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Self-described Bitcoin maximalist Rob Wolfram has been plotting the price of BTC against the Stock-to-Flow model.
In the graph below, the IT security expert explained that the dark blue area represents one standard deviation of error from the price predicted by the S2F model. At the same time, the light blue area covers two standard deviations of error from the expected price.
However, with recent bearish price action, Bitcoin sank as low as $17,600 on June 18 and breached the light blue lower bound area for the first time, calling the validity of the S2F model into question.
What is the Stock-to-Flow model of Bitcoin?
The S2F model was created in March 2019 by the anonymous Twitter account @100trillionUSD, also known as Plan B.
The model uses an existing stock-to-flow model initially formulated for use with raw materials, such as gold and palladium. The model claims that it is possible to predict the price of an asset based on its scarcity over time.
In other words, this model examines the relationship between the flow (or the annual production of mined tokens) and the stock (or tokens in circulation).
He predicts that the price of Bitcoin will reach $100,000 in mid-2024 and $1,000,000 in mid-2025.
However, by violating the lower bound for the first time, there is documented evidence that the model is invalid.
The limitations of the Stock-to-Flow model
In the past, critics have pointed to various reasons for the model’s limitations. Most pertinent is the assumption that scarcity or supply is the sole driver of value. This does not take into account other essential price drivers, namely the demand effect.
Perhaps the most fundamental theory about price is the relationship between demand and supply. In that, when supply exceeds demand, prices will go down. And when demand exceeds supply, prices will rise.
However, the S2F model ignores the influence of Bitcoin demand and overlooks unexpected events, such as an economic collapse or a Black Swan event.
Critics say the model lacks scientific rigor by focusing only on scarcity and being based on a dataset spanning just 13 years.
In response to the breach of the lower limit, writer and mining analyst Zack Voell tweeted that Bitcoin is not dead. But he went on to say that S2F has been exposed as a scam.
Bitcoin is not dead.
But the Stock-to-Flow scam is. pic.twitter.com/ZYZ0NR8n92
— Zack Voell (@zackvoell) June 19, 2022
The coming weeks will reveal whether the breach was an outlier or a sign of worse to come.
Posted in: Bitcoin, Analysis
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This post Recent volatility sees Bitcoin’s Stock-to-Flow model violated for the first time
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