Bitcoin Stock-to-Flow: From Scarcity Theory to Investment Practice

Why Scarcity Matters for Valuing Bitcoin

Since its launch in 2009, Bitcoin has revolutionized the financial system, becoming the first fully decentralized digital currency based on transparency and predictability. The cryptocurrency peaked at over $69,000 in November 2021, attracting investors worldwide. However, Bitcoin’s path is characterized by extreme volatility, bull and bear cycles, making it challenging to choose the optimal entry point.

It is in this environment of uncertainty that the Stock-to-Flow model (S2F) provides investors with an analytical tool to assess Bitcoin’s future value based on the principle of scarcity. This model offers a perspective on cryptocurrency through the lens of classical economic theory, which has long been applied to precious metals like gold and silver.

Core Mechanism: Stock versus Flow

The Stock-to-Flow model operates with two key metrics:

Stock (Stock) — the total amount of Bitcoin that has already been mined and is in circulation at the moment. As it approaches the limit of 21 million coins, the stock continuously increases, but the rate of its growth slows down.

Flow (Flow) — the annual volume of newly mined Bitcoin. This metric directly depends on the halving schedule, during which the block reward is cut in half approximately every four years.

The S2F ratio is obtained by dividing the current stock by the annual flow. The higher this ratio, the scarcer the asset, and according to the model, the higher its potential value. Historically, gold has one of the highest S2F ratios among all commodities, which explains its value over millennia.

How Halving Transforms Bitcoin’s S2F

The halving mechanism is a critical element of Bitcoin’s system and directly impacts the S2F ratio. Approximately every four years (or after mining 210,000 blocks), the mining reward is halved. This means the annual flow of new Bitcoin decreases significantly, while the stock remains the same or grows more slowly.

History shows a pattern: after each halving, Bitcoin’s price demonstrated substantial growth in the following months and years. According to PlanB (creator of the S2F model), Bitcoin could reach $55,000 during the 2024 halving and potentially $1 a million by 2025. However, the current BTC price at $88.68K indicates that the market is evolving in a more complex manner than linear model predictions suggest.

Factors Beyond Scarcity

Despite the elegance of the S2F model, the actual value of Bitcoin is determined by a much more complex ecosystem of factors:

Demand dynamics and adoption — expanding use of Bitcoin as a means of payment and store of value by corporations and countries influences demand regardless of its S2F ratio.

Changes in mining difficulty — the Bitcoin network automatically adjusts mining difficulty every two weeks to maintain a consistent block time. External factors such as energy costs and hardware influence mining profitability and indirectly affect the flow.

Regulatory environment — favorable or repressive legislation in key jurisdictions can drastically alter demand for Bitcoin regardless of its scarcity.

Technological innovations — developments like second-layer scaling (Lightning Network), improvements in scalability and security can increase Bitcoin’s utility and attractiveness for both retail and institutional investors.

Macroeconomic cycles — inflation rates, currency devaluations, financial crises, and global economic conditions can make Bitcoin more or less attractive as a store of value.

Competition from alternative cryptocurrencies — the emergence of altcoins with new technologies or use cases can divert capital from Bitcoin.

Market psychology — investor sentiment, media coverage, geopolitical events, and public opinion often create bubbles and crashes that the S2F cannot predict.

Experts Divided: Support and Criticism of S2F

Opinions among prominent figures in the crypto industry regarding the reliability of the model are far from unanimous.

Ethereum co-founder Vitalik Buterin sharply criticized the S2F model, calling it “not very good” and “harmful” due to its potential for erroneous forecasts. He points out the oversimplification of demand and supply dynamics and the linear forecasting approach as significant drawbacks.

Adam Back, CEO of Blockstream and early Bitcoin supporter, considers S2F as a reasonable curve fitted to historical data. He supports the logic that a slowdown in the growth rate of new supply should lead to price increases as scarcity rises.

Kori Clippsten (Swan Bitcoin) and Alex Krüger (a well-known crypto trader) are skeptical about the predictive power of the model. Krüger describes the price forecasting approach based on S2F as “meaningless,” since it ignores many other factors.

Nico Cordeiro (Strix Leviathan) criticizes the model’s basic assumptions, asserting that relying solely on scarcity as the determinant of value does not reflect the real complexity of Bitcoin valuation.

Practical Application of S2F: From Theory to Strategy

If you decide to incorporate the S2F model into your investment strategy, here are key steps:

Deepen your understanding of the mechanics — start by understanding how the stock-to-flow ratio is calculated and how it relates to Bitcoin’s historical price movements. Study how halving events have affected this metric in the past.

Historical analysis with caution — examine correlations between S2F and BTC price in previous cycles, but remember the golden rule of investing: past results do not guarantee future performance.

Diversify analytical tools — use S2F as one of many elements in your analysis. Combine it with technical analysis (support and resistance levels, wave analysis), fundamental analysis (ecosystem development, adoption), market sentiment analysis, and macroeconomic factors.

Monitor external variables — track changes in the regulatory climate, technological developments in blockchain, geopolitical events, and overall economic conditions. All of these can drastically alter demand and supply dynamics.

Strict risk management — set clear rules: position size, stop-loss orders, target prices. Remember that the cryptocurrency market is highly volatile, and the S2F model is not a universal insurance policy.

Long-term horizon — the S2F model works best for investors with a multi-year outlook. Short-term fluctuations can be unpredictable, even if the long-term trend aligns with S2F forecasts.

Continuous adaptation — the crypto market evolves rapidly. Regularly reassess your strategy in light of new data, market condition changes, and technological developments.

Critical Limitations of the S2F Model

Despite its popularity, the Stock-to-Flow model has serious limitations that investors should consider:

Mono-focus on scarcity — the model assumes scarcity is the primary determinant of value, as with gold. However, Bitcoin is not just a store of value; it is a technological system whose utility can change over time. Developments in functionality (scalability, speed, ease of use) can significantly influence demand regardless of scarcity.

Ignoring external factors — the model largely neglects technological innovation, regulatory changes, economic cycles, geopolitical events, and shifts in market sentiment, which often play a decisive role in price.

Predictive accuracy issues — although the model has shown some correlation with historical data, its ability to forecast future prices is disputed. It failed to predict, for example, the price remaining below $100,000 in recent cycles, highlighting its limitations.

Misinterpretation risks — optimistic forecasts like (a million dollars per Bitcoin$1 can mislead novice investors into taking simplified scenarios as guaranteed outcomes in a highly volatile market.

Market nonlinearities — a simple mathematical model cannot capture the complexity and unpredictability of market psychology, the emergence of new assets, Bitcoin’s evolving role in portfolios, and ecosystem development.

Final Perspective: S2F as a Tool, Not a Holy Grail

The Stock-to-Flow model is a valuable but incomplete tool for analyzing Bitcoin. It provides a theoretical basis for understanding how scarcity influences value and has historically shown some correlation with price movements, especially around halving events.

However, critical analysis indicates that Bitcoin’s future value will be determined by a much more complex interplay of factors: adoption scale, technological development, regulatory environment, macroeconomic cycles, and competitive dynamics in the crypto space. Investors should use S2F as part of a broader analytical toolkit, not as the sole decision-making guide.

The current Bitcoin price at $88.68K, with an all-time high of $126.08K, demonstrates that the market remains highly volatile and susceptible to many influences beyond any single model. Success in investing requires a comprehensive approach, flexibility, and readiness to adapt strategies to changing conditions.