The Scarcity Code of Bitcoin: An In-Depth Analysis of the Stock-to-Flow Model

Core Model: Why Does Stock-to-Flow Predict BTC Price?

Since its inception in 2009, Bitcoin has evolved into the most controversial investment asset in the digital asset space. From surpassing $69,000 in 2021 to the current market performance of $87.09K, behind this dramatic price trajectory lies a widely discussed analytical framework—the Stock-to-Flow (S2F) model.

The core logic of this model is straightforward: it compares the total existing supply (Stock) of a commodity with its annual production rate (Flow) to quantify its scarcity. Traditionally, this method has been used to assess the intrinsic value of precious metals (especially gold and silver). With the rise of cryptocurrencies, it has been adapted to evaluate Bitcoin’s value.

Basic formula: S2F ratio = Existing stock ÷ Annual production

A higher ratio indicates greater scarcity, and theoretically, greater potential value. Gold is considered valuable largely because it has an extremely high S2F ratio—its new production relative to existing stock is minimal.

How Bitcoin Fits into This Traditional Model

Bitcoin’s supply mechanism is inherently deflationary. The 21 million cap means that over time, the growth rate of new Bitcoin will continually slow down. This is precisely the effect of halvings—approximately every four years, the block reward for miners is halved.

Looking at specific numbers:

• Initially, each block produced 50 BTC
• After the first halving in 2012, it became 25 BTC
• The second halving in 2016 reduced it to 12.5 BTC
• The third halving in 2020 brought it down to 6.25 BTC

This mechanism directly reduces the “Flow” component, automatically increasing the S2F ratio. PlanB (the most well-known proponent of this model) has predicted that after the 2024 halving, Bitcoin could reach $55,000, and possibly hit $1,000,000 by the end of 2025.

While the accuracy of these predictions remains debated, the model has some historical validation in describing the relationship between Bitcoin and halving events.

Real Factors Affecting Bitcoin’s S2F Ratio

Beyond the mathematical halving mechanism, several variables can alter the perception of Bitcoin’s scarcity:

1. Dynamic Adjustment of Mining Difficulty
Bitcoin’s network recalculates mining difficulty approximately every two weeks to maintain a relatively stable block time. An increase in difficulty lengthens the new coin issuance cycle, while a decrease shortens it. This directly impacts the speed of Flow.

2. Market Adoption and Demand Trends
No matter how the S2F model calculates scarcity, if market demand is weak, prices will struggle to rise. Institutional investment, expansion of payment networks, corporate balance sheet allocations—all can boost demand.

3. Regulatory Policy Changes
From outright bans to friendly regulations, different countries’ stances directly influence Bitcoin’s mining costs and holding appeal. A more relaxed regulatory environment generally benefits the S2F model’s effectiveness.

4. Technological Iterations and Innovations
Advancements like the Lightning Network, Taproot upgrades, and other tech breakthroughs can improve Bitcoin’s usability and security, influencing its long-term adoption curve and investment value.

5. Crypto Market Sentiment Indicators
Global economic conditions, geopolitical events, media coverage—all can shift investor risk appetite, causing cyclical fluctuations in Bitcoin demand.

6. Competition from Altcoins
Technological progress and ecosystem development of alternatives like Ethereum, Solana, etc., may divert investment interest away from Bitcoin, weakening its dominance.

7. Macroeconomic Cycles
Inflation expectations, dollar strength, global financial crises—these factors influence Bitcoin’s attractiveness as a “store of value,” affecting its valuation.

These factors collectively influence both ends of the S2F formula, ultimately shaping Bitcoin’s price trajectory. Importantly, S2F is not an independent prediction tool but should be used alongside other analytical dimensions.

PlanB’s Predictions and Criticisms

PlanB’s series of price forecasts have sparked polarized reactions in the crypto community.

Supporters’ view:
Adam Back, CEO of Blockstream, believes S2F is a reasonable fit for historical data. Supply slowdown events naturally lead to price increases, which makes logical sense.

Critics’ sharper stance:

• Vitalik Buterin (Ethereum co-founder) bluntly states that “truly not very good,” criticizing its fundamental predictive flaws.
• Alex Kruger (noted crypto trader) outright dismisses the entire S2F-based price projection as “meaningless.”
• Corey Klippstein (founder of Swan Bitcoin) warns that PlanB’s model might mislead followers.
• Nico Cordeiro (investment director at Strix Leviathan) questions the underlying assumptions, arguing that overemphasis on scarcity ignores demand-side complexities.

These criticisms highlight the fundamental limitation of the S2F model: it assumes scarcity necessarily drives prices higher, but in reality, Bitcoin’s price is influenced by many factors, and supply alone cannot explain all phenomena.

Practical Investment Insights from Stock-to-Flow

If you consider integrating S2F into your Bitcoin investment decisions, these tips are worth noting:

1. Deeply understand the model fundamentals
Learn how Stock-to-Flow is calculated—dividing total existing Bitcoin by annual issuance—and how it relates to halving events.

2. Review historical correlations
Examine past Bitcoin price movements alongside S2F ratios. Pay special attention to price actions before and after halving events, but remember—past performance does not guarantee future results.

3. Build a multi-dimensional analysis framework
Relying solely on one model can be risky. Combine S2F with:

• Technical analysis (candlestick patterns, moving averages)
• Fundamental factors (network activity, on-chain transaction volume)
• Sentiment indicators (fear and greed index, social media trends)

4. Monitor external environment changes
Stay updated on policy developments, macroeconomic data, and progress of competing assets, adjusting your expectations accordingly.

5. Implement strict risk management
Set stop-loss levels, control position sizes, avoid excessive leverage. S2F has limitations and cannot predict perfectly; managing risk is essential.

6. Adopt a long-term perspective
S2F is more suited for long-term holders rather than short-term traders. Volatility is inevitable, but the model focuses on multi-year trends; short-term noise should be ignored.

7. Regularly review and adjust
Crypto markets are volatile; periodically revisit your strategy and adapt based on new information.

Limitations and Risks of the Stock-to-Flow Model

Despite some periods of strong performance, S2F has several unavoidable issues:

Issue 1: External variables are severely overlooked
The model emphasizes scarcity but inadequately accounts for technological progress, policy shifts, and economic cycles. Bitcoin’s value depends on more than just decreasing mining speed.

Issue 2: Past performance does not guarantee future results
While it has successfully predicted some halving cycles, this success is time-limited. As markets mature, institutional participation, derivatives, and other factors make price drivers more complex.

Issue 3: Insufficient modeling of demand-side factors
S2F only addresses supply-side issues. It lacks depth in demand dynamics such as adoption rate, institutional interest, and payment ecosystem expansion.

Issue 4: Risk of misinterpretation by beginners
Optimistic forecasts (e.g., million-dollar targets) can be overinterpreted by novice investors, leading to irrational chasing of highs and potential losses.

Issue 5: Limitations of linear assumptions
The model uses a relatively linear mathematical relationship, but real markets often exhibit nonlinear jumps. Sudden regulatory crackdowns or systemic risks can disrupt the predicted trajectory.

Rational Reflection on Bitcoin’s Future

Overall, the Stock-to-Flow model offers an interesting reference framework but is far from the sole basis for decision-making.

Its value lies in:
Highlighting the objective fact of supply slowdown and how this scarcity could push prices higher—this logic is internally consistent.

Its limitations are:
Over-simplifying the market, assuming a stable mapping between scarcity and price, while ignoring numerous other forces at play.

Bitcoin’s long-term prospects will ultimately depend on a combination of factors:

• Continued technological innovation improving usability and security
• Maturation and friendliness of global regulatory frameworks
• Accelerated adoption by institutions and retail investors
• Establishing a clear role within the global financial system
• Evolution of competitive landscapes among cryptocurrencies

These factors are far broader than what S2F considers. Savvy investors will treat S2F as one of many reference tools, not the sole decision-maker.

FAQs

Q: How does the S2F model predict Bitcoin prices?
A: By calculating the ratio of stock to flow. A higher ratio indicates greater scarcity. The model regresses this ratio against historical prices to derive a price function, then predicts future prices based on expected S2F changes (mainly driven by halving events).

Q: How accurate has the model been historically?
A: Mixed. It captured some major trends around halving cycles but also failed at times (e.g., underestimating the depth of the 2022 bear market). It should not be viewed as a precise forecasting tool.

Q: How will future halvings affect the model’s predictions?
A: Halvings will directly increase the S2F ratio, which should theoretically push prices higher. However, actual impact depends on market conditions, policies, and macroeconomic factors at that time—not just the mathematical change.

Q: How should novice investors use this model?
A: As an aid to understanding Bitcoin’s long-term value proposition, not as a trading signal. Combine it with other analyses, build a multi-dimensional decision framework, and maintain cautious risk management.