Bitcoin all time price (Image: s2f.hamal.nl)

The Stock-to-Flow Model (S2F) and the Virtue of Hodling

Having a lot of your net worth in Bitcoin can be a rollercoaster as the price of Bitcoin is so volatile. One day you’re up 20%, the next day you’re down 25%. I have bought and sold regularly in the past, very often at the wrong times, and found the whole business very stressful.

These days I mostly just Hodl, and so far that has worked well. One of the reasons I changed strategy was Stock to Flow, and that’s what I’d like to talk about today.

Like the infamous alchemists of old, most people in crypto are looking for shortcuts to wealth. Finding the cheap coins before they rise in value, looking for the trends in price, particularly the dips, etc. I’m just the same, and over the years I’ve been doing crypto I have had a particular eye out for predictions – mathematical models – of the future Bitcoin price so that I would know what was coming down the line. The thing is, with Bitcoin, such predictions may be possible and practical. While the value of most assets is at the whim of the market, and their supply can respond to changes in demand, Bitcoin is different. Its entire supply is defined in code – we know there will only ever be 21 million, and we know more are created every 10 minutes, and so on. Therefore it seems credible that its price could be predicted in the future.

I have looked into various models and many of them seem to have some value for predicting price and/or market peaks, for example:

All of these have some value but none appeared to me to be both precise enough and easy to read.

Instead the model I always return to is Stock-to-Flow. This was introduced to the community by a Dutch trader known as ‘Plan B’ (aka ‘100TrillionUSD’) through an article on Medium early in 2019: Modeling Bitcoin Value with Scarcity. It caused quite a stir with its bold claims. Firstly, that Bitcoin price could be accurately modelled into the future. Secondly, fundamentally, it was all about the rate of creation of new Bitcoins. In particular, because the rate of creation drops in half every 4 years (in events known as ‘halvings’) it was able to match and predict the four year boom-bust cycles that Bitcoin is prone to. For the details, it’s well worth reading through the article.

I have now been following this model for two years and have repeatedly found that it works, the match between prediction and reality is good enough to inform my view of the market and the way that prices are going – and that’s a very reassuring feeling. It is a logarithmic model so with its wide error bars (1 and 2 standard deviations) you have to accept that the Bitcoin price can still vary hard and fast and be within the broad range of the model. However, it always seems to get the long term trends correct. Personally I check it about once a day, and usually find it has the price about right and well within 1 standard deviation. I take note, however, if the price starts tending out of the 1sd range – something that happened at the height of the Covid panic, and a couple of times since. However, the bitcoin price has always returned to the model, and I have relaxed.

There are various instances of the model available online. There is a well known one here: Bitcoin stock to flow model live chart. It is well featured, with the ability to zoom in live etc. However, the one I always return to, and which I believe most closely matches the S2F model as defined in the original Medium article is here: Daily updated charts of Bitcoin’s stock-to-flow vs price. In particular, the chart I check about daily is this one: Bitcoin daily stock-to-flow and price (2 years).

Bitcoin daily stock-to-flow and price (Image:s2f.hamal.nl)
Bitcoin daily stock-to-flow and price (Image:s2f.hamal.nl)

Hodling while watching the S2F chart has worked well for me over the last year or two, and in particular has helped me to be steady through the various downturns. However, it’s worth noting two things on the S2F charts. Firstly the good news is that Bitcoin will hit a peak this summer and it will be at least $100k. Secondly the bad news is that the period approaching a peak is very volatile, and after each previous post-halving peak there has been a big crash.

In other words the real price goes above the prediction at a peak and drops below it in the months following:

Bitcoin all time price (Image: s2f.hamal.nl)
Bitcoin all time price (Image: s2f.hamal.nl)

Therefore I will be looking to ‘reduce my exposure’ as the price passes $90k. That doesn’t necessarily mean I’ll sell any Bitcoin, as it has been hard to come by, but I will at least cancel the Bitcoin loans I have taken out and then hunker down for a likely tumultuous following year or so.

So that’s Bitcoin stock-to-flow (S2F) in a nutshell. I can’t tell you how you should use it, but it has worked well for me, both psychologically and financially in guiding my trades.

Before I go, for completeness, I’ll just touch on Bitcoin S2FX. A year after Plan B announced the original S2F model he introduced a refined version called Stock-to-Flow Cross Asset (S2FX); for the details see here. The new model is more attractive in a number of ways, for example giving more justification for the application of S2F theory, and also predicting a high this summer for Bitcoin near $300k. However, I find the theory less convincing and by eye I don’t think its price predictions are quite as close to real prices as the original model. Take a look, though, it may work for you. Of course it does rather muddy the waters: if Bitcoin hits $200k this summer then it could be S2FX being correct, and the value will keep going up, or it could be S2F is correct, and it’s just about to crash. But then investing in Bitcoin has never been boring!