Deep Dive into the BTC Stock-to-Flow Model: From Scarcity Argument to Investment Practice

The Paradox of Scarcity in a Digital Asset

Since its inception in 2009, Bitcoin has become the first programmable digital scarce resource in human history, thanks to its fully decentralized nature and a fixed total supply of 21 million coins. As of the latest data, BTC price has surpassed $88.83K, approaching its all-time high of $126.08K.

But what drives this? Why does the same technology, when replicated in other cryptocurrencies, fail to garner similar market recognition?

The answer may lie in an analytical framework called the Stock-to-Flow ( S2F ) model. Originally used to measure the scarcity of precious metals like gold and silver, this tool has recently been applied to Bitcoin valuation, gradually becoming a reference for long-term investors’ decision-making.

Core Logic of the Stock-to-Flow Model

From Precious Metals to Digital Assets Analogy

The basic idea of the S2F model is not complicated:

• Stock ( Stock ): The total amount mined and in circulation
• Flow ( Flow ): The amount produced annually
• S2F Ratio = Stock ÷ Flow

A higher ratio indicates greater scarcity, often correlating with higher prices historically. Gold’s high price is due to its extremely high S2F ratio—centuries of accumulation make its annual new supply just a few hundredth of its total stock.

Bitcoin’s Scarcity Mechanism

Bitcoin’s supply model inherently possesses scarcity attributes similar to gold:

• Total fixed at 21 million coins
• “Halving” events occur every four years, halving mining rewards
• Over time, new coin issuance slows down, and the S2F ratio continues to rise

This built-in deflationary mechanism strengthens Bitcoin’s scarcity over time—exactly the opposite of most fiat currencies.

Model Predictions and Historical Performance

Price Fluctuations During Halving Cycles

Famous analyst PlanB derived an “energy curve” based on the S2F model, predicting:

• 2024 halving: BTC may test above $55,000
• Before the end of 2025: potential impact pushing toward the million-dollar mark

These forecasts are notable because historical data shows Bitcoin’s price tends to rise significantly around halving events. Supporters argue this validates the fundamental hypothesis that scarcity drives value.

Why Do Some Believe, and Others Oppose?

Supporters’ Arguments:

• Bitcoin’s co-founder and Blockstream CEO Adam Back believes the model appropriately captures the “supply pressure easing → price rising” logic
• Long-term holders find that investment strategies based on the S2F model have a good track record

Critics’ Arguments:

• Ethereum co-founder Vitalik Buterin openly states the model “performs poorly” and is “harmful,” accusing it of oversimplifying market dynamics
• Trader Alex Krueger argues that using liquidity metrics alone to predict prices is “meaningless”
• The model failed to predict Bitcoin’s recent cycle peak below $100,000, weakening its credibility

Hidden Factors Influencing Bitcoin’s S2F

The Dual Role of Mining Difficulty

Bitcoin’s network adjusts mining difficulty every two weeks to maintain a stable block generation rate. This also means:

• Increased hash power → higher difficulty → actual output may be lower than theoretical
• Further pushes up the S2F ratio, reinforcing scarcity expectations

Market Sentiment and Adoption

Key variables ignored by the model include:

Regulatory Environment: Strict policies may suppress demand, while lenient ones can boost it
Technological Upgrades: Improvements like Lightning Network and cross-chain bridges enhance usability and adoption
Macroeconomics: Inflation expectations, USD trends, geopolitical tensions influence capital flows
Competition from Alternatives: The rise of other Layer 1 blockchains and stablecoins diverts some demand
Media and Public Opinion: A single headline can sometimes outweigh thousands of data points

These factors collectively mean that while the S2F model captures an important aspect of Bitcoin, it is far from the sole determinant.

Proper Application of S2F in Investment

Three Essential Practices

1. Understand the Basic Logic but Avoid Blind Faith in Predictions
   S2F offers a framework for thinking but over-reliance on a single model is risky. Short-term traders especially should be cautious, as model deviations can lead to significant losses.

2. Be Cautious with Historical Backtesting
   The model performs well in certain cycles but does not guarantee future applicability. Market structures and participant compositions are evolving.

3. Build a Multi-Dimensional Decision System
   Combine technical analysis (support/resistance, volume), on-chain fundamentals (activity, institutional holdings), sentiment indicators (fear/greed index), macro factors (interest rates, liquidity) to form a more robust judgment.

Long-term Investor Strategy Framework

• Dollar-Cost Averaging Instead of Timing: Trust in the long-term trend indicated by S2F but avoid trying to predict short-term swings; regular investments smooth out volatility
• Risk Management First: Even if bullish, set stop-losses and limit individual positions
• Continuous Learning and Adjustment: Monitor on-chain data, market structure, regulatory developments, and review strategies regularly

Inherent Limitations of the S2F Model

Why It’s Not a Universal Key?

1. External Shocks Are Unpredictable
The model extrapolates from historical patterns, but black swan events (e.g., major regulation, technical vulnerabilities) can instantly invalidate assumptions.

2. Demand Side Is Severely Underestimated
Scarcity is only half of the valuation equation. As Bitcoin’s utility expands (from store of value to payment method to smart contract layer), demand curves may change non-linearly, which the model cannot capture.

3. The Trap of Linearity Assumption
The model’s logic—halving → scarcity → price increase—is linear. In reality, markets may reach saturation and enter new phases where marginal effects of supply pressure diminish.

4. Risks for Novice Investors
Overly optimistic forecasts (e.g., million-dollar targets) can be misinterpreted as certainties, leading inexperienced investors to buy at inopportune times and bear unnecessary risks.

Multi-Dimensional Outlook on Bitcoin’s Future

S2F Is Just One Perspective

The future trajectory of Bitcoin’s price will likely depend on multiple evolving dimensions:

• Practical Adoption: Can Lightning Network, cross-chain solutions make Bitcoin a truly global payment network?
• Institutional Acceptance: Will more traditional assets enter via spot ETFs and other products?
• Policy Frameworks: Can major economies craft clear, friendly regulations to unlock market confidence?
• Competitive Landscape: How will other assets (gold, CBDCs, emerging tokens) reshape the scarcity ecosystem?

These factors, together with scarcity, will jointly determine Bitcoin’s valuation potential.

Practical Summary

✓ Use: S2F as an auxiliary tool for long-term trend assessment, suitable for investors with a holding period of 3+ years
✓ Combine: Technical analysis, on-chain metrics, macro data, and sentiment indicators
✓ Avoid: Short-term trading, high leverage, decision-making based on a single indicator
✓ Continuously: Monitor the model’s effectiveness, watch for signs of decay, and adjust strategies accordingly

Bitcoin’s future is likely to be full of uncertainties, but one thing is certain: no single model can fully explain or predict its price movements. The value of the S2F model lies in helping investors understand how scarcity influences price—provided it is applied rationally and cautiously.