Bitcoin stock-to-flow deflection hasn’t been this low since 2010

Stock-to-Flow deflection gives bullish signal

Stock-to-Flow (S2F) deflection is a way to estimate Bitcoin’s value against one of the most popular models of its price.

If the chart turns green, then Bitcoin’s value is undervalued in relation to S2F. If it is red, it is overvalued. The chart therefore allows one to determine whether the price of Bitcoin relative to the S2F model is low, normal or high.

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Bitcoin Stock-to-Flow Deflection / Source: Glassnode

Currently, the S2F deflection chart is deep in green undervalued territory. We recently pointed out at BeInCrypto that this is the largest undervaluation in 10 years. This was happening with Bitcoin trading in an area of support between $29,000 and $31,000 from May 19 to July 21, 2021.

Commenting on such low S2F deflection values, cryptocurrency trader Michaël van de Poppe said in his YouTube video:

He further added that the current S2F deflection is reminiscent of the first half of 2017. At that time, the BTC market also experienced a deeper correction, and the deflection went deep into undervalued territory. In hindsight, this moment proved to be an excellent opportunity to invest in BTC.

The 6th bounce off the long-term trendline

In the same tone, popular on-chain analyst Will Clemente tweeted yesterday, drawing a long-term trendline on the S2F deflection chart. This line goes back to the first BTC cycle of 2011. He then marked the points where the deflection chart touched that line and connected them with vertical lines to the BTC price from that period.

Source: Twitter

It turns out that whenever the deflection reached this long-term trendline, the “Bitcoin has gone on an absolute tear”. If this scenario were to repeat itself, we can expect not only a reduction in the S2F deflection in the coming months, but also a continuation of the long-term bull market in crypto.

Will Stock-to-Flow survive?

There is an ongoing discussion that the current Bitcoin price is not keeping up with the S2F model. The consequence could be the rejection of this way of modelling the main cryptocurrency price as no longer adequate.

One of the arguments for this thesis is the lengthening cycle theory, whose main advocate is Benjamin Cowen. If indeed the current Bitcoin cycle will be longer than the traditionally accepted periods of 4 years between halvings, then the S2F model may no longer be helpful in forecasting further movements of BTC.

This is noted by the model’s creator PlanB himself, who openly stated in early July that the next 6 months will be decisive (“make or break”) for the relevance of S2F. Since that tweet, Bitcoin has managed to print another orange dot above the previous one. It gives hope to supporters of the S2F model that its forecasts will continue to be valid.

Source: Twitter

Problem #2: STF underestimates the powers that be

The stock-to-flow model underestimates the challenge of maintaining the same exponential growth as your size increases.

When bitcoin went from a $1 million market cap to a $100 million market cap, the world hardly noticed or cared.

Going from a $100 billion market cap to a $10 trillion market cap is also 100x growth, but it is orders of magnitude more difficult to do.

That’s because if bitcoin has a $10 trillion market cap, it’s no longer a fly in the room. It’s the elephant in the room. That would make bitcoin’s market equal to the 3,000-year-old gold market!

In the What Bitcoin Did podcast, Plan B told the host Peter McCormack that bitcoin «is not a toy anymore.»

True. When it was a «toy» in the 2010s, the power players kept a wary eye on it, but they hoped it would stay small or disappear.

If bitcoin manages to grow into the next phase transition, it will step on many toes with sharp claws. Bitcoin will disrupt industries, but not without a fight. Bitcoin will survive but will suffer blackeyes and slower growth as a result.

In the next phase transition, bitcoin will begin to bump its elbows against many entrenched powers: regulators, governments, banks, tax authorities, Western Union, financial services, environmentalists, gold bugs, the FBI, the CIA, and grumpy old baby boomers.

If bitcoin threatens them, they will do whatever it takes to stop bitcoin and preserve the status quo.

Bitcoin fans underestimate how powerful these entities are. Although these powerful organizations cannot destroy bitcoin, they will slow down bitcoin’s adoption (i.e., the demand). They will erect troublesome roadblocks. They will impede (and perhaps stop) bitcoin’s ability to continue rising to the next «phase transition.»

It’s naive to underestimate these future challenges, but the stock-to-flow model ignores them.

To be realistic, the stock-to-flow model ought to have some «deceleration factor» in the calculation. That’s because each «phase transition» becomes progressively more difficult to achieve.

Bitcoin’s market cap curve will probably look more like Murad Mahmudov’s chart below, where BTC’s exponential growth rate slows as it gets bigger.

Bitcoin Hits $40,000

BTC/USD trades above $40,000 on approach to the 20-weekly exponential moving average ($43,300). Conquering this moving average on a weekly basis would throw the number one coin back into the midst of a raging bull market, but until then BTC/USD is simply ranging within the parameters defined in previous newsletters.

Ranging price action can go on for much longer than one might think. This comes part and parcel with the unpredictability of events, the known unknowns and unknown unknowns, and should serve as grounds to avoid any departures from reason. Fomo-ing doesn’t normally work.

Still, bitcoin’s real value is worth well above $100,000 per coin, because if central bank printing has no bottom then any bitcoin/fiat currency pair has no top. The question is and has always been ‘when’ not ‘if’ the market will recognise this truism.

While BTC/USD teeters on the edge of bull-market territory, it’s worth considering what might transpire in the event that the 20-weekly EMA is convincingly recaptured.

Assuming typical Fib levels from the $65,000 all time high, then a retracement to the golden pocket (.618 fib level) would place bitcoin at $51,000 again. This is typically the maximum retracement that’s widely acknowledged for a given market bias (i.e., in this case, mid-term bearish arguments can make sense until the .618 Fib level is taken). In my view, the 20-weekly EMA defines bull/bear-markets, but it’s always worth considering what goes on in the mind of someone on the other side of the trade.

If the 20-weekly EMA holds as resistance, then BTC/USD would probably head back towards the pivot, testing the $36,000 level once again, and opening the door to lower targets. We’ll cross this bridge if we get to it.

Still, until the market gives a clearer indication of where it’s likely heading, it’s reasonable to assume that bitcoin is ranging between $43,000 and $30,000 until proven otherwise.

Why did traders use the SF model first place?

PlanB’s article “Modeling Bitcoin Value with Scarcity” describes precious metals with unchangeable costliness and limited rates of supply as maintaining monetary roles throughout history. Gold, for example, is valuable because fresh supply (mined gold) is small in comparison to the present supply, and it is impossible to replicate the huge stockpiles of gold across the world. PlanB then claims that the same reasoning applies to bitcoin, which gains value when fresh supply is decreased every four years, eventually resulting in a supply of 21 million bitcoin.

He then graphs the SF of bitcoin versus the USD market capitalization and two randomly picked SF data points for gold and silver. Following a linear regression with the natural logarithm of bitcoin’s SF metric as the independent variable and USD market capitalization as the dependent variable, the study concludes that there is a statistically significant link between USD market capitalization and SF values, as demonstrated by linear regression with an R2 (a statistical measure of how well data fits a regression line) of 0.95. The two randomly selected data points for gold and silver are consistent with bitcoin’s trajectory and are provided as additional support for the hypothesis.

Source: PlanB Original Paper

The method mentioned above, according to PlanB, may be used by investors to estimate the future USD market capitalization of bitcoin. Also, the model lends validity to the $100,000 bitcoin forecasts.

As a result, SF has gone viral and generated rags-to-riches fantasies for people betting everything on the future of bitcoin. However, I anticipate that the model’s accuracy will be roughly as good at forecasting bitcoin’s future price as other models were at predicting financial events.

Even Fidelity Digital Assets examined the S2F valuation model in August 2020, indicating that the stock-to-flow approach had some validity.

However, no model is 100% accurate because of the various unpredictable events that could occur spontaneously. For example, the Covid 19 outbreak was a massive hit for the crypto market as prices crashed over a span of days.

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 drastically increased since back in 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 Musk effect, combined with various other factors like 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, 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.

Stock-to-Flow deflection gives bullish signal

Stock-to-Flow (S2F) deflection is a way to estimate Bitcoin’s value against one of the most popular models of its price.

Bitcoin Stock-to-Flow Deflection / Source: Glassnode

Commenting on such low S2F deflection values, cryptocurrency trader Michaël van de Poppe said in his YouTube video:

Stock-to-Flow deflection gives bullish signal

Stock-to-Flow (S2F) deflection is a way to estimate Bitcoin’s value against one of the most popular models of its price.

Bitcoin Stock-to-Flow Deflection / Source: Glassnode

Commenting on such low S2F deflection values, cryptocurrency trader Michaël van de Poppe said in his YouTube video:

BTC: Stock to flow Deflection Peaks

Meanwhile, on-chain data shows that the stock-to-flow deflection ratio has reached its highest levels ever (since 2010).

The Stock-to-flow deflection model is based off PlanB’s S2F projection. If deflection is greater or equal to one then bitcoin is overvalued. Otherwise, it’s undervalued.

By this calculation, BTC/USD hasn’t been this undervalued since 2010. The negative deflection has never been this high.

This effectively means that a long-term bear market could break the stock-to-flow model, dealing a heavy blow to bitcoiners who swear by its Biblical math.

Will time vindicate PlanB’s prophecy? You know where my money is.

Let’s do this.

Catch you next time.

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What went wrong?

As Bitcoin hovers around the $30,000 mark, the price is currently the furthest away from what the chart predicts. If we consider the model, the price should be over $80,000, which is quite a lot compared to current prices.

Early this year, PlanB predicted that Bitcoin might even surpass $450,000 by the end of this year and $135,000 in the “worst-case scenario.” Furthermore, the model forecasts that Bitcoin will reach the much-anticipated $1 million mark by July 2025.

Bitcoin SF model performance correlation chart as of press time.

Source: buybitcoinworldwide

Several industry experts have criticized the SF approach. Johnny Lyu, CEO of KuCoin Global, recently said:

“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 add that models like this are often established based on historical data and that although some periodic trends may assist in determining the overall direction of the market, specific trends can sometimes be hard to track in advance.

Industry expert, Lennix Lai, elaborated on why this model is failing, stating:

“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.”

Over the past year, a lot has changed for the Bitcoin and Crypto markets in general. For instance, the rate of institutional adoption has gone up drastically since 2019. The other major factor being the COVID-19 pandemic that has plagued the world for more than 19 months now. Lai elaborated further:

“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.”

In conjunction with other reasons like the mainstream appeal of nonfungible tokens (NFTs), the Musk effect has also played a significant influence in increasing awareness of cryptocurrencies and blockchain technology in general. Since the beginning of the year, Bitcoin’s dominance as the leading cryptocurrency has declined from more than 60% to 46.3%, indicating a strengthening altcoin sector.Ultimately, it is safe to conclude that no analytical approach can be touted as perfectly accurate. Perhaps this is the core reason behind professional traders leveraging a combination of different technical approaches. Whether or not the SF model would actually be accurate about its end of the year target is yet to be seen. Plan B has himself stated that the next few months are going to be a “make or break” situation for the stock-to-flow model.

The 6th bounce off the long-term trendline

Source: Twitter

Will Stock-to-Flow survive?

Source: Twitter

Bitcoin value and scarcity

One well-respected Bitcoin analyst with the pseudonym ‘PlanB’ published an article on Medium in March 2019 called Modelling Bitcoin Value with Scarcity. The article suggests a statistical relationship between the S2F ratio of Bitcoin and its price—and that this can be used to help forecast the future price of Bitcoin.

In order to get this relationship, Plan B ran a statistical model which estimates Bitcoin’s price using a regression equation involving annually smoothed S2F ratios. The next chart shows this from 2011 until the sixth halving event in 2028.

Bitcoin Price vs. Stock-to-Flow. Log scale. Source: authors own calculation using data from blockchain.com and lookingintobitcoin.com. The concept of this chart is attributed to ‘Plan B’.

Looking at the chart, there has been a strong relationship in the past between the S2F model and Bitcoin’s price. But it would be dangerous for an investor to think that this model can predict the future. The model suggests that Bitcoin will (give or take) go up by ten times sometime after each new block reward halving date.

As with gold, Bitcoin’s price could go up in the future because dollars get printed at a faster rate—not because Bitcoin’s supply keeps increasing at a slower and slower rate. Ninety percent of all bitcoins in the world have already been mined. In other words, Bitcoin is already extremely scarce.

The model suggests a $1 million Bitcoin in the year 2028 and a $10 million Bitcoin in 2032. We can’t assume Bitcoin’s price will increase by an order of magnitude each time we have a halving event.

Модель Stock–to–Flow

Отклонение STF представляет собой разницу между курсом биткоина (BTC) и моделью STF.

Значения, превышающие 1 (красная линия), указывают на то, что биткоин переоценен относительно модели. Напротив, значения ниже 1 (зеленая линия) сигналят о недооцененности.

Текущий рекордный минимум по этому ончейн-индикатору был зарегистрирован в ноябре 2010 года на отметке 0,3 (черная стрелка). Впоследствии, в июле 2017 года, показатель достигал значения 0,36 (черный кружок).

Теперь же в результате недавнего падения биткоина величина отклонения STF составила 0,314, что стало минимальным показателем за последние примерно десять лет.

Таким образом, согласно модели STF, текущий курс BTC отражает крайнюю недооцененность валюты.

Метод

В сегодняшней статье мы рассмотрим эту модель, проведем диагностику нормальной регрессии и определим, было ли преобразование логарифма необходимо или целесообразно (или и то, и другое), а также исследуем возможные вмешивающиеся факторы (конфаундеры), взаимодействия и чувствительность.

Еще одна проблема, которую мы исследуем, – это проблема нестационарности. Стационарность (неизменность во времени) является необходимым условием большинства статистических моделей. Имеется в виду идея о том, что, если тренд относительно времени отсутствует в средних значениях (или дисперсии), то он отсутствует и в любой момент времени.

Помимо анализа стационарности, мы исследуем также возможность коинтеграции.

All That Glitters Isn’t Bitcoin

While the Stock-to-Flow Model is undoubtedly an interesting concept, it lacks in some aspects due to its narrow view of how commodities are valued. The S2F model relies on the idea that only scarcity — as measured by the model — should drive value. This causes the model to break down in a scenario where Bitcoin does not have any useful applications other than its scarcity.

1 Volatility

Volatility is also a significant factor that must be considered when evaluating an asset. If the asset’s price volatility is predictable, its valuation may be more accurate. However, since Bitcoin is notoriously volatile, predictions of its value are never entirely precise using this model.

2 Unexpected Economic Events

Unexpected economic events can easily undermine the stock-to-flow model, such as the coronavirus pandemic in 2020, which led to a slump in market activity. This caused high fluctuation in the value of Bitcoin, and the stock-to-flow model could never have accounted for any such economic setback.

3 The Demand for Bitcoin

The price of an asset is a function of both its demand and supply. One of the biggest disadvantages of the stock-to-flow model is that it only accounts for Bitcoin’s market supply while completely ignoring demand. Since its origin, Bitcoin has enjoyed a steady growth in demand, with it now outpacing the supply.

Without considering demand, the stock-to-flow model can produce distorted price predictions. However, another significant setback for the model is that it cannot work for cryptocurrencies without fixed supply caps.

Структура моделей

Запасы секторов и блок-схема денег, энергии и материалов согласованной модели ввода-вывода с потоком запасов.

Модели SFC обычно состоят из двух основных компонентов: расчетной части и системы уравнений, описывающих законы движения системы. Последовательность бухгалтерского учета обеспечивается использованием трех матриц: i) сводные балансы со всеми начальными запасами, ii) поток транзакций, регистрирующий все транзакции, происходящие в экономике (например, потребление, выплаты процентов); iii) матрица переоценки запасов, показывающая изменения запасов в результате операций (поток операций и матрица переоценки запасов часто объединяются в полную матрицу интеграции). Матрицы построены с соблюдением интуитивных принципов. Чей-то актив — это чья-то ответственность, а чей-то приток — это чей-то отток. Более того, каждый сектор и экономика в целом должны соблюдать свои бюджетные ограничения. Ни один фонд не может появиться (или закончиться) ниоткуда.

Второй компонент моделей SFC, поведенческие уравнения, включает в себя основное теоретическое допущение модели. Большинство статей в существующей литературе основаны на посткейнсианской теории. Однако уравнения поведения не ограничиваются какой-то одной школой.

Большинство моделей SFC формулируются в дискретном времени, но также могут быть сформулированы в непрерывном времени как дифференциальные уравнения или дифференциально-алгебраические уравнения .

Пример численного анализа устойчивости. Для некоторых значений параметров (здесь: процентная ставка и потребление из богатства) модель нестабильна, но стабильна для других.

Простые модели могут быть решены аналитически и исследованы с помощью таких концепций теории динамических систем, как бифуркационный анализ. Более сложные модели необходимо моделировать численно .

Bitcoin stock-to-flow deflection hasn’t been this low since 2010

Stock-to-Flow deflection gives bullish signal

The 6th bounce off the long-term trendline

Will Stock-to-Flow survive?

Problem #2: STF underestimates the powers that be

Bitcoin Hits $40,000

Why did traders use the SF model first place?

Demand and adoption dynamics have shifted

Stock-to-Flow deflection gives bullish signal

Stock-to-Flow deflection gives bullish signal

BTC: Stock to flow Deflection Peaks

Read More: The IMF Fears Becoming Irrelevant After El Salvador Adopts BTC

What went wrong?

The 6th bounce off the long-term trendline

Will Stock-to-Flow survive?

Bitcoin value and scarcity

Модель Stock–to–Flow

Метод

All That Glitters Isn’t Bitcoin

1 Volatility

2 Unexpected Economic Events

3 The Demand for Bitcoin

Структура моделей

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