The Stock-to-Flow (S2F) model is an analytical tool used to determine an asset's scarcity by calculating the ratio of the total supply (stock) to the annual incremental supply (flow).
A higher S2F ratio is indicative of higher rarity and may result in an increase in the asset's value.
The S2F model is commonly used to forecast future asset prices, particularly in Bitcoin.
In Bitcoin's case, the S2F ratio is calculated as the ratio between the total number of Bitcoins in circulation (stock) and the annual increase in supply (flow). As the supply increment decreases, the S2F ratio is presumed to rise, which may be reflected in higher Bitcoin value in the long term.
The S2F is not a precise forecast of future prices, but merely an indicator of the potential direction of price movements. In assessing a future investment, several other indicators and factors that may affect the value of an asset should be analyzed.
Primary ones include:
In the case of Bitcoin, the S2F ratio is commonly used to predict its future value based on its scarcity. According to the popular Bitcoin stock-to-flow model proposed by PlanB, Bitcoin's S2F ratio has been increasing over time as the rate of new Bitcoin issuance (i.e., the flow) decreases due to the halving events that occur roughly every four years.
As of March 2023, the S2F ratio of Bitcoin is around 55 (54.4/54.8), meaning that it would take 55 years of the current production rate to produce the current supply of Bitcoin.
In summary, the Stock-to-Flow model is an analytical tool used in cryptocurrencies to forecast future asset prices by calculating the ratio of total supply to annual incremental supply.
While a higher S2F ratio may indicate higher rarity and may result in an increase in the asset's value, other factors such as geopolitical situation, interest rates, market risk, or economic conditions should also be considered when assessing a future investment.
