As the price of Bitcoin (BTC) continues to struggle around the $30,000 mark, the widely accepted stock-to-flow (S2F) model to price Bitcoin, coined by Twitter user and unnamed Dutch investor Plan B, is now the farthest from its estimates

The model was popularized by the Twitter pseudonym more than two years ago in March 2019 and amid a minor bull through Q1 2019. It’s considered to be one of the leading quantitative valuations for the first-ever scarce digital currency. The model presumes that scarcity of certain assets or commodities drives its price.

The S2F model is an attempt to price Bitcoin in a way similar to scarce commodities, such as gold, silver, etc. The essence of it is that assets like Bitcoin, gold and silver have only limited supply injections in a certain period of time when compared with commodities like oil, copper and steel, where the supply flow is higher and considered to be theoretically limitless. 

Since Bitcoin has a maximum supply limited to 21 million tokens and considering the time- and energy-intensive mining process, there is only a certain number of new Bitcoin that can come into circulation in a certain timeframe. The premium cryptocurrency had fit right into this model, until now. Johnny Lyu, CEO of KuCoin Global — a cryptocurrency exchange — told Cointelegraph:

“The model creator tried to predict the continuously surging Bitcoin price based on its scarce nature similar to gold in that it also has a high stock-to-flow ratio. Therefore, the hypothesis is: As Bitcoin’s stock-to-flow rises, so will its price.”

He went on to say that models like these are usually built on historical data and that while some periodic trends can help identify the general direction of the market, specific trends can often be difficult to track in advance.

Deflection from S2F model at an all-time high

According to the S2F model, BTC’s price is supposed to be at $88,531 on July 20, which is nearly three times the current price. In fact, earlier this year, PlanB suggested that Bitcoin could hit $450,000 before the end of this year in the best-case scenario, and $135,000 in the “worst-case scenario.“ Furthermore, the model predicts that Bitcoin is expected to have hit its much-awaited $1 million mark in July 2025.

However, in a PlanB Twitter poll on June 21, 41% of respondents thought that Bitcoin would remain under $100,000 this year.

This is compared to the 16% that believed the same back in March when Bitcoin was exchanging hands at $55,000. PlanB went on to say that Bitcoin prices deviating from the S2F model make even him feel “a bit uneasy.”

The model, as the name would suggest, uses the stock-to-flow ratio to value Bitcoin. This ratio is defined by the current number of Bitcoin in circulation at a given time and the incoming flow of newly mined Bitcoin. As evident in the chart describing the model, historically, Bitcoin has traced the price estimates in a fairly accurate fashion at most times.

As pointed out by Lex Moskovski, chief investment officer of Moskovski Capital, the negative S2F deflection — the ratio between the market price of Bitcoin and the S2F ratio — is now the highest it has ever been in the history of the token. He went on to say that for believers in the S2F model, this is a great time to buy Bitcoin, as this price drop could be perceived as an unexpected dip.

Lennix Lai, director of financial markets at cryptocurrency exchange OKEx, spoke with Cointelegraph on the limitations of the S2F model, saying: 

“Despite its limited predictions, the S2F model only had limited power over Bitcoin price prediction because it assumes the production of Bitcoin will be limited. While its simplicity makes the concept easier to understand, PlanB debuted the Bitcoin S2F model back in 2019. Demand back in the time is a different story to now, in which demand has a direct influence on its intrinsic value.”

Demand and adoption dynamics have shifted

One of the major changes in the past year for Bitcoin and the cryptocurrency markets as a whole is the high rates of institutional and retail adoption that have drastically increased since March 2019. Another important factor in this demand and adoption dynamic is the COVID-19 pandemic that has plagued the world for more than 19 months now. Lai elaborated more on this, saying:

“The pandemic has probably also accelerated adoption, as the USD supply has inflated massively over the last year. Investors are seeking alternative assets to place their money in as a hedge against inevitable inflation. We also see daily analyses from well-respected firms and institutions predicting that Bitcoin is undervalued, the Musk effect is an ambush to the market.”

The Musk effect, combined with various other factors, such as the mainstream popularity of nonfungible tokens (NFTs), has played a large role in raising awareness about cryptocurrencies and blockchain technology in general. 

Lyu touched upon this changing scenario in the cryptocurrency market as well, saying, “The emerging projects and altcoins on the market with diversified application scenarios will distract investor attention and diversify their existing investment portfolios, thus continuously fluctuating the Bitcoin market.” This change is evident in the fact that, since the beginning of this year, Bitcoin’s dominance as the premier cryptocurrency has fallen from over 60% to its current 46.3%, signifying a growing altcoin sector.

In a recent example of the shift in demand and adoption dynamic since the inception of the S2F model, the Grayscale Bitcoin Trust Fund (GBTC) recently underwent several share unlockings across July, with the biggest on July 18. This expiry further increased the continual downward pressure on Bitcoin, causing it to drop further to trading around $30,500 on July 19, dropping from nearly $32,200 on July 18 before the expiry. In the past — when the S2F model initially became prevalent — there wasn't institutional demand that could heavily impact the market in a short amount of time.

The rate of adoption model might be more accurate

While the S2F model is one of the most widely known quantitative models that predicts Bitcoin’s price in the short term (less than five years), there are several other models that are often used to gauge its price potential. Daniele Bernardi, founder of the PHI Token project and CEO of Diaman Partners Ltd. — a fintech asset management company — explored some of these models in a recent paper. Bernardi evaluated the inadequacies of the S2F model, stating to Cointelegraph:

“It is not enough to consider the scarcity to predict the fair value price of an asset, because of course, it has to be supported by the demand. My mom can draw some art, but if no one wants to purchase them, the value is zero despite the scarcity.”

Instead, Bernardi prefers the rate of adoption model, which he explores in his paper. He stated that, according to this model, the “fair price” of Bitcoin can be around $60,000, but not more than that. This estimate is based on the “actual users of Bitcoin and the wallets created.” 

He went on to explain the probability of PlanB’s S2F model actually coming into fruition this year: “Of course, anything can happen, but from my point of view, there is less than 20% of probability, based on Monte-Carlo simulations, that the Bitcoin price will reach a value greater than $100,000 in 2021.”

Related: Forecasting Bitcoin price using quantitative models, Part 3

That said, it is important to remember that Bitcoin was exchanging hands at $18,000 for a few days in the March 2017 bull run and went straight to trading at $64,000 in March 2021. 

There are not many assets in financial markets that have witnessed gains at these levels within such a short time span. Bernardi explained the impact of this growth:

“We have to consider that only after six months that the Bitcoin price hit a value greater than $30,000, we are tempted to consider the Bitcoin undervalued, but it is not; it is just in the fair value average price, based on our ‘rate of adoption’ model.”

Fair value or not, Bitcoin seems to be in a period of turmoil, more often than not facing downward pressure on the token since the flash crash on “Black Wednesday” n May. However, positive institutional news keeps flooding in. Most recently, Grayscale CEO Michael Sonnenshein said that Grayscale is “100% committed” to turn GBTC into a Bitcoin exchange-traded fund.