Stock-to-Flow Model: Modeling Bitcoin's Value with Scarcity

[fillippone]

I read up to this point:

Bitcoin has unforgeable costliness, because it costs a lot of electricity to produce new bitcoins

And it was enough for me to stop reading any further. It is utility that gives value to something, not its cost of production. No matter how much one bitcoin is worth in terms of production costs (electricity, time, effort, etc), if it loses its utility (right now mostly as a vehicle of speculation, and as a store of value, to a degree), its price will be zero, and no amount of scarceness will be able to fix it. In simple terms, when someone talks about scarcity without referencing utility at the same time, they are likely not very competent in economic matters

So value comes through utility, and scarcity adds a price tag to it

I think you misunderstood the “ unforgeable costliness”.
This is not to set a minimum threshold for bitcoin valuation, like an “intrinsic value” as they used to be.
This is only meant to answer the question: “why you do say bitcoin is scarce when I can create infinite bitcoin clones (think of all the bitcoin forks back created in the 2017 season) thus nullifying the scarcity hypothesis?

The answer lies in the cost to write an information on the public ledger: mining bitcoin is very costly: writing a block is not cheap (it’s cheap to transact, but this is a different measure), hence using bitcoin is a good store of value because nobody wants or can alter his history. Nevertheless the bitcoin protocol and the number of bitcoin in particular.
This is not true for fiat money, where a very small group of persons can unilaterally change the ninety supply or, as I said, the various shitcoin where again a small miner can alter the blockchain.
This was the meaning of the above sentence, as I understood it.

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[deisik]

I read up to this point:

Bitcoin has unforgeable costliness, because it costs a lot of electricity to produce new bitcoins

And it was enough for me to stop reading any further. It is utility that gives value to something, not its cost of production. No matter how much one bitcoin is worth in terms of production costs (electricity, time, effort, etc), if it loses its utility (right now mostly as a vehicle of speculation, and as a store of value, to a degree), its price will be zero, and no amount of scarceness will be able to fix it. In simple terms, when someone talks about scarcity without referencing utility at the same time, they are likely not very competent in economic matters

So value comes through utility, and scarcity adds a price tag to it

I think you misunderstood the “ unforgeable costliness”. This is not to set a minimum threshold for bitcoin valuation, like an “intrinsic value” as they used to be

That's how I got it

Anyway, introduction of new terms like this one is not a very bright idea overall, especially in the field with an already established and well-defined vocabulary as it only leads to confusion and misunderstanding. Regardless, the cost of mining a bitcoin, or as you put it, the cost to write a piece of information to the public ledger has nothing to do with its market value, let alone a store of value. Put differently, if you could render the information in the blockchain as immutable as it is now at no cost at all, Bitcoin would be as valuable, if not more, provided you kept it capped at the same 21M coin limit as of now

[FanEagle]

We should not also forget the fact that even tho there are bitcoins that are mined every single day there is also fact that some are locked for people to use in exchanges that we can never really calculate.

There are probably close to over a million people by now (making up this number, don't have any data) that have money in some exchange that is not used at all and exchanges can't use that money neither since it is owned by other people so all in all it becomes a way where bitcoin is stuck there doing nothing, it is not lost and it is not sent to somewhere wrong and nothing is done badly to them, they are just locked there for future use or even maybe long term holding which means bitcoin is even more scarce than we can imagine. Who knows how many people just put bitcoin into a USB and locked it in a safe?

[henrybek3]

Too many people may have invested in Bitcoin. A new order is about to be established. Bitcoin price can move up or down. It doesn't matter. Bitcoin offers something else. The price may become more stable as bitcoin becomes widespread to too many people. When the price problem is solved, a new social order will be established.

[Dabs]

The other thing, is that even though there could be a great number of clones and forks, they're still not the same as BTC. Any transactions are on separate blockchains, not bitcoin's.

[tartibaya]

I don't think it's possible to calculate it. We don't know how much the bitcoin wallet is locked. We do not have the power to examine Bitcoin movements from day one. However, the amount of bitcoin circulating in 130 years will be clear. Then the inhabitants can make a more accurate assessment.

[Dabs]

I don't think we need to wait 130 years, maybe as short as 10 to 20 years is all that's needed as by then 99% of all bitcoins will have been mined, and it's another hundred years to mine the last one percent.

[kotik085]

Ahead comes Halving Bitcoin and we can see the simulation of Bitcoin in practice. This will happen in May 2020.

[fillippone]

Another tweet by PlanB on the most discussed topic: why bitcoin price is so low if S2F model is true? Why people are not discounting future halvings?

#Bitcoin halving .. 4 months to go 🚀

IMO halving is priced in correctly and markets are efficient, in the sense that few people (10%) know, understand and believe S2F model, and most people (90%) don't know S2F, don't understand stats&math behind it, think demand is missing etc

https://twitter.com/100trillionusd/status/1212373777927081984?s=21

[JayJuanGee]

Another tweet by PlanB on the most discussed topic: why bitcoin price is so low if S2F model is true? Why people are not discounting future halvings?

#Bitcoin halving .. 4 months to go 🚀

IMO halving is priced in correctly and markets are efficient, in the sense that few people (10%) know, understand and believe S2F model, and most people (90%) don't know S2F, don't understand stats&math behind it, think demand is missing etc

https://twitter.com/100trillionusd/status/1212373777927081984?s=21

I am a little bit confused about those white dots.

Explain to me like I am a young person...

What do the white dots represent?    And, why is the $10 line highlighted?


Edit:  I did not change the chart (I just clicked on "Quote" in order to reply), but my post is showing the $.10 line as highlighted.  I don't understand that, either.

[fillippone]

I am a little bit confused about those white dots.

Explain to me like I am a young person...

What do the white dots represent?    And, why is the $10 line highlighted?

The white dots represent the ratio between BTC price and Model price. I think they improperly use the left axis discarding the $ symbol.

Look at the end of 2013: the BTC price is around 1,000$ and the mode price is around 100$. The ratio is then 10 and the white  dot lies on the 10$ horizontal line.

Edit:  I did not change the chart, but my post is showing the $.10 line as highlighted.  I don't understand that, either.

I can’t see any line highlighted, it’s a mysterious mystery.

[JayJuanGee]

I am a little bit confused about those white dots.

Explain to me like I am a young person...

What do the white dots represent?    And, why is the $10 line highlighted?

The white dots represent the ratio between BTC price and Model price. I think they improperly use the left axis discarding the $ symbol.

Look at the end of 2013: the BTC price is around 1,000$ and the mode price is around 100$. The ratio is then 10 and the white  dot lies on the 10$ horizontal line.

Edit:  I did not change the chart, but my post is showing the $.10 line as highlighted.  I don't understand that, either.

I can’t see any line highlighted, it’s a mysterious mystery.

O.k.  That clarified my confusion.  The white dots are just representing how far above or below 1 (in sync) the model is in with what it predicts in terms of where BTC price is as compared with where the model predicts BTC's price to be.  Makes much moar senses, now.   Thanks.  

[fillippone]

Grayscale just updated his investors about 2019.:

A new Bitcoin boom?Grayscale reports record crypto investments for 2019

Something stands out:

Digital currency manager Grayscale took in $607 million of investments in 2019, an amount that outstripped its collective inflows of the previous five years.

From their report:

Most significant asset raising year in Grayscale’s history: Investment for FY19, totaled $607.7 million, surpassed combined investment into all Grayscale’s products from 2013 through 2018.
Largest quarterly investment to Grayscale® Bitcoin Trust ever: With $193.8 in 4Q19, investment into Grayscale Bitcoin Trust exceeded the $171.7 million in investment raised in 3Q19.

The current situation is this one:



Please note the relative size of Bitcoin Investments comparet to shitcoins.

You can download the complete report here (you need to prive an email-trowawaymail will work).
So returning on topic, doing some back of the envelope calculations:

USD 607 millions@BTCUSD8,000 means roughly 75,000 bitcoins were bought this year.
After the halving each year 6.25*6*24*365 Bitcoins will be mined.
This means Greyscale alone will buy more than 20% of newly mined Bitcoins next year.

Of course this doesn’t mean only the new mined bitcoin will be bought by Greyscale: they will probably buy via OTC desks from whales, nevertheless this is a looming offer on the market that will be swept away.

Do not forget also Jack’s Square, who has been buying massively bitcoins over the last quarters.

How cannot this be bullish?
This is Stock to Flow in full power!

[Dabs]

No Tulip Trust? ahahahah..... I didn't know they had anything else other than BTC. But even with the relative size, look at the absolute size, some 5 million went to BCH. I can understand a little bit the others too though. ETH and ETC act like the index ETFs (exchange traded funds) of the altcoin world.

[fillippone]

Another article from PlanB has just been published!

Very interesting.
This article is trying to answer one of the most common question: why Bitcoin is still at a very low level if it is going to be worth in the million in a few years?



Efficient Market Hypothesis and Bitcoin Stock-to-Flow Model

Bitcoin Stock-to-Flow (S2F) model was published in March 2019 [1]. The model has been well received by bitcoiners and investors. Many analysts have verified the cointegrated S2F model and confirmed bitcoin price predictions [2][3][4].
The S2F model also received critique. The best steel man argument against the model comes from the Efficient Market Hypothesis (EMH). The argument states that the model is based on publicly available information (S2F, bitcoin's supply trajectory) and therefore the analysis and conclusion must be already priced in.
In this article I share my point of view on S2F model and EMH. I analyze arbitrage opportunities, risk & return model and derivatives markets.

The read is very interesting and I'm going to analyse it on the next days, but the ultimate conclusion is: don't worry. Markets are rational AND bitcoin is cheap!

[fillippone]

This post is eligible for my project:

Help me translate my best posts in your Local Board

I am a strong believer in the utility of local boards.
I am lucky enough to be able to express myself in at least a couple of languages, but I know this is not the case for everyone.
A lot of users post only in the local boards because of a variety of reasons  either language or cultural barriers, lack of interest or whatever other reason.
I personally know a lot of very good users (from the italian sections mainly, for obvious reason) who doesn't post in the international sections.

I think all those users they are missing a lot of good contents posted on the international (english) section or on other boards.

If you think you can help here, just visit the thread!

[fillippone]

Has the recent dump invalidated the stock to flow model?
Not at all:

There is a big misunderstanding about the stock-to-flow model: that 1 red dot outside the blue bands invalidates the model.
That is not true! Red dots have been below the band in 2010,2012,2016,2019 and above in 2011,2013,2017.
But co-integration is strong, even now at $5300.

https://twitter.com/100trillionUSD/status/1240008836792139782?s=20

Going down the thread there is an answer that might then surface on your head:

Q.

is there any piece of data that would disprove the model?

A.

I have explained this 100 times before, but here we go again: S2F model is invalidated if S2F and BTC price are no longer co-integrated.
Everybody can calculate and verify that themselves, or you can check real time at http://btconometrics.com (Engle-Granger Test).

Wow, what an hint:
Going to the website we find that:

Engle-Granger Cointegration Test
The Engle-Granger test determines if two series are cointegrated by modelling the lag of the residuals against the first difference of the residuals. The t statistic for the coefficient from this OLS is not distributed Student, and should be thought of as "tau". If the tau statistic is below around -2.7 then there is strong evidence of stationarity in the residuals, thus the series are likely to be cointegrated.

The more negative the less likely the series are to be not cointegrated.

Red: no cointegration
Orange: cointegration requires a detailed investigation
Green: strong cointegration

[BitcoinVN_News]

Given that the halving is just about a month away and many people in our home country Vietnam are still seeing Bitcoin mostly as a speculator's game or simply as a tool to move value around, we have had some of our team members recently translate PlanB's original article into Vietnamese:

https://news.bitcoinvn.io/mo-hinh-dinh-gia-bitcoin-stock-to-flow/


...as well as Eric Voskuil's ( Libbitcoin ) critique of the model:

https://news.bitcoinvn.io/sai-lam-cua-mo-hinh-du-doan-gia-bitcoin-bang-ty-le-stock-to-flow/

[fillippone]

Almost forgot to post here another good podcast where PlanB appeared as a special guest:

Pomp Podcast #238: PlanB on Why Bitcoin’s Stock-To-Flow Model Is Becoming More Accurate Over Time

PlanB is one of the most notorious Bitcoin investors in the world. He has amassed a loyal and engaged following on Twitter and has popularized the stock-to-flow model that is widely cited throughout the Bitcoin community. In this conversation, Anthony and PlanB discuss his discovery of Bitcoin, what it took to feel comfortable enough to invest, how he came across the s2f model, why his team hasn't bought Bitcoin in their institutional funds, and why PlanB believes the s2f model is actually getting more accurate over time.

https://www.youtube.com/watch?v=ryLZiE0N4lQ

[BitcoinVN_News]

Given that the halving is just about a month away and many people in our home country Vietnam are still seeing Bitcoin mostly as a speculator's game or simply as a tool to move value around, we have had some of our team members recently translate PlanB's original article into Vietnamese:

https://news.bitcoinvn.io/mo-hinh-dinh-gia-bitcoin-stock-to-flow/


...as well as Eric Voskuil's ( Libbitcoin ) critique of the model:

https://news.bitcoinvn.io/sai-lam-cua-mo-hinh-du-doan-gia-bitcoin-bang-ty-le-stock-to-flow/

We also added by now the response of PlanB (from 19 January 2020) to various critiques on the model to our Vietnamese language series on the topic:

https://news.bitcoinvn.io/li-thuyet-thi-truong-hieu-qua-va-mo-hinh-stock-to-flow-bitcoin/