The Scarcity Code of Bitcoin: Can the Stock-to-Flow Model Really Predict Prices?

Looking at Bitcoin Valuation Logic from $87K

Since its inception in 2009, Bitcoin has experienced a long journey from $0 to $87.12K. Behind this price surge is not solely driven by hype — there is a set of quantitative models, revered by many institutional investors, supporting it: Stock-to-Flow (S2F) model.

This model claims to predict price trends by analyzing Bitcoin’s scarcity. But the question is — does it really work? Especially at the current price level of $87K, does this model still hold relevance?

The Core Logic of the S2F Model: Scarcity Equals Value

Stock-to-Flow is fundamentally a scarcity measurement tool, originally used to evaluate the value of precious metals (gold, silver). Later, its creator PlanB applied it to Bitcoin analysis.

The calculation method is simple:

S2F = Existing Circulating Supply ÷ Annual New Mining Output

The higher the ratio, the scarcer the asset, and theoretically, the more valuable it is. Taking Bitcoin as an example:

• Stock (Supply): About 20.5 million Bitcoin mined so far (still room before reaching the 21 million cap)
• Flow: New mined Bitcoins per year (about 525,000, lower after the 2024 halving)

This ratio is currently roughly 36-40, whereas gold’s S2F ratio is above 60. According to supporters of the model, Bitcoin’s S2F still has room to rise, implying potential for price appreciation.

How Halving Amplifies the S2F Effect

Bitcoin undergoes a “halving” approximately every 4 years — mining rewards are cut in half from the previous cycle. This mechanism directly reduces the “flow,” boosting the S2F ratio.

Historical data shows:

• After the first halving in 2012, Bitcoin rose from $5 to over $1000

• After the second halving in 2016, from $600 to $19000

• After the third halving in 2020, from $6,500 to $69,000 (November 2021)

• The 2024 halving has occurred, with the current price at $87.12K

This “halving → scarcity increase → price rise” correlation does exist, but correlation does not imply causation.

When the S2F Model Fails: Why It Often Misses the Mark

Although S2F has shown impressive predictive accuracy at times, it has also experienced several “facepalm” moments:

1. Prediction Failures in 2021-2022
PlanB predicted Bitcoin would reach $100K by the end of 2021, but the actual high was only $69K. During the 2022 bear market, the model also failed to warn of significant price drops.

2. Ignoring Demand Factors
S2F only considers supply-side (mining output), completely ignoring demand-side changes. Price is fundamentally determined by supply and demand:

• Institutional inflows can push demand higher
• Regulatory tightening can suppress demand
• New technologies (like Lightning Network expansion) may alter demand dynamics

3. Overly Linear Assumption
The model assumes a linear positive correlation between scarcity and price, but market psychology, risk appetite, macroeconomic factors, and nonlinear influences are often the real drivers.

Ethereum founder Vitalik Buterin has openly criticized this model, calling it “really bad” and potentially misleading new investors. Renowned trader Alex Krueger has even labeled it as a “meaningless forecasting method.”

Hidden Factors Affecting S2F

Beyond halving and mining volume, other factors are quietly changing Bitcoin’s valuation logic:

Mining Difficulty Adjustments
Bitcoin’s network adjusts mining difficulty every two weeks to maintain block times. Rising difficulty reduces new coin issuance, and vice versa. This is an implicit variable affecting the “flow.”

Evolving Regulatory Policies
Approval of spot Bitcoin ETFs in the US (early 2024) significantly lowers institutional entry barriers, directly boosting demand. Conversely, tightening regulations in some countries can suppress demand.

Global Economic Cycles
During periods of high inflation and currency depreciation, Bitcoin’s appeal as a “hedge asset” increases. But during recessions and risk asset downturns, Bitcoin is not immune.

Emergence of Competitors
The rise of Layer 1 chains like Solana, Polkadot, and the proliferation of stablecoins divert some investor attention, affecting Bitcoin’s relative valuation.

Technological Iterations
Upgrades like Taproot, RGB protocol, and others expand Bitcoin’s capabilities, evolving it from a simple “store of value” to a “programmable asset,” attracting new investor groups.

Using S2F for Investment: Proper Approach vs. Common Pitfalls

Don’t: Rely solely on S2F as the only guide

• Short-term traders are most prone to pitfalls, as the model offers little insight into daily or weekly fluctuations
• No single model is infallible; Bitcoin’s price is influenced by multiple factors

Do: Use S2F as one part of a long-term framework

If you are a long-term holder (3-5 years), you can apply S2F as follows:

1. Understand the model’s principle: Scarcity can support long-term value, but it’s not everything

2. Combine with on-chain data analysis

   • Whale holdings (Are whales accumulating or distributing?)
   • Exchange balances (Large withdrawals suggest long-term holding intentions)
   • MVRV ratio (Market Value / Realized Value, indicating overall profit/loss levels)

3. Incorporate macroeconomic analysis

   • Federal Reserve monetary policy trends
   • Global inflation outlook
   • Geopolitical events

4. Implement risk management

   • Dollar-cost averaging instead of lump-sum investing
   • Set stop-loss levels (e.g., below certain key support)
   • Limit exposure to 20-30% of personal risk tolerance

Does the S2F Model Have a Future?

Supporters’ view:
Bitcoin co-creator Adam Back believes S2F captures a real phenomenon — that reduced supply leads to higher prices, consistent with basic economics.

Critics’ view:
Scarcity alone does not create value; demand must be present. A rare item with no demand is still worthless.

Most objective assessment:
S2F is a useful but insufficient analytical tool. It has shown predictive accuracy at times, but that does not mean it can reliably forecast all future prices.

Final Advice

If you’re considering investing in Bitcoin, don’t be dazzled by the elegant formulas of the S2F model. The right approach is to:

• Understand the logical basis (scarcity matters)
• Question its absolute predictive power (many historical misses)
• Combine multiple analysis dimensions (technical, fundamental, on-chain, macro)
• Manage risks cautiously (remember Bitcoin is a high-volatility asset)

The $87.12K Bitcoin price reflects not only scarcity value but also institutional recognition, technological progress, regulatory improvements, and multiple other factors. Relying solely on the S2F model won’t give you the full picture or accurately predict the next move. But as a perspective on Bitcoin’s long-term value, it remains worth understanding.