What is it about ?
Stock to flow (S2F) is a concept primarily used in commodity markets to measure the scarcity or abundance of a particular resource. It quantifies the supply side economics of a resource, examining the amount in reserves (stock) versus the amount produced annually (flow). The model has recently gained traction in the world of Bitcoin, as it appears to have a strong correlation with Bitcoin’s price movements. This paper aims to delve into the intricacies of the S2F model, its application to commodities and Bitcoin, and explore its limitations and economic perspectives.
How does it work ?
Basic Concepts
The stock to flow model is a way of understanding the scarcity of a certain commodity or asset. The ‘stock’ refers to the current amount or reserves of that commodity, and the ‘flow’ is the amount that is added to the stock each year through mining or production.
Stock to Flow Ratio
The stock to flow ratio (S2F) is calculated by dividing the current stock of a commodity by the yearly production. A higher S2F ratio indicates that the commodity is more scarce and thus, could be more valuable.
Stock to Flow and Bitcoin
The S2F model has been used to explain the price of Bitcoin. Bitcoin, like a commodity, has a finite supply (21 million) with new Bitcoins being added through the process of mining. As the rate of new Bitcoin creation decreases over time (due to halving events), the S2F ratio increases. According to the model, as the S2F ratio of Bitcoin increases, so should its value.
For more details please read our blog posts about Stock to Flow model
Stock to Flow Model: A Comprehensive Guide Part 1
Stock to Flow Model: A Comprehensive Guide Part 2
Stock to Flow Model: A Comprehensive Guide Part 3
