Bitcoin’s stock-to-flow model states that Bitcoin’s price will rise as its supply diminishes. If the S2F model’s forecasts are correct, Bitcoin investors will receive tenfold returns every four years.
An S2F model calculates an asset’s scarcity by comparing its circulating supply, which is called the stock, with its annual incoming supply, also called the flow. The higher the S2F ratio, the scarcer and more valuable the asset is. So over time, as fewer BTC enter the market relative to the total supply, Bitcoin’s S2F ratio will rise. And broadly, assets with higher S2F ratios should, in theory, grow in value over time. Comparatively, goods with low S2F rations, like clothes, food, and other consumable items, generally lose value over time.
But Bitcoin, on the other hand, isn’t influenced by any of these factors: Its flow cannot be altered or manipulated, and its total supply is always known. You also can’t take Bitcoin out of the market to manufacture consumable goods, like components or jewellery, for instance. This means that Bitcoin’s S2F ratio is almost perfectly accurate, which is why we use it to forecast Bitcoin’s future price moves.
However, deviations from the model’s predictions have happened before, and Bitcoin’s price has always come back in line with the model’s predictions - eventually.
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