Perianne Boring, the Founder of the Chamber of Digital Commerce, said one Bitcoin would equal ten thousand ounces of gold in eight years. Her lofty statement was the result of analysis using the stock-to-flow (S2F) model.
The S2F model measures the scarcity of a particular resource. It uses a ratio based on the amount of a resource held in reserves (stock) divided by the amount produced annually (flow). In other words, as Bitcoin’s S2F ratio rises, so will its price.
Crypto trader and Twitter personality PlanB was the first to apply this model to Bitcoin. He made a statistical model using the S2F data in conjunction with historical Bitcoin prices. This resulted in data points on a scatter plot to create his model.
According to the S2F model, Bitcoin will hit the $1 million mark sometime around spring 2025.
But how credible is the S2F model?
The stock-to-flow model indicates an undervalued Bitcoin
Speaking on CNBC’s Squawk Box, Boring made a case for an undervalued Bitcoin. She led by saying the Metcalfe’s Law put a $72,000 price tag on Bitcoin, which equates to an approximate 20% undervaluation based on the current price.
Boring also referred to the S2F model, citing a price of between $100,000 and $288,000 this year, further backing this up by saying the model is 94% correlated.
“We have twelve years of data on stock-to-flow in Bitcoin, and if you measure it using U.S. dollars, stock-to-flow is 94% correlated. If you use gold, stock-to-flow is 99% correlated.”
And if that wasn’t ambitious enough, Boring dropped a bombshell by saying, in 2029, 1 BTC would equal 10,000 gold ounces. Current figures put 1 BTC at 33.5 gold ounces.
The stock-to-flow model has limitations
Although this model makes for an exciting way to measure scarcity, limitations cast doubt on its efficacy in predicting future prices.
For one, it assumes scarcity/supply is the sole driver of value. This assumption fails to take into account other variables, especially demand. Convention dictates that price comes from the interplay between supply and demand.
But the S2F model does not account for demand while also skipping over unexpected happenings such as a hypothetical crypto ban or Black Swan event.
Economist Alex Kruger poured cold water over the idea that scarcity and price would have a predictable and long-running relationship.
“[it’s] nonsensical to think that bitcoin stock-to-flow, a number that goes up programmatically, and everybody knows what it will be at any point in time, can be used to predict price.”
S2F doesn’t account for all aspects of Bitcoin’s valuation. Add to that the relatively small data set (of ten or so years), and, on the basis of scientific rigor, it fails to stack up.
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