The following article deep dives the stock-to-flow ratio, which essentially measures the scarcity of Bitcoin (BTC) to predict the future price. Price predictions derived from the stock-to-flow ratio have been highly accurate since the launch of Bitcoin (BTC), and now it is predicting that Bitcoin (BTC) will rally to $50,000-$100,000 sometime during 2021 due to the block halving making Bitcoin (BTC) more scarce.
The stock-to-flow ratio theory for Bitcoin (BTC) was originally posted in March 2019 by a crypto enthusiast named PlanB. The basic theory is that Bitcoin (BTC) is scarce and that scarcity gives Bitcoin (BTC) value. Indeed, only 21 million Bitcoins (BTC) will be mined in total, 18.2 million Bitcoins (BTC) have already been mined, and the Bitcoin (BTC) mining rate is decreasing towards zero long term due to the pre-programmed block halving schedule.
Another way to look at Bitcoin’s (BTC) scarcity is via the concept of unforgeable costliness, which is the original cost of mining a Bitcoin (BTC) or mining some gold. A tremendous amount of electricity, expensive mining rigs, labor, and time are required to mine a Bitcoin (BTC), giving Bitcoin (BTC) a certain unforgeable costliness. For example, a study from September found that mining a Bitcoin (BTC) costs between $5,100 and $8,500.
When the block halving comes, this unforgeable costliness will essentially double, since the amount of energy and time it takes to mine a Bitcoin (BTC) will double.
Apparently one of the best ways to measure the scarcity of a commodity is via the stock-to-flow ratio, which is the circulating supply of a commodity divided by the yearly production, i.e. the stock divided by the flow. Therefore, the stock-to-flow ratio is effectively an estimate of how many years it would take to double the circulating supply of a commodity.
For example, gold has a stock-to-flow ratio of 62, which is the highest among precious metals, and equivalently means it takes 62 years to double the gold supply. Silver has a stock-to-flow ratio of 22, making it less scarce than gold but still relatively scarce compared to palladium and platinum which have stock-to-flow ratios of 1.1 and 0.4 respectively.
Commodities, which are not scarce, cannot see an increase in their stock-to-flow ratio. If the price of platinum rises for example, then production will rise and the price will fall again. Non-scarce commodities have stock-to-flow ratios near or below 1.
Bitcoin (BTC) on the other hand has a stock-to-flow ratio of 27.7 at this time, which is calculated via 18,211,000 Bitcoins (BTC) divided by 657,000 Bitcoins (BTC) mined per year.
This indicates Bitcoin (BTC) is more scarce than silver, although not yet as scarce as gold. When the May block halving comes Bitcoin’s (BTC) stock-to-flow ratio will rise to 56, making it almost as scarce as gold but not quite. When the 2024 block halving comes Bitcoin’s (BTC) stock-to-flow ratio will suddenly spike to 120, theoretically making it much more scarce than gold.
PlanB then found that there was a statistically significant relationship between the stock-to-flow ratio and the market cap of a commodity, with a higher stock-to-flow ratio being associated with a higher market cap. PlanB then initially predicted that the May block halving would ultimately cause the Bitcoin (BTC) market cap to reach $1 trillion due to the rise in the stock-to-flow ratio, corresponding to a Bitcoin (BTC) price of over $50,000.
Further, PlanB found that block halvings worked according to a power-law relationship, meaning a relative change in one quantity leads to a proportional relative change in the other quantity, independent of the initial sizes of the quantities. Specifically, PlanB determined that with each block halving Bitcoin’s (BTC) stock-to-flow ratio approximately doubles, and the Bitcoin (BTC) market cap increases by an order of magnitude.
Notably, a later model has a higher Bitcoin (BTC) price forecast of $100,000. In order to account for the potential range in Bitcoin (BTC) prices calculated via the stock-to-flow ratio, there are probability bands on both sides of the average price prediction.
Fortunately, someone named bitstein took PlanB’s paper and calculations and created a Twitter bot called S2F Multiple which automatically calculates the Bitcoin (BTC) price forecast for the next decade based on the stock-to-flow ratio. An up to date chart can be seen below.
Right off the bat, it is remarkable how Bitcoin’s (BTC) price has stayed within the probability bands almost all of the time. The only times that Bitcoin (BTC) went outside of the probability bands were in the middle of 2011, early 2013, and late 2013 when Bitcoin (BTC) went above the upper bound. Notably, Bitcoin (BTC) has never gone below the lower bound.
It is also important to note that Bitcoin (BTC) can often meander between the upper and lower bounds of this projection, as bull markets and bear markets run their course. So in reality, the price prediction for 2021-2024 is approximately between $50,000 and $500,000
Therefore, the stock-to-flow ratio Bitcoin (BTC) price forecast yields a very broad range, and it is not very useful for predicting exact prices at any given time. However, the utility of this forecast is it quantifies how increased scarcity caused by the May block halving could lead to the biggest Bitcoin (BTC) rally in history, with the price eventually landing somewhere in the neighborhood of $100,000.
Ultimately, there is no guarantee that this forecast will pan out despite its solid track record, and the stock-to-flow ratio will really be put to the test when the May block halving arrives. That being said, this price forecast makes it clear that the block halving has the potential to cause a major Bitcoin (BTC) rally.