Inventory Flow Ratio Model: Revealing the Key to Bitcoin's Long-Term Value

Since its inception in 2009, Bitcoin has attracted global investors with its fully digital currency design emphasizing transparency and scarcity. Although its price has experienced significant volatility, there are underlying economic principles at play. The Stock-to-Flow (S2F) model emerged as an important tool for many investors to evaluate Bitcoin’s long-term value. By quantifying scarcity, this model offers a unique perspective to understand the fundamental support for Bitcoin’s value.

The Core Logic of the S2F Model: How Scarcity Defines Asset Value

The stock-to-flow ratio is a relatively simple yet powerful concept. It compares the existing supply (stock) to the annual new supply (flow), measuring the scarcity of a commodity. The higher the ratio, the more difficult it is to obtain, and theoretically, the higher its value. This principle was first applied in precious metals markets to assess the value of gold and silver.

For Bitcoin, the application of stock-to-flow is more straightforward. Its total supply is permanently capped at 21 million coins, fundamentally ensuring its scarcity. When calculating Bitcoin’s S2F ratio, we divide the current circulating supply (stock) by the annual newly mined Bitcoin (flow). As this ratio increases, it indicates that the relative new supply is decreasing, making the asset increasingly scarce.

The appeal of this model lies in its quantifiability. Unlike methods based on market sentiment or technical analysis, the stock-to-flow ratio provides an objective framework grounded in supply-side fundamentals. It assumes that as scarcity increases, so should the asset’s value—just as gold’s high price is due to its extreme difficulty to obtain.

Bitcoin Halving and the Chain Reaction with the Stock-to-Flow Ratio

Bitcoin’s protocol triggers a halving approximately every four years (roughly every 2.1 million blocks), reducing the block reward by 50%. This mechanism is central to Bitcoin’s scarcity promise.

The three halving events in 2012, 2016, and 2020 have profoundly impacted Bitcoin’s S2F ratio. Each halving significantly reduces the annual new supply, causing the S2F ratio to spike sharply. From the supply side, this reinforces the scarcity narrative. However, supply-side changes alone do not determine price—demand factors are equally important.

Historical data shows interesting price dynamics around halving events. In the 18 months following the 2020 halving, Bitcoin’s price experienced substantial increases, seemingly validating the S2F model’s theoretical basis. Yet, it’s important to note that global liquidity expansion and institutional inflows during this period also contributed to the price rise. Currently, as of February 2026, Bitcoin’s all-time high has reached $126,080 (far above the $69,000 peak in November 2021), indicating that market factors are far more complex than a single model can capture.

Historical Validation of S2F’s Predictive Power and the Current Situation

As a leading advocate of the S2F model, analyst PlanB has made several price forecasts based on this framework. He predicted Bitcoin would reach $55,000 after the 2024 halving and was optimistic about surpassing $1 million by the end of 2025. These forecasts sparked widespread discussion in the crypto community.

Looking back, the S2F model has shown some correlation with long-term trends. During the 2012–2020 cycle, Bitcoin’s price roughly followed the expected trajectory derived from the S2F calculations. This gave many supporters confidence that the supply-based valuation framework is reliable. However, in practice, the model’s predictions are not perfectly accurate—market performance often deviates from expectations, especially in the short term.

From the perspective of 2026, the actual prices in 2024–2025 have fallen short of PlanB’s optimistic forecasts. While Bitcoin has maintained a long-term upward trend, reaching $1 million by 2025 has not materialized. This reminds us that no single model can fully capture market complexity. Currently, Bitcoin trades at about $67,560, down 22.91% over the past 30 days, indicating ongoing high volatility.

Market Factors Influencing the S2F Ratio

While the S2F emphasizes supply-side scarcity, demand-side factors also significantly influence the model’s predictive accuracy. Understanding these factors is crucial for proper application of the S2F model.

Adoption and Institutional Participation: As Bitcoin evolved from a niche asset to a mainstream investment, large-scale institutional entry has driven demand higher. The launch of spot Bitcoin ETFs and other innovative products has further expanded the investor base. These demand factors often reinforce or counteract the signals from the S2F ratio.

Regulatory Environment: Regulatory attitudes toward cryptocurrencies vary widely across jurisdictions—from outright bans to active acceptance. Favorable regulation can boost demand, while restrictive policies can dampen it. The S2F model does not account for these policy variables, which is a key limitation.

Technological Developments and Network Utility: Advances like the Lightning Network and other layer-two solutions may alter perceptions of Bitcoin as a store of value or payment method. As practical utility increases, demand-based valuation may strengthen.

Macroeconomic Conditions: Global interest rates, inflation expectations, and economic growth prospects influence investor demand for Bitcoin as a risk asset or store of value. High inflation environments tend to increase hedging demand, while economic downturns may lead to risk aversion and price declines.

Market Sentiment and Media Influence: News coverage, social media discussions, and opinions from influential figures can cause short-term price swings, which are beyond the scope of the S2F model’s supply-focused approach.

Why Experts Are Cautious About the Stock-to-Flow Model

Despite some correlation with long-term trends, skepticism about the S2F model’s reliability persists in academia and industry.

Ethereum co-founder Vitalik Buterin has publicly stated that the S2F model “is not very good” and warned that its potential for “harmful” inaccurate predictions makes it problematic. His criticism highlights a core issue: the model oversimplifies supply and demand dynamics and relies on linear extrapolation, which may be too coarse for complex markets.

Adam Back, CEO of Blockstream, adopts a more moderate stance, viewing S2F as a “reasonable curve fit” to historical data. While not outright dismissive, this suggests limited applicability—trustworthy for describing past phenomena but risky for future predictions.

Prominent traders like Alex Kruger and Cory Clippsten (founder of Swan Bitcoin) have expressed more direct doubts. They argue that basing future price forecasts solely on the stock-to-flow ratio is fundamentally flawed. Kruger has bluntly called such predictions “meaningless.”

Nico Cordeiro, CIO of Strix Leviathan, offers another perspective: even if scarcity influences value, the S2F model fails to incorporate other critical drivers like market demand strength and macroeconomic factors, which can sometimes outweigh scarcity.

How Investors Should Properly Use the S2F Model

While the S2F model has clear limitations, it still offers some value if used appropriately.

Set Realistic Expectations: The S2F model is best suited for long-term investors rather than day traders. It emphasizes multi-year trends rather than short-term price movements. Short-term deviations are common, so it should not be the primary basis for short-term trading decisions.

Adopt a Multi-Dimensional Analysis Framework: Do not rely solely on the S2F ratio for investment decisions. Combine technical analysis, fundamental analysis, and market sentiment to form a comprehensive view. Technicals reveal price patterns and trends; fundamentals assess long-term value support; sentiment analysis captures psychological cycles.

Implement Risk Management: Recognize the limitations of the S2F model as part of your risk management strategy. Set clear stop-loss levels and position sizes. Overreliance on any single model is dangerous, including the S2F.

Continuous Learning and Adaptation: The crypto market evolves rapidly. As Bitcoin matures from an experimental asset to a mainstream investment, the factors influencing its price are also changing. Investors should keep updating their knowledge and reassessing the model’s relevance.

Focus on Key Events: While the S2F model has limited short-term predictive power, it remains useful for identifying critical moments like halving events. These are periods of structural supply change that often create investment opportunities or risks.

Limitations and Future Outlook of the S2F Model

Although the S2F model offers an intriguing perspective, its limitations are deep-rooted and structural.

First, data incompleteness: the model mainly focuses on supply scarcity, ignoring many demand-side determinants. Bitcoin’s value depends not only on scarcity but also on utility, liquidity, adoption, and correlation with other assets—all outside the S2F calculation.

Second, the disconnect between historical and future relevance: while the model shows some correlation historically, it does not guarantee accurate future predictions. Changes in market structure, participant composition, liquidity, and depth can alter the relationship between price and scarcity.

Third, oversimplification: reducing complex market dynamics and human behavior to a single ratio involves trade-offs. It risks neglecting key variables—during panic, high scarcity may not support prices; during euphoria, scarcity may be overvalued.

Looking ahead, the relevance of the S2F model may change due to:

Diminishing supply-side predictability: As Bitcoin matures, supply may become less of a price driver. Once most coins are mined, the S2F ratio will continue to rise, but whether this will push prices higher remains uncertain.

Increasing demand complexity: Institutional involvement and broader adoption make demand factors more diverse and complex. Simple scarcity narratives may no longer suffice.

Parameter failure risk: The linear relationships based on historical parameters may break down if market structures change fundamentally.

Therefore, investors should view the S2F model as one of many analytical tools—not the sole guiding star. It helps highlight the importance of scarcity design but should not be used in isolation for investment decisions.

Conclusion: Rationally Assessing the Role of the Stock-to-Flow Model

The S2F model offers a unique perspective rooted in scarcity for Bitcoin investors. In certain historical periods, its predictions have shown notable validity. However, as markets evolve and understanding deepens, we must remain cautious of its limitations.

True investment wisdom lies in neither blindly trusting any single model nor dismissing its insights entirely. For investors confident in Bitcoin’s long-term potential, the S2F provides a reasonable framework for thinking about scarcity’s role. For traders aiming to precisely time markets, it often leads to disappointment.

Ultimately, the applicability of the S2F depends on market evolution. If Bitcoin continues to develop as a global store of value, scarcity may remain its core value driver; if its utility and adoption expand significantly, other factors could surpass scarcity in importance. Maintaining a cautious, multi-faceted approach and adjusting based on actual market performance is the prudent attitude in navigating the highly uncertain crypto landscape.