Stock to Flow: Unlocking the Mysterious Key to Bitcoin Valuation

Since its inception in 2009, Bitcoin has been the first truly decentralized digital asset, and its tumultuous price trajectory has consistently attracted the attention of investors worldwide. From reaching a historic high of over $69,000 in November 2021 to hovering around $87,120 today, the valuation of this digital asset continues to puzzle market participants. Among many analytical tools, the Stock to Flow model stands out for its unique logic — it attempts to reveal Bitcoin’s future price direction through a relatively simple mathematical framework.

Core Logic of the Stock to Flow Model

Stock to Flow (hereafter S2F) is fundamentally a scarcity assessment tool. Originally used to measure the relative value of precious metals, it was later applied to Bitcoin analysis, forming a distinctive valuation approach.

The operation of this model is not complicated:

• Stock: The total amount of Bitcoin that has been mined and is in circulation
• Flow: The number of new Bitcoins produced each year

By dividing stock by flow, we obtain a key indicator — the S2F ratio. The higher this ratio, the smaller the proportion of new supply relative to the total supply, theoretically implying greater scarcity of the asset.

Bitcoin’s design inherently reinforces this logic. The total cap of 21 million coins, combined with halving events approximately every four years (reducing mining rewards by half), causes Bitcoin’s supply growth rate to slow systematically. This structural scarcity enhancement forms the basis for the S2F model’s optimistic long-term outlook on Bitcoin.

Interaction Between Halving Cycles and S2F

Bitcoin’s halving mechanism is crucial to understanding the S2F model. Each time this event occurs, the rate of new coin issuance drops sharply, causing the flow to decrease and the S2F ratio to automatically rise — often marking the start of a market re-pricing of Bitcoin’s scarcity.

Historical data shows that around each halving cycle, Bitcoin’s price has experienced significant rallies. Based on this pattern, the model’s creator PlanB predicted that after the 2024 halving, Bitcoin could reach $55,000, and potentially hit $1 million by the end of 2025. While the accuracy of these forecasts remains to be tested over time, they reflect a core view: increasing scarcity correlates with rising prices.

Multi-Dimensional Factors Affecting Stock to Flow

Beyond halving, several factors can alter Bitcoin’s S2F ratio and its underlying economics:

Adoption and Demand Dynamics: As institutional investors, payment service providers, and even some governments gain recognition of Bitcoin, demand may increase significantly. With supply relatively fixed, rising demand naturally pushes prices higher.

Regulatory Environment Evolution: Policy shifts in various countries can quickly change market sentiment. Favorable regulation may stimulate adoption, while restrictive policies could dampen it.

Mining Difficulty Adjustments: The Bitcoin network automatically adjusts mining difficulty every two weeks to maintain a relatively stable block time. Rising difficulty impacts new coin production efficiency, influencing the flow metric.

Technological Innovation: Maturity of second-layer solutions like the Lightning Network could alter Bitcoin’s appeal as a store of value and payment tool, affecting long-term demand.

Macroeconomic Context: Global inflation, exchange rate fluctuations, geopolitical risks, and other macro factors can lead investors to view Bitcoin as part of their asset allocation, reinforcing its “digital gold” status.

Performance of the S2F Model in Price Prediction

Historically, the S2F model exhibits an intriguing paradox. Over long cycles, its trajectory aligns closely with actual price movements — especially around halving events. This has led many investors to regard it as some sort of “oracle.”

However, critics point out that the model is almost powerless against short-term volatility. When market sentiment is extremely optimistic or pessimistic, prices can deviate significantly from the S2F curve. For example, in certain phases leading up to 2024, actual prices have exceeded or fallen short of model expectations.

Ethereum founder Vitalik Buterin publicly criticized the S2F model as “pretty bad,” arguing that it oversimplifies supply and demand dynamics. Other prominent figures, such as Adam Back, CEO of Blockstream, acknowledge the model’s logical basis but emphasize that it is merely a “reasonable fit to historical data,” not an ironclad law.

Practical Path to Incorporate Stock to Flow into Investment Decisions

If you decide to use the S2F framework to guide your investments, keep in mind the following points:

Deeply Understand the Model’s Essence: Don’t treat S2F as a black box. Comprehending how it calculates scarcity and why it may fail under certain conditions is crucial to avoid blindly following it.

Historical Benchmarking: Observe Bitcoin’s performance across previous halving cycles, noting differences under similar conditions. Market environments evolve, so exact repetition is unlikely.

Multi-Modal Validation: Cross-verify with on-chain data analysis, technical indicators, and fundamental assessments. Don’t rely solely on the S2F model for decision-making.

Risk Management: Regardless of how optimistic the S2F outlook appears, set clear stop-loss levels and position management rules. Markets can always move beyond expectations.

Long-Term Perspective: The S2F model is most suitable for investors with holding periods of several years. If you are a short-term trader, this tool may not be very useful.

Reflection on the Model in the Current Market Context

Bitcoin’s current price is around $87,120, down from its all-time high of $126,080. In this environment, what does the S2F model suggest?

From a scarcity perspective, mining difficulty and supply expectations have not changed abruptly, so the long-term S2F logic remains valid. However, the market’s price volatility — with a 12.62% decline over the past year alone — clearly indicates that scarcity theory alone cannot explain all fluctuations.

Variables such as macroeconomic cycles, regulatory developments, and technological adoption rates are actively influencing Bitcoin’s pricing in real time.

Intrinsic Constraints and Limitations of the Model

The biggest limitation of the S2F model lies in its inherent simplicity. By focusing on a single dimension — scarcity — it necessarily overlooks other critical factors:

Demand-Side Complexity: The model assumes that scarcity automatically translates into value, but demand-side changes can completely rewrite this assumption. If Bitcoin’s utility or acceptance stagnates, scarcity alone cannot sustain prices.

Uncertainty of Technological Progress: Developments like the Lightning Network, sidechains, or future revolutionary innovations could alter Bitcoin’s value proposition. The model struggles to anticipate these “black swan” events.

Unpredictability of External Shocks: Global financial crises, new regulatory frameworks, or unforeseen geopolitical events can instantly shift market psychology.

Over-Interpretation Risks: Many novice investors may overly trust the S2F forecast, leading to unpreparedness during market corrections or missing other valuable opportunities.

Final Thoughts

The Stock to Flow model offers an interesting perspective on understanding Bitcoin’s long-term value. It emphasizes the role of scarcity in asset pricing, which is indeed worth considering. However, it is far from the complete truth.

Bitcoin’s future price will inevitably be the result of a complex interplay of scarcity, technological developments, regulatory frameworks, market psychology, and macroeconomic factors. Using the S2F model correctly means treating it as one tool in your analysis toolkit — not the sole compass.

For long-term investors, this model can help explain why halving events are significant and why Bitcoin’s scarcity design is its core value proposition. But equally important is maintaining awareness of other factors, regularly adjusting your market understanding, and adopting a holistic approach for sustainable investing.

Frequently Asked Questions

How does the S2F model specifically predict Bitcoin’s price?

The model calculates the ratio of stock to flow and, based on historical correlations, infers corresponding price levels. Higher S2F ratios have historically been associated with higher prices, so reductions in new supply (like after halving) are interpreted as bullish signals.

How accurate has this model been historically?

The answer is nuanced. The model shows strong correlation around long cycles and key events like halving. However, its short-term predictive power is limited, and it can deviate significantly in certain periods. For example, it predicted Bitcoin might reach $100,000 by late 2021; while close, it did not surpass that target.

How will future halving events influence S2F predictions?

In theory, each halving increases the S2F ratio, which the model associates with higher prices. But actual impact depends on market conditions, investor sentiment, and the broader economic environment. The model provides directional guidance rather than precise forecasts.