As the price of Bitcoin drops by $30,000, the stock-to-flow model may fail

As the price of Bitcoin (Bitcoin) Continues to struggle near the $30,000 mark, and the widely accepted stock-to-flow (S2F) model created by Twitter users and unnamed Dutch investors Plan B sets Bitcoin prices The estimate farthest away from it now.

The model was promoted by Twitter under a pseudonym in the Mavericks in March 2019 and the first quarter of 2019 more than two years ago. It is considered to be one of the leading quantitative valuations of the first scarce digital currency ever. The model assumes that the scarcity of certain assets or commodities drives their prices.

The S2F model is an attempt to price Bitcoin in a way similar to scarce commodities such as gold and silver. The essence is that the supply of assets such as Bitcoin, gold and silver is limited in a certain period of time. Commodities such as oil, copper and steel have higher supply flows and are theoretically considered unlimited.

Since the maximum supply of Bitcoin is limited to 21 million tokens, and taking into account the time and energy-intensive mining process, only a certain amount of new Bitcoin can be circulated within a certain time frame. Until now, advanced cryptocurrencies are suitable for this model. Johnny Lyu, CEO of KuCoin Global, a cryptocurrency exchange, told Cointelegraph:

“The creator of the model tried to predict the continuously soaring bitcoin price based on the scarcity nature of bitcoin and gold, because it also has a high stock-to-flow ratio. Therefore, the hypothesis is: as the stock flow of Bitcoin rises, its price Will rise too.”

He went on to say that models like this are usually based on historical data. Although some cyclical trends can help determine the overall direction of the market, specific trends are often difficult to track in advance.

The deviation from the S2F model hits a record high

According to the S2F model, the price of BTC on July 20 should be US$88,531, which is almost three times the current price.In fact, earlier this year, PlanB suggested that Bitcoin might $450,000 before the end of this year In the best case, in the “worst case” it is $135,000. In addition, the model predicts that Bitcoin is expected to reach the long-awaited $1 million mark in July 2025.

However, in PlanB Twitter polling On June 21, 41% of respondents believed that Bitcoin Will stay below 100,000 USD this year.

In contrast, when Bitcoin was traded at a price of $55,000 in March this year, 16% of people believed this. PlanB continued to say that the deviation of the Bitcoin price from the S2F model even made him “a little uneasy”.

As the name suggests, this model uses the stock-to-flow ratio to evaluate the value of Bitcoin. The ratio is defined by the number of bitcoins currently in circulation at a given time and the inflow of newly mined bitcoins. It is obvious from the chart describing the model that, historically, Bitcoin has tracked price estimates in a fairly accurate manner in most cases.

As tip Lex Moskovski, chief investment officer of Moskovski Capital, pointed out that negative S2F bias-the ratio between the market price of Bitcoin and the S2F ratio-is now the highest value in the history of the token. He went on to say that for believers of the S2F model, this is a good time to buy Bitcoin, as this price drop may be seen as an unexpected drop.

Lennix Lai, Financial Market Director of OKEx, a cryptocurrency exchange, talked to Cointelegraph about the limitations of the S2F model. He said:

“Despite the limited predictions, the S2F model has limited ability to predict bitcoin prices because it assumes that bitcoin production will be limited. Although its simplicity makes the concept easier to understand, PlanB first introduced bitcoin in 2019. In the currency S2F model, the demand at that time was different from the current one, and demand has a direct impact on its intrinsic value.”

Demand and adoption dynamics have changed

One of the main changes in Bitcoin and the entire cryptocurrency market in the past year has been the sharp increase in institutional and retail adoption rates since March 2019. Another important factor in this demand and adoption dynamics is the pandemic that COVID-19 has plagued the world for more than 19 months. Lai elaborated on this, he said:

“The pandemic may have also accelerated adoption because the supply of U.S. dollars has expanded significantly in the last year. Investors are looking for alternative assets to invest in to hedge against the inevitable inflation. We also see daily analysis and forecasts by well-respected companies and institutions. Bitcoin is undervalued, and the Musk effect is an ambush on the market.”

The Musk effect, coupled with various other factors, such as the mainstream popularity of non-fungible tokens (NFT), has played an important role in raising people’s awareness of cryptocurrency and blockchain technology.

Lyu also talked about this change in the cryptocurrency market. He said: “The diversification of emerging projects and altcoin application scenarios in the market will distract investors, distract their existing investment portfolios, and continue to fluctuate Bitcoin. Market.” This change is obvious, because since the beginning of this year, Bitcoin’s dominance as a major cryptocurrency has fallen from over 60% to the current 46.3%, which shows that the altcoin industry is constantly evolving.

In a recent example, the dynamic shift in demand and adoption since the emergence of the S2F model, the Grayscale Bitcoin Trust Fund (GBTC) Recently experienced several stock unlocks in July, The largest of which is July 18th. This expiration further increased the continued downward pressure on Bitcoin, leading to its further decline to a transaction price of approximately US$30,500 on July 19, down from nearly US$32,200 on July 18 before the expiration. In the past—when the S2F model first became popular—no institutional demand could have a significant impact on the market in a short period of time.

The adoption rate model may be more accurate

Although the S2F model is one of the most widely known quantitative models that can predict the price of Bitcoin in the short term (less than five years), there are several other models that are commonly used to measure its price potential. Daniele Bernardi, the founder of the PHI token project and CEO of Diaman Partners Ltd., a financial technology asset management company, explored some of these models in a recent report. paperBernardi assessed the shortcomings of the S2F model and told Cointelegraph:

“It’s not enough to predict the fair value of an asset by considering scarcity, because of course it must be supported by demand. My mother (can) draw some artworks, but if no one wants to buy them, despite the scarcity, the value is zero .”

Instead, Bernardi prefers to adopt a rate model, which he discusses in his paper. He stated that according to this model, the “fair price” of Bitcoin can be around $60,000, but it will not exceed this number. This estimate is based on “actual users of Bitcoin and wallets created”.

He went on to explain the probability of PlanB’s S2F model being implemented this year: “Of course, anything can happen, but in my opinion, according to Monte Carlo simulation, there is less than 20% probability that by 2021, bit The price of the currency will reach more than US$100,000.”

related: Using a quantitative model to predict the price of Bitcoin Part 3

That said, it is important to remember that in the bull market in March 2017, Bitcoin was traded at a price of $18,000 within a few days and directly traded at a price of $64,000 in early February of this year.

Few assets in the financial market have witnessed these levels of returns in such a short period of time. Bernardi explained the impact of this growth:

“We have to consider that only six months after the price of Bitcoin has reached more than $30,000, we tend to think that Bitcoin is undervalued, but this is not the case, it is just based on the fair value of our’rate’ average Price adoption model.”

Regardless of fair value or not, Bitcoin seems to be in a period of turbulence. Since the “Black Wednesday” flash crash in early May, the token has generally faced downward pressure. However, positive institutional news keeps pouring in. Recently, Grayscale CEO Michael Sonnenshein stated that Grayscale is “100% committed” to transforming GBTC into a Bitcoin exchange-traded fund.