Why modelling Bitcoin’s price using the Stock To Flow Model is a bad idea

On August 1, 2020, The Coin Telegraph read: “the price of Bitcoin surpassed $11,700 and Plan B, a twitter user and the creator of the Stock to Flow model said that BTC rally to $100,000 is well on track.”

The stock to flow model (S2F) potentially tells a story of scarcity. Stock refers to the total amount of the commodity available in use and in reserves. Flow refers to how much of the commodity is produced in a year. The ratio of the stock to the flow gives the number of years required to produce the exact stock available.

This ratio inversely describes supply. The ratio of flow to the stock is the supply growth rate. As the stock flow ratio increases, supply of the commodity decreases. This has the potential to create scarcity of the commodity which can lead to an increase in price. Investors use the stock to flow ratio of commodities like gold and silver to attempt to estimate their price trajectory, because for such commodities, whose usefulness and demand are known, an increase in the S2F ratio reduces supply and creates scarcity, which can lead to increase in price. Bitcoin participants have attempted to apply the same model to estimate the price trajectory of the cryptocurrency.

A notable proponent of this ideology is someone who goes by the Twitter username…