Estimating Bitcoin’s “Fair Value” Using the Stock-to-Flow Model

Estimating Bitcoin Fair Value via the Stock-to-Flow Model

In the world of crypto analysis, few concepts have sparked as much debate as the Stock-to-Flow (S2F) model, popularized by the anonymous analyst PlanB. At its core, the model posits that an

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asset’s scarcity is the primary driver of its market value. For Bitcoin, which features a fixed supply and a programmed supply-reduction mechanism, this approach seems a logical extension of the Austrian School of Economics, where hard money is valued for its resistance to inflation.

Scarcity as a fundamental factor

The S2F model was originally applied to value precious metals like gold and silver. The ratio is calculated by dividing the total stock of an asset by its annual production, or flow. The higher this value, the less of the asset enters the market relative to the existing supply, making it more scarce. Until recently, gold held the lead with a ratio of around 60; however, following the latest halving, Bitcoin has significantly outperformed the precious metal by this metric. This provides a theoretical basis for exponential price growth, as digital gold becomes the scarcest asset in human history.

The mathematical nature of the Stock-to-Flow model

Mathematically, S2F is a power-law function that predicts an asset’s market capitalization based on its scarcity. Historical data analysis shows a high degree of correlation between the calculated fair price and actual market quotes over the past decade. The model suggests that the Bitcoin price inevitably trends toward the mean defined by its issuance schedule. Each halving, which cuts the miner reward in half, sharply increases the S2F ratio, which, according to the formula, should lead to a step-function increase in price. For a trader, this serves as a long-term benchmark, allowing them to ignore short-term volatility in favor of the macro trend.

The relationship between halving and market cycles

The halving acts as a catalyst that pushes the model into a new state. Historically, we have observed how, after each supply cut, the Bitcoin price reached new all-time highs within 12 to 18 months. The S2F model describes this process not as a coincidence, but as a logical consequence of a supply shock. When the inflow of new coins to exchanges drops while demand remains stable or grows, a shortage ensues, pushing prices upward until a new equilibrium is reached. However, it is worth noting that with each cycle, the influence of miners on overall market liquidity diminishes, which introduces adjustments to the accuracy of these forecasts.

Criticism and weaknesses of the concept

Despite the visual persuasiveness of the charts, the S2F model faces harsh criticism from the professional community. The main argument of skeptics is that the model only considers supply while completely ignoring demand. In economics, price is always the intersection point of these two curves. If demand for Bitcoin were to drop to zero, its scarcity would have no significance. Furthermore, critics point to the risk of false correlation: the Bitcoin price has risen alongside the adoption of the technology, and this growth may only coincidentally overlap with halvings. The model also assumes infinite price growth, which would eventually lead to Bitcoin’s capitalization exceeding the total volume of global wealth, which appears utopian.

Fair value in modern realities

At the current stage of market development, the S2F model has begun to show significant deviations from reality. Periods of prolonged consolidation and the deep drawdowns of 2022 have led many to doubt its infallibility.