Stock-To-Flow: where is Bitcoin price going?

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One of the main features of Bitcoin is its price fluctuation.

In the early days of Bitcoin, the price of BTC could fluctuate by up to 15% when measuring the standard deviation of daily returns in 30-60 days.

These fluctuations at the beginning of Bitcoin and its rise in value made it equal with the national currencies of Sierra Leone, Uzbekistan, and Nigerian naira in terms of purchasing power.

Although Bitcoin’s volatility has decreased in recent years, between 2-4% in the past 12 months, the Bitcoin price prediction has remained a solid pillar in the imagination of cryptocurrency analysts and followers.

Dozens of analysts are studying charts to discover subtle shifts in Bitcoin’s price to help determine where the cryptocurrency might move to the next stage.

In general, some have suggested that Bitcoin’s price will eventually go to zero, while others have said that there is no theoretical limit to how high it will be.

Among all these models and predictions, there is an idea that captured the imagination of Bitcoin lovers, namely:

“Stock-To-Flow” Model

The idea behind this model is simple:

As Bitcoin continues to be scarce, the price will increase.

So far, as the chart above demonstrates, the model has largely predicted bitcoin’s price movement.

This has led to an intense debate about the merits of this model.

Some even believe that this model is the reason why institutional investors participate in the bitcoin market.

This model indicates that Bitcoin will be worth ten times over the next few years.

Others believe that the oversimplification of supply and demand is an unreliable reason to invest, and they also highlight several flaws in the model.

What is the Bitcoin “Stock-To-Flow”?

An anonymous Twitter user created the “Stock-To-Flow” template with the pseudonym “PlanB,” who claims to be a Dutch investor with a financial and legal background and manages nearly $ 100 billion in assets.

The model calculates the ratio based on the current supply of the asset versus the amount being traded.

The higher the number, the longer it takes production to meet current demands, and the asset becomes rarer.

Let’s take the Gold, for example.

The ratio of the “Stock-To-Flow” model for Gold is around 66, which means that it will take 66 years of gold production to produce the current amount of gold supply currently in circulation.

Commodities such as Gold and silver are struggling to increase their supply significantly, given that the search for Gold is expensive and time-consuming.

Bitcoin is similar, and it is also rare by design.

When the anonymous creator Satoshi Nakamoto created Bitcoin, it was supposed to have a limited supply, as it would become difficult to extract it from the network over time.

Today, nearly 90% of Bitcoin’s supply has already been mined and extracted.

This increasing scarcity, says the “Stock-To-Flow” model, is why Bitcoin’s price is expected to reach $ 1 million sometime in 2025 as it is under upward pressure on the price.

PlanB subsequently released an updated version of his “Stock-To-Flow” template that reviews Bitcoin’s growth to about $ 288,000 by 2021.

Many believe in PlanB’s “Stock-To-Flow” model.

Earlier this year, “PlanB” surveyed hundreds of thousands of users, asking how many people would agree with his expectations that the bitcoin price would continue to rise.

A third of the participants in the survey agreed with what the “PlanB” Model refers to.

Bitcoin analyst Nick Implo said on Twitter:

The model gives us some clues to show that [supply and demand] is an essential variable in understanding Bitcoin’s value.

Criticism of the “Stock-To-Flow” model

One of the most vocal critics is Vitalik Buterin, the co-founder of Ethereum. In his tweet, he said:

The halving theory that causes bitcoin’s price to rise is irrefutable.

But did Bitcoin reach its peak before halving? (As the “Stock-To-Flow” template illustrates).

The peak of the last $ 20,000 was near the midpoint between the 2016 and 2020 halving.

Simply put, Buterin believes that it is impossible to refute the effect of the mining reward split, so the Stock-To-Flow model is not particularly helpful.

Niko Cordero, the chief investment officer, and director of the Strix Leviathan Fund, has also criticized the “Stock-To-Flow” model. He believes that the model’s accuracy is likely to predict the future bitcoin price as astronomical models have in the past expected financial results.

Despite criticism of the “Stock-To-Flow” model, its resonance is rising and echoing across the crypto arena, whether investors agree to it or not.

Whaletank Team

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