For a commodity such as Bitcoin, the stock-to-flow ratio refers to the total supply of that asset divided by the amount that is produced each year. Therefore, the ratio measures how many years of production would be required to reach the current supply if we hold constant the current production rate.
Commodities that have a bigger stock-to-flow (STF) ratios are preferred to those with smaller ones — since they are perceived to be more scarce. Gold has the highest ratio with 62. This means that at the current production level, it would take 62 years to produce the current total supply of gold. One of the many reasons why some people refer to Bitcoin as ‘digital gold’ is because of its high stock-to-flow ratio.
Additionally, the stock-to-flow model can also be used to predict the price of an asset, based on its total supply and amount produced each year. Trader and analyst @filbfilb noted that the current Bitcoin price is 15-20 percent below that predicted by the model.
Bitcoin’s Stock to flow model.
Currently below s/f by 15-20%
— fil₿fil₿ (@filbfilb) November 27, 2019
The STF model predicts a price of $8300, while the current price is around $7200. In the future, the model predicts a price of $100,000 in 2022 and $1,000,000 in 2025.
Bitcoin and Gold
Previously, we mentioned that Bitcoin’s STF ratio is similar to that of gold. Currently, there are roughly 19 million bitcoins in circulation and 657,000 bitcoins are generated every year. Therefore, by dividing these numbers, we find that Bitcoin has a 27 STF ratio, compared to that of 62 for gold.
However, Bitcoin’s STF ratio decreases with time, since BTC undergoes periodical block-reward halvings — which cuts in half the amount of BTC produced. Furthermore, the asset has a fixed supply of 21,000,000 coins.
The next Bitcoin block-reward halving is set to be on May 2020. After it, BTC will be generated at a rate of about 330,000 coins a year, giving an STF ratio of 53. This number will increase to 106 by the following halving in 2024, finally surpassing that of Gold.
Therefore, if we go by the STF ratio alone, Bitcoin should be perceived as more valuable than gold — living up to its moniker of “digital gold.”
Disclaimer: This article is not trading advice and should not be construed as such. Always consult a trained financial professional before investing in cryptocurrencies, as the market is particularly volatile.
Images courtesy of Shutterstock, TradingView, Twitter.
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