The stock-to-flow ratio produces Bitcoin price forecasts at dizzying heights. In May of next year, the largest crypto currency in terms of market capitalization could therefore still be 250,000 US dollars. An anonymous scientific paper has refined the analysis – and found some shortcomings.
The Stock-to-Flow Ratio as the Basis for Bitcoin Price Forecasts
The stock-to-flow ratio describes the scarcity of an asset. The ratio is the time it would take for the current production quantity (flow) to reach the current inventory level (stock). In other words, the relationship between stock and production quantity describes the scarcity of a good. The higher the ratio, the scarcer the good.
The stock-to-flow ratio is usually consulted for gold, for example. Here, it is assumed that the price of gold will rise in the event of a rising shortage. In doing so, it is always taken into consideration that the demand for the asset remains at least the same.
This analysis can also be applied to the Bitcoin price – and sometimes leads to dizzying price forecasts. This is not least due to the fact that the Bitcoin supply or the Miner reward is halved at regular intervals – the crypto community speaks of halving here.
Following the crypto-analysts PlanB and Saifedean Ammous, an anonymous Reddit user now addressed the stock-to-flow ratio in his paper “On the Apparent Convergence of Bitcoin’s USD Market Value Toward the Stock-To-Flow Valuation Model and the Necessary Divergence Into the Narrow Halving Window”.
The anonymous Bitcoin analyst added factors such as price fluctuations to the stock-to-flow ratio and concluded that the Bitcoin price at the next halving in May 2020 could be $250,000.
The Narrow Halving Window and the Bitcoin Price
But even this extremely bullish prognosis does not come without (at least) one catch: the Narrow Halving Window (NHW). This is the price range in which the Bitcoin price moves around the half in the days – the price could deviate.
If the forecasts based on the stock-to-flow ratio are not correct, the paper states that the Bitcoin price must be based on the NHW. In other words, if the stock-to-flow forecast is not correct, the Bitcoin price will deviate according to the NHW.
Bitcoin price forecast with hooks
As the author himself admits, the model described is highly speculative. This is not least due to the fact that it assumes that “Bitcoin’s market price ultimately depends exclusively on the production rate of new Bitcoins”.
As the author also admits, the stock-to-flow model provides for a Bitcoin price of one million US dollars after the fifth halving. For this forecast, however, the total market capitalisation would have to be between 20 trillion and 200 trillion US dollars. The total amount of all national currencies is estimated to be between 10 trillion and 100 trillion US dollars. For a Bitcoin exchange rate of one million US dollars, the crypto currency would have to become the world currency. On the other hand, the value of the world currencies would have to fall steadily.
The premise is also worth considering. After all, in terms of the stock-to-flow ratio, it is generally assumed that people also use Bitcoin – even if it is “only” as a store of value. The demand for new Bitcoins therefore presupposes representatives of the thesis. There are some points that argue in favour of describing Bitcoin as digital gold. The changed perception of the crypto currency in the public as well as a slowly growing adaptation also suggest that the demand for Bitcoin is increasing. Nevertheless, forecasts should be treated with caution.
The problem with forecasts
Forecasts, whether in relation to shares or crypto currencies, are necessarily based on past events. Since Bitcoin, for example, has always gained in strength with regard to halving in the past, a repetition is assumed. One can justify that economically by the shortage of the supply. But the premise that the demand for the crypto-asset remains the same or even increases must be in the realm of speculation.
Here, too, there are indications that lead to such optimistic looks into the future. For example, one can assume increasing institutional interest in the physical BTC futures of the option trader Bakkt. A growing spread of Bitcoin & Co. is also expected – encouraged by the cooperation of the same company with the coffee house giant Starbucks, which speaks a bullish language.
Nevertheless, forecasts always remain what they are: a glimpse into the future. Straight one the so far insufficient regulation at the crypto market and again and again appearing manipulation suspicion admonishes here to observe the market critically.