The Stock-to-Flow Model of Bitcoin: Scarcity as an Investment Compass

Since its creation in 2009, Bitcoin has transformed our understanding of digital money. With a current price of $87.06K and characteristic volatility, the leading cryptocurrency remains a subject of intense debate among analysts. One of the most discussed models for understanding its valuation is the Stock-to-Flow (S2F), which uses scarcity as a basis to project future price movements.

Understanding the Fundamentals of the S2F Model

The Stock-to-Flow model is a metric that quantifies the rarity of any asset. It is traditionally applied to precious metals but has gained significant relevance in Bitcoin analysis in recent years.

Two key concepts define this model:

• Stock: Total reserve already in circulation. For Bitcoin, this represents all existing BTC to date.
• Flow: Amount of new supply generated in a specific period (typically one year). In Bitcoin, this is the new coins created through mining.

The equation is simple: divide the stock by the flow. The higher this ratio, the greater the scarcity of the asset and, theoretically, the higher its potential value.

How Bitcoin Benefits from This Scarcity Analysis

Bitcoin is capped at 21 million coins, a design feature that introduces programmed deflation. Halving events — which reduce mining rewards approximately every four years — intensify this dynamic by compressing the flow of new coins.

This mechanism creates a cascading effect: as the flow decreases and the stock grows, the S2F ratio expands, increasing relative scarcity. According to this reasoning, the price should follow this increase in rarity over time.

Historical projections of the model, particularly those by analyst PlanB, suggest significant valuations post-halving. Although some predictions have not materialized exactly as forecasted, the general pattern of recovery after halving has been observable in previous Bitcoin cycles.

Factors Shaping the Stock-to-Flow Ratio Beyond Halving

The model’s dynamics do not operate in isolation. Multiple variables influence how the S2F ratio actually behaves:

Mining Difficulty: The Bitcoin network automatically adjusts difficulty every two weeks to maintain consistent block intervals. Changes in difficulty directly affect the speed of new coin creation.

Institutional Demand: The entry of institutional investors and governments has significantly altered Bitcoin demand. Index funds, ETFs, and corporate adoption expand the potential market.

Regulatory Environment: Government policies in different jurisdictions impact both demand and mining capacity. Bans can slow the flow, while regulatory clarity boosts adoption.

Technological Innovation: Improvements in scalability (like Lightning Network) and security make Bitcoin more useful and attractive, influencing demand regardless of scarcity.

Macroeconomic Cycles: Periods of high inflation or fiat currency devaluation increase interest in Bitcoin as a store of value, boosting demand pressure.

Altcoin Competition: The proliferation of alternative cryptocurrencies with innovative features can divide investor attention, affecting Bitcoin’s dominant position.

Market Psychology: Collective sentiment, amplified by media and geopolitical events, generates cycles of enthusiasm and panic that impact prices in the short term.

Assessing the Accuracy of the S2F Model

Debate over the model’s reliability divides experts. PlanB has made optimistic predictions, while critics point out inaccuracies.

Favorable Perspectives:

Adam Back, CEO of Blockstream and Bitcoin pioneer, affirms that the S2F model traces a reasonable curve that fits historical data, recognizing that halving events compress supply and could logically elevate prices due to increased scarcity.

Critical Perspectives:

Vitalik Buterin, co-founder of Ethereum, has harshly criticized the model, calling it “really not looking good now” and “potentially harmful” due to misleading predictions.

Alex Krüger, an experienced trader, dismisses the S2F approach as “nonsense” for price projections.

Nico Cordeiro, from Strix Leviathan, questions the fundamental assumptions of the model, arguing that it oversimplifies factors such as market demand and broad economic conditions.

The Verdict: The model has shown a historical correlation with post-halving cycles but failed in specific recent predictions (such as reaching $100K in previous cycles). Its validity depends on not using it as the sole tool.

Critical Limitations of the Stock-to-Flow Model

Understanding its limitations is essential for responsible application:

1. Ignoring External Variables: The model focuses on scarcity, neglecting technology, regulation, economic cycles, and sentiment shifts that significantly impact Bitcoin.

2. Gaps Between History and Future: Past correlations do not guarantee future accuracy. The complexity of the crypto market has increased considerably since Bitcoin’s early cycles.

3. Overemphasis on Scarcity: Bitcoin evolves beyond a simple store of value. Its increasing utility as a means of payment, integration into financial systems, and technical developments like layer-2 sidechains could play roles as important as scarcity.

4. Risk of Misinterpretation: Novice investors may place excessive confidence in simplified projections, leading to poorly founded decisions. Optimistic predictions that do not materialize highlight this danger.

Practical Strategy for Incorporating S2F into Your Investment

If you choose to use this model, do so as part of a comprehensive strategy:

Step 1 - Education: Master the basic concepts. Understand how stock and flow are calculated and why halving events matter.

Step 2 - Historical Analysis: Review how Bitcoin has behaved after previous halvings. Observe correlations but remember: past does not guarantee future.

Step 3 - Diversify Tools: Do not rely solely on S2F. Combine with technical analysis (key levels), trend analysis(, fundamental analysis )adoption(, use cases), and sentiment analysis (news, market behavior).

Step 4 - External Monitoring: Stay alert to regulatory changes, technological advances, and global economic conditions. These can quickly invalidate scarcity-based projections.

Step 5 - Rigid Risk Management: Set clear stop-loss orders, limit position sizes, and never invest more than you can afford to lose. Understand that the model, like any predictive tool, has uncertainties.

Step 6 - Long-Term Horizon: The S2F model works best for investors with a multi-year perspective, not day traders. Short-term volatility is driven by factors the model does not capture.

Step 7 - Continuous Review: The crypto market evolves rapidly. Update your strategy periodically based on new information.

Key Questions Answered

How does the S2F model predict exactly?

It calculates the stock-to-flow ratio (total supply divided by annual new supply$100K . Higher ratios indicate greater scarcity, historically associated with higher prices. The model then projects future movements based on how halvings compress supply over time.

Has the model worked in practice?

Partially. It has correctly predicted post-halving recoveries in previous cycles but failed in specific projections )such as not reaching in the 2021-2023 cycle. Critics argue it oversimplifies market dynamics by ignoring external factors.

What will happen when the next halving occurs?

Future halvings are expected to reduce flow, theoretically increasing scarcity and upward price pressure. However, the actual impact will depend on market adoption, technological developments, regulatory environment, and global economic conditions — factors that go beyond pure scarcity.

Final Reflection: Bitcoin Beyond Scarcity

The Stock-to-Flow model provides a valuable framework for conceptualizing one aspect of Bitcoin valuation. However, considering multiple models and factors offers a more nuanced understanding. Bitcoin’s future likely emerges from the complex interaction between scarcity, market dynamics, technological innovation, and regulatory evolution.

Currently, with Bitcoin trading near $87.06K and a historical ATH of $126.08K, the market continues to navigate between fundamentalist optimism and realistic caution. Any investment decision should be based on holistic analysis, not a single indicator, no matter how sophisticated.