Why The Stock-to-Flow Bitcoin Valuation Model Is Wrong

Nico Cordeiro is the chief funding officer and fund executive program at Strix Leviathan. He oversees quantitative analysis, proficiency improvement, danger administration and portfolio allocation. An extended model of this put up power be discovered right here.

The stock-to-flow mannequin (SF), popularized by a onymous Dutch institutional investor who operates at a lower place the Twitter account “PlanB,” has been generally praised and is the main evaluation mannequin for bitcoin proponents. SF has achieved microorganism recognition and affected rags-to-riches desires for these performin all of it en route forward for bitcoin. However, we imagine the mannequin’s truth will probably be about as profitable at foretelling bitcoin’s future worth because the pseudoscience fashions of the previous have been at predicting medium of exchange outcomes.

Stanford Professor Paul Pleifderer coined the period of time “chameleons” to explain fashions which can be constructed upon doubtful assumptions and are given extra credence than they deserve. An preliminary analysis of any mannequin ought to start with a crucial get a load at the mannequin’s theoretical assumptions, he says. As an instance, Pleifderer gives the next state of affairs:

Imagine an plus pricing mannequin based mostly on the opinion that there is no such matter as a uncertainty about any plus’s returns. … No critical particular mortal would counsel that the predictions of the mannequin ought to be subjected to rigorous empirical examination earlier than rejecting it. The mannequin power be rejected but on the idea {that a} crucial assumption is contradicted by what we already know to be true.

Chameleons are importantly tough to identify and dispute as a result of they look like significant. It’s only at a lower place additive examination that you just notice they’re constructed upon assumptions that don’t map to what we learn about truth world.

Introducing stock-to-flow

PlanB’s paper “Modeling Bitcoin Value with Scarcity” states that sure loved metals have maintained a business function all through historical past ascribable their unforgeable preciousness and low fee of provide. For instance, gold is efficacious each as a result of new provide (mined gold) is insignificant to the present provide and since it’s inconceivable to duplicate the huge shops of gold crosswise the globe. PlanB then argues this similar logic applies to bitcoin, which turns into extra useful as new provide is reduced each 4 years, in the end culminating in a provide of 21 million bitcoin.

Low fee of provide, which PlanB defines as “scarcity,” power be quantified utilizing a metric referred to as Stock-to-Flow (SF), which is the ratio between present provide and new provide.

This premise is then translated into the speculation, “…that scarcity, as measured by SF, directly drives value.” PlanB then plots bitcoin’s SF con to USD market capitalization in addition to two willy-nilly chosen SF information factors for gold and silver.

Taken from “Modeling Bitcoin Value with Scarcity,” by PlanB.

PlanB then runs a rectilineal regression utilizing the pure log of bitcoin’s SF metric because the unbiased variable and the USD market capitalization because the dependent variable. The paper ends with the conclusion that there’s a applied mathly vital relationship between USD market capitalization and SF values, as tried by the rectilineal regression leading to an R2 (a applied math measure of how shut the information suits to a regression line) of ~0.95. The two willy-nilly chosen information factors for gold and silver are in keeping with bitcoin’s flight and introduced as additive proof of the speculation.

PlanB means that traders can forecast the long haul USD market capitalization of bitcoin utilizing the above method. This has helped give credence to these $100,000 bitcoin projections.

Problems abound

There are a number of deficiencies inside the paper, each in its theoretical proposition and its empirical basis.

From a theoretical viewpoint, the mannequin relies on the quite sturdy assertion that the USD market capitalization of a business good (e.g. gold and silver) is plagiarised instantly from their fee of recent provide. No proof or analysis is offered to help this conception, aside from the singular information factors chosen to chart gold and silver’s market capitalization con to bitcoin’s flight.

This turns into fairly apparent when one extends the mannequin into the about future. By 2045, the mannequin estimates every Bitcoin will likely be value $235,000,000,000.

The second is the nae utility of a rectilineal regression that leads to a excessive likelihood of a investigator discovering spurious outcomes. “Good” applied math outcomes, corresponding to a excessive R-square, don’t represent a significant discovering. It is frequent for investigators to underestimate how normally such methods result in false outcomes. And importantly on this scenario, the place there’s a giant sheepskin of exemption for random information to suit a chosen consequence.

Gold and the government note

From a theoretical perspective, what PlanB defines as “scarcity” shouldn’t be shortage by definition. PlanB makes use of “scarcity” to explain an plus’s provide progress fee or new manufacturing as measured by the SF metric. This assumes that rising new provide depresses worth via elevated promoting stress from producers and vice versa.

This appears cheap ab initio look till one considers {that a} excessive SF represents a dynamic the place new provide is insignificant to the present provide. PlanB quotes “Bitcoin Standard” creator Saifedean Ammous locution as a good deal:

Perhaps unsurprisingly then, SF has no direct relationship with gold’s worth during the last 115 years, as power be seen inside the scatter plot at a lower place. Gold’s market capitalization held evaluations between ~$60 billion to ~$9 trillion, all on the similar SF worth of 60. A spread of $eight trillion shouldn’t be very indicative of instructive energy and lends itself to the plain conclusion that different components drive gold’s USD evaluation.


Gold market capitalization versus SF. Chart created by Strix Leviathan utilizing information from Clio Infra & USGS

Recall that the worth of gold/USD is the ratio of buying energy between gold and the USD. When the buying energy of the government note decreases, the worth of gold/USD will increase and vice versa. With relative stability inside the buying energy of gold, we discover that roughly 88% of the variability in gold’s worth during the last 115 years power be defined by the substantial lower inside the buying energy of the USD, with $1 in 1915 now value simply $0.04. Most market individuals comprehend this dynamic intuitively, shopping for and promoting gold based mostly on USD inflationary expectations.

While a better SF worth could also be a vital function for a good to function “hard money,” the metric itself says nomatter about how market individuals worth mentioned good. Many cryptocurrencies which make the most of Bitcoin’s code have the very same provide agenda as Bitcoin and everybody understands their SF values don’t have anymatter to do with their future (or present) evaluation.

We are left with a speculation that applies to no business property besides bitcoin and whose only proof is a rectilineal regression with questionable utility and clear choice bias.

$235 billion bitcoin to eternity

An complete overview of rectilineal regression and its mathematical foundation is past the scope of this eevaluation. However, there are a number of implementation errors well-established inside the analysis group that exhibit why the SF mannequin is prone to be spurious. Obscure math has allowed SF proponents to dismiss all criticism so it power be extra intuitive to grasp conceptionually why the SF mannequin is inapplicable for future worth predictions.

The mannequin provided inside the SF paper is similar slope-intercept equation everybody learns in 7th grade: . An ordinary-least-squares (OLS) regression shouldn’t be a adumbrative mannequin even so quite estimation of the and values that reduce the distinction between the precise values and the estimated values given by the equation . In different phrases, each change in equates to a corresponding change in .


Left chart reveals a clean projection as a result of precise provide information is used from Glassnode whereas PlanB annualized month-to-month Flow emphasizes the change in move at every halving. Source: PlanB SF Model, Glassnode, Strix Leviathan

Recall that OLS is estimating how a good deal (Market Cap) adjustments for a given change in On a month-to-month foundation during which the mannequin is plagiarised, the change in is successfully 0. As a consequence, the OLS mannequin is doing nomatter greater than estimating Bitcoin’s historic progress fee. This turns into fairly apparent when one extends the mannequin into the about future. By 2045, the mannequin estimates every Bitcoin will likely be value $235,000,000,000 earlier than in the end convergence to eternity as bitcoin’s move approaches 0.

Using the estimated slope-intercept method is making basically the most naive prediction potential, as a result of bitcoin grew by X previously, it’ll develop by X sooner or later. One ought to keep in mind that previous outcomes are normally not advisor of future returns.

Marketing piece

Darrell Huff wrote in “How to Lie with Statistics“: “Many a statistic is fake on its face. It will get by only as a result of the magic of numbers brings few suspension of frequent sense.” Upon reflection, few would take importantly the conception that gold’s USD worth is a operate of its mortalal provide fee and later so is bitcoin’s. Yet, the supposed mathematical preciseness introduced inside the paper has resulted inside the SF mannequin patient with to be closely promoted in each retail {and professional} funding channels.

Investors ought to be extremely skeptical of this mannequin even when they imagine bitcoin is digital gold. The SF paper shouldn’t be correct empirical eevaluation, even so extra akin to a advertising and marketing piece during which the creator is attempting to carry readers that bitcoin goes to be value much more tomorrow. This power or power not prove true, even so it has little to do with bitcoin’s provide agenda.


The chief in blockchain information, CoinDesk is a media outlet that strives for the best print media requirements and abides by a strict set of editorial insurance policies. CoinDesk is an unbiased working subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Why The Stock-to-Flow Bitcoin Valuation Model Is Wrong

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