One of the most important factors that determine a cryptocurrency’s value is supply and demand. Digital currencies — and almost anything else, for that matter — will always be worth more when demand is strong and there isn’t enough to go around. So, how do we know how much there is to go around? Many traders use the stock-to-flow (SF or S2F) model.
Stock to flow is employed to measure the abundance of a particular resource, such as a currency (including cryptocurrency), gold, oil, and lots more. It can be used to calculate a ratio between the amount of a particular resource available in reserves, and the amount that is produced annually. It sounds complicated, but it is actually pretty simple.
In this AAG Academy guide, we’ll explain what stock-to-flow is, how to calculate a stock-to-flow ratio yourself, and how this process can help you plan your cryptocurrency investments.
Once a stock-to-flow ratio has been calculated, it is easier to understand the availability of a resource and its current production rate. With the help of this data, we can forecast the future supply of a particular commodity, which we can then use to determine whether or not the price of that commodity may rise or fall given predicted market conditions (or predicted demand).
As we mentioned above, calculating stock to flow involves dividing the amount of a resource available today by how much of that resource is produced on a yearly basis. To make this calculation a little easier to understand, let’s use gold as an example since its supply is relatively consistent and, thanks to the World Gold Council, we already have some solid figures for it.
According to the latest estimates, more than 205,000 tonnes of gold have been mined to date. This figure is what we would refer to as “stock,” since it is made up of the total amount of gold available. Since 2013, between 3,000 and 4,000 tonnes of gold have been mined every year. This figure is what we would refer to as “flow.”
Once we have these metrics, we can calculate the stock-to-flow ratio by dividing the total supply by the amount produced each year. So, 205,000 tonnes, divided by 4,000 tonnes, equals just over 51 tonnes. If we use the lowest annual production estimate, we would divide 205,000 tonnes by 3,000 tonnes, which equals just over 68 tonnes.
This SF or S2F ratio tells us that, assuming production rates remain consistent, it would take at least 51 years (or as many as 68 years) to mine another 205,000 tonnes of gold.
Bitcoin stock to flow, as you might have already guessed, involves using the same calculation we just outlined above to determine the SF or S2F of Bitcoin. Some cryptocurrencies, like Bitcoin, work well with this model because much like commodities like gold, BTC has a “store of value.” In other words, it retains its value over time, thanks in large part to its scarcity.
What’s more, Bitcoin is difficult and costly to produce (like gold and lots of other commodities), and therefore its supply or production rate is unlikely to jump significantly within a short period of time. In fact, thanks to its design, Bitcoin’s production rate is entirely predictable, which makes it even more ideal for the stock-to-flow model.
So, let’s calculate the stock-to-flow of Bitcoin. As of January 2023, just over 19,185,545 BTC have been produced, and around 900 new coins are mined every day, for a total of about 328,500 per year. 19,185,545 divided by 328,500 equals just over 58.
Based on this SF or S2F ratio as it currently stands, it would take 58 years to double the supply of Bitcoin. But there are some caveats to this, which do not apply to other commodities like gold. Firstly, as we touched on above, Bitcoin’s supply is finite. A maximum of about 21 million BTC can ever be produced. Furthermore, a process called Bitcoin halving must be considered.
We have another AAG Academy guide on Bitcoin halving for those who want to learn about this in detail, but in a nutshell, this process means that the number of BTC that is produced through the mining process is halved every 210,000 blocks. As things stand, that’s approximately every four years, with the next halving scheduled to occur in 2024.
When this happens, the number of BTC produced every year will fall to around 179,250, assuming current mining rates remain consistent. That means Bitcoin’s SF or S2F will be doubled to approximately 107.
Bitcoin’s stock-to-flow ratio has generally shown association with its value in the past, so traders and investors may take this into account. However, due to the volatile nature of cryptocurrencies in general, we often see large fluctuations in price regardless of the SF or S2F ratio. There are other factors that also mean stock-to-flow is somewhat inconsistent when it comes to Bitcoin.
Another major factor that SF or S2F cannot account for is what many refer to as “black swan events.” These are unforeseen or unexpected events that come as a surprise and have considerable consequences. In Bitcoin’s case, this could be the threat of regulation, which tends to drive down the cryptocurrency’s market value every time it hits the news.
While considering the SF or S2F of Bitcoin may be beneficial to some, then, there are other, more accurate analytical and forecasting methods for those interested in trading and investing in cryptocurrencies. To learn more, see our in-depth AAG Academy guides on bull and bear markets; fundamental, technical, and on-chain analysis; cryptocurrency price chart patterns, and price chart candlesticks — all of which can prove incredibly useful for strategy planning.
For those who like the relative simplicity of the stock-to-flow model and want to take advantage of it as much as possible, let’s briefly look at how it can be used to invest — not only in cryptocurrencies like Bitcoin but also in other commodities.
Generally speaking, a stock-to-flow ratio of 50 or higher is considered to be a good thing. This indicates greater scarcity, which in turns suggests that market value is rising or will rise as investors clamor to get their hands on the commodity. A stock to flow under 50 indicates lower scarcity, which in turn suggests prices are falling or will fall.
Bitcoin’s stock to flow has been roughly associated with its market value in the past, however, there are instances when it has been very inaccurate in predicting price fluctuations. While SF or S2F may be worth considering, then, it should not be the only thing taken into account.
When it comes to Bitcoin, the limitations of stock to flow are that it does not take into account Bitcoin’s volatility or the potential for “black swan events” — of which there tend to be many within the cryptocurrency industry.
Stock to flow can be useful because it helps determine scarcity of a commodity. The more scarce a commodity is, the greater the potential that demand will exceed supply, and therefore the more valuable that commodity becomes.
There are lots of other crypto forecasting models that can be incredibly useful for traders and investors. Check out the AAG Academy to find guides on things like bull and bear markets; fundamental, technical, and on-chain analysis; cryptocurrency price chart patterns, and price chart candlesticks.
This article is intended to provide generalized information designed to educate a broad segment of the public; it does not give personalized investment, legal, or other business and professional advice. Before taking any action, you should always consult with your own financial, legal, tax, investment, or other professional for advice on matters that affect you and/or your business.
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