Buterin Criticises Bitcoin’s Stock-to-Flow Price Prediction Model – But What Is It?

Predicting the price of Bitcoin–or any cryptocurrency coin for that matter–has always been tricky. The very nature of the cryptocurrency market is that it’s volatile. While one day the price of Bitcoin could be up by 30%, the next it could have its worst month on record, leaving investors to panic-sell in a desperate bid to attain some kind of return.

Of course, for many investors, the fluctuating market comes with the package. No one buys Bitcoin with a pre-attained knowledge of exactly where it’s going to go in the next week, month or year. Some simply have an inkling, an educated guess, a feel for where the horizon lies and the digital age we appear to be moving into. 

The Prediction Of Crypto

The apparent inability to accurately predict the cryptocurrency market is what makes cryptocurrency so exciting. At the time of writing, the price of Ethereum is around £1,000, but with the merge coming into play in the next couple of years, that price could rise even higher than Bitcoin - leaving investors of 2022 exponentially richer in 2024. 

The game is the game because nobody knows where the game is headed. At least that always appeared to be the case until Bitcoin’s stock-to-flow prediction model began turning heads. This has become one of the most popular prediction models in the cryptocurrency market, and it is currently being used to forecast Bitcoin’s future price, based on quantifying its scarcity. As with anything inside the crypto community, however, it isn’t exactly being met with rave reviews by everyone. While a lot of traders are excited about the prospect of predicting the price of Bitcoin, other crypto juggernauts, such as the Ethereum co-founder Vitalik Buterin, have a less than positive response. 

So what is stock-to-flow and why is it creating such strong reactions?

The Concept Of Stock-To-Flow

The idea of stock-to-flow was originally used in traditional finance, for example: central local banks have control of the issuance and distribution of a country’s currency, with the ability to print money. Silver and gold, on the other hand, are scarce assets which are limited in their stock, making the supply and flow the most critical aspect of their price. 

Stock-to-flow predicts the value changes of these assets by comparing the current stock to the rate of production (or how much the asset has been produced in a year). In this way, a higher ratio suggests greater scarcity, which subsequently gives the asset a higher price. Taking this formula and applying it to Bitcoin has been said to achieve the same results. 

Bitcoin’s Stock-To-Flow Model

Bitcoin is far more valuable than fiat currency because its supply is capped at 21 million. The protocol behind Bitcoin is that no more coins will be mined once it hits this number, which means that the rate of production is always reducing. Every 210,000 blocks, the network will go into a halving process, leading to the reward of a mined block being sliced in half every four years. By combining this data with other relevant statistics, the popular Bitcoin trader known as ‘PlanB’ created Bitcoin’s stock-to-flow model.

According to PlanB, to calculate a BTC’s stock-to-flow, you can take the number of the existing stock and divide it by the annual flow of production. For example, if there is currently around 19 million in BTC supply and an annual flow of 328,500, a stock-to-flow formula would give an SF ratio of 57.712, meaning it would take 57 years to mine the BTC supply. In February, PlanB stated that this prediction points to the price of BTC worth $100,000 in 2023.

The Backlash Of The Model

As mentioned previously, this attempt to predict Bitcoin’s price has not exactly gone down well with everyone. Ethereum’s co-founder Vitalik Buterin, for instance, has said that the prediction model gives people a “false sense of certainty and pre-destination” which is ultimately harmful to the future of cryptocurrency and the investors who are looking for realistic returns. 

Importantly, Buterin stated that this was not an opportunity to gloat (Ethereum is currently tipped to overtake Bitcoin in the future as the world’s leading cryptocurrency), but rather an opportunity to warn users about the dangers of predicting a coin’s value. Likewise, Ethhub founder Antony Sassano described stock-to-flow as an “epic failure”, while chief investment officer of Strix Leviathan, Nico Corderio, called the model a “chameleon” with no evidence to support itself.

The Reason Behind The Critique 

Despite the ferocity of some critics, there is good reason for their concern. While the stock-to-flow model has been adopted by some investors in the community, it doesn’t actually consider other factors which can determine BTC’s value, such as demand or volatility. The cryptocurrency landscape is also susceptible to price fluctuations caused by government regulatory demands, as well as the freezing of transactions and withdrawals due to liquidation. Recently, the price of Bitcoin dropped because of the de-pegging of Terra and Tether, both of which affected the value of coins across the entire cryptocurrency market. This was essentially an unpredictable alteration to Bitcoin’s value, as both Terra and Tether were never meant to fall behind their pegs. 

There are plenty of scenarios to consider when it comes to crypto’s price, and although stock-to-flow has been accurate on a few occasions, it has been inaccurate on others. In this way, it is important to take the model with a pinch of salt and not base the purchasing or trading of any BTC based solely on its predictions. With strong crypto exchange strategies, any investor can look to make a good return on their coins, whether it’s through day-trading, swing-trading or holding onto assets until the grass is greener. If stock-to-flow gets anything right, it is that the future of crypto is bright enough to invest in it. Just don’t expect to predict the exact price. As mentioned before, unpredictability is simply the nature of the game.