to-Flow (S2F) model, applicable to Bitcoin having some very basic data:

1. Bitcoin has a limited BTC stock of 21 million units.
2. The generation of BTC halves approximately every 4 years, or more accurately, every 210 thousand blocks. Since blocks are not generated exactly every 10 minutes, round this value up to 200k blocks.
3. It takes into account a number of lost coins (which generate scarcity because they do not circulate). In the initial model (there are several) the calculation takes into account 1 million lost coins.
4. An S2F cycle (known as a time span) is generated. The time span is calculated with a value of 463 days. This value is given by the formula: Time Span = (Blocks Generated / 3) / 144
   Time Span = (200.000 / 3) / 144
   Time Span = 463 (462,962 for better precision).
   Time spans are identified by dotted vertical lines on the S2F chart and identify market cycles (bull run, bear market, and average stabilization). Cycles get shorter, so this value needs to be adjusted to correct the model over time.
5. The final model is generated mathematically, which synthesizes the above information plus additional data that the analyst wishes to add.

One base model, many Stock-to-Flow models to build

The above is the basic idea behind the Stock-to-Flow model just as Plan B thought in 2019. Without major complications, Plan B devised this formula (corresponding to the fifth point above).

S2F BTC = 0,4 * SF^3

And from it and from all the analyzed data he managed to create this graph:

At first glance we can see how clearly Bitcoin price evolution This is true for this model, even for the year 2020, which was already the future at the time this graph was generated, showing that the price of Bitcoin met the prediction with a certain margin.

Seen this way, it seems simple and it is, but to calculate this accurately it is necessary to have the flow data (existence) of BTC in the network, something for which you need day-to-day records of the amount of BTC generated in the network, what the nodes can indicate. And then perform the calculation for each day (using the formula S2F BTC = 0,4 * SF^3 ) until you reach this chart.

El success of this predictive model It has been such that many were quick to replicate and improve it, including Plan B itself, knowing that it was not perfect and never would be, for one simple reason: the markets and their reality are unpredictable.

An example of these improvements can be seen in the model of Look into Bitcoin, in which we can see a similar behavior.

Of course, this last model does not follow the initial formulation of Plan B, since it is an own interpretation of the model adjusted to its predictive needs.

Is it really accurate?

Despite the good predictions of the Stock-to-Flow (S2F) model, the reality is that it is far from being exact. Like all predictive models, this one may have errors in its final prediction simply due to the entropy of reality. For example, events such as COVID-19 had a strong effect against the S2F predictions and therefore Plan B had to adjust the model to take this situation into account. Of course, other situations may arise and with this the S2F model would no longer be exact.

This has generated long discussions in the community about whether S2F is really a good tool. Its detractors attack it because it has been "clearly manipulated", referring to the adjustments that are made to adapt to the reality of the market. While its defenders indicate that any market predictive tool must be adjusted to take into account supervening factors and thereby adjust the future predictions of the model, which in a certain way continue to be met with acceptable error margins.

In any case, Stock-to-Flow (S2F) is a complementary tool for traders, especially for long-term traders or hodlers, which is where S2F has shown its greatest predictive value. Like any tool, it can be useful in many cases and not in others, but that is something that you must study and adapt to your style of operating in the markets, always bearing in mind its possibilities and limitations.