Analysis of Bitcoin's Stock-to-Flow Model: From Theory to Practical Application

2025-12-26 14:05:50

Quick Overview: Why Investors Need to Pay Attention to the S2F Model

Since its inception in 2009, Bitcoin has evolved from a fringe concept to a focal point of global financial attention. As of December 2025, Bitcoin’s price stands at $89.02K, a correction from its all-time high of $126.08K, but its volatility remains a serious concern for investors.

In this high-volatility environment, professional investors are seeking scientific tools to assess Bitcoin’s intrinsic value. The Stock-to-Flow model (S2F) is such a tool — it offers a new perspective on understanding Bitcoin’s value based on scarcity principles.

Core Principles of the Stock-to-Flow Model

The Stock-to-Flow model was originally applied to precious metals markets. It measures the scarcity of a commodity through a simple yet powerful logic:

Stock: The total amount of the commodity that has been mined and is in circulation
Flow: The amount of new production added annually

The higher the ratio of stock to flow, the scarcer the commodity, and theoretically, the higher its value. For example, gold’s high stock-to-flow ratio reflects its centuries-long scarcity, which is one reason it can preserve value over the long term.

Why Bitcoin Is Suitable for the S2F Model

Bitcoin has absolute scarcity — a maximum supply of only 21 million coins. This feature gives it a unique position among digital assets and allows the stock-to-flow analysis framework to be effectively applied to its valuation.

Bitcoin’s supply dynamics revolve around halving events. Approximately every four years, the block reward for miners is halved, directly reducing the flow of new Bitcoin. For example:

Before halving: 6.25 BTC per block
After halving: 3.125 BTC per block

This artificial supply compression mechanism, by increasing the stock-to-flow ratio, theoretically enhances Bitcoin’s scarcity, similar to the rising costs of gold mining.

Multidimensional Factors Affecting the Stock-to-Flow Ratio

Beyond halving events, several factors can alter the supply-demand balance within the Bitcoin ecosystem:

Mining Difficulty Adjustment: The Bitcoin network automatically adjusts mining difficulty approximately every two weeks to maintain a stable block time. An increase in difficulty reduces new coin flow; a decrease increases it.

Adoption and Demand: Institutional investor entry, national recognition, expansion of payment applications — all can boost Bitcoin demand. When demand remains stable or grows while supply is limited, the price increase predicted by the S2F model is activated.

Regulatory Environment: Strict regulations may suppress demand and increase mining costs; friendly policies may stimulate adoption and investment.

Blockchain Technology Advances: Layer 2 solutions (like Lightning Network) improve usability, and security enhancements can increase Bitcoin’s attractiveness.

Market Sentiment: Global macroeconomic conditions, geopolitical events, and volatility in traditional financial markets influence investor interest in Bitcoin as “digital gold.”

Threats from Competing Coins: Technological innovations in emerging cryptocurrencies may divert investor attention, impacting demand for Bitcoin.

Historical Validation and Model Predictions

The creator of the stock-to-flow model, PlanB, has made several price forecasts based on this framework, some of which have been validated. The model predicts significant price surges after specific halving cycles, and these predictions have shown considerable accuracy over past cycles.

However, the model also has its failures. For example, in some cycles, the anticipated $100,000 target was not reached, reminding us that any single model has limitations.

From charts, it can be seen that Bitcoin’s long-term trend correlates strongly with the S2F curve, but short-term fluctuations often deviate from the model’s predictions. This offers different insights for various investor groups:

Short-term traders: the model is not suitable for timing
Long-term holders: the model provides a valuable reference framework

Academic and Industry Evaluations of the S2F Model

Supporters argue that reduced supply inevitably increases scarcity, ultimately driving prices higher — a fundamental economic principle. Industry veterans like Adam Back, CEO of Blockstream, endorse this logic.

Critics point out that the model oversimplifies market complexity. Vitalik Buterin, co-founder of Ethereum, bluntly states that the model is “not of high quality” and warns that its predictions can be misleading. Swan Bitcoin founder Cory Clippsten and well-known trader Alex Krueger have expressed skepticism about the model’s predictive power.

Strix Leviathan investment director Nico Cordeiro further argues that the model overemphasizes scarcity while neglecting the complexity of demand-side factors — such as utility innovation, market absorption capacity, and actual adoption speed.

Exact Limitations of the Model

External Variables Are Overlooked: Policy shifts, technological breakthroughs, global economic crises — all can instantly change Bitcoin’s valuation, but the S2F model reacts slowly to these factors.

History Does Not Guarantee Future Performance: Past correlations do not ensure future repetitions. As Bitcoin evolves from an “emerging asset” to a “systemic allocation,” the factors influencing its price may undergo qualitative changes.

Underestimation of Utility: The model mainly analyzes scarcity, but Bitcoin’s real value also stems from its utility as a store of value and transfer medium. As second-layer solutions like Lightning mature, these factors may gain more weight.

Risk of Misinterpretation by Beginners: The optimistic price targets provided by the model are often amplified by media, leading immature investors to overly rely on a single indicator for decision-making.

Practical Application of the S2F Model

Step 1: Establish Correct Understanding
Deeply understand how the model quantifies scarcity through the stock-to-flow ratio. Recognize how halving mechanically changes this ratio, but that price reactions are not necessarily automatic.

Step 2: Historical Backtesting
Study Bitcoin’s price performance before and after past halving events. Observe when the model was accurate and when it failed, to identify its applicable boundaries. Remember: Past performance does not predict future results.

Step 3: Multi-Dimensional Strategy Integration
Use S2F as one foundational framework, but combine it with:

Technical analysis (trend, support/resistance levels)
Fundamental research (on-chain data, adoption metrics)
Sentiment monitoring (market fear/greed index, media buzz)
Macro environment assessment (economic cycles, policy directions)

Step 4: Prioritize Risk Management
Set clear stop-loss levels, limit exposure to a single asset, and prepare for scenarios where the model’s predictions fail.

Step 5: Adopt a Long-Term Perspective
The S2F model is more suitable for “yearly” investors. Mentally prepare to accept 50% price swings in the short term without panic.

Step 6: Dynamic Adjustment
Regularly review new market data, policies, and technological developments to decide if strategy adjustments are necessary. The crypto market evolves rapidly; rigid frameworks will become outdated.

Accuracy Evaluation of the Stock-to-Flow Model

Current Data: The model has been relatively reliable in predicting the direction of prices after halving cycles but often deviates in precise values and timing.

Fundamental Issue: The model is essentially a curve fitted to historical data, while the structure of market participants, risk appetite, and global environment are rapidly changing. In 2017, market participants were mainly retail investors; today, hedge funds, publicly listed companies, and central bank digital currency planners are involved — a qualitative shift.

Ideal Attitude: View it as a “reference tool” rather than a “oracle.” The directional insight (supply compression may push prices higher) is supported by theory, but specific price and timing forecasts should be approached with significant uncertainty.

The Multifaceted Factors Shaping Bitcoin’s Future Value

Bitcoin’s long-term value trajectory is ultimately shaped by multiple forces and will not be determined solely by scarcity. While the stock-to-flow model offers valuable insights into scarcity, a complete valuation picture must incorporate:

Technological evolution (scalability, privacy enhancements)
Institutional recognition (exchange listings, asset management products)
Global economic shifts (currency devaluation pressures, geopolitical conflicts)
Ecosystem vitality (application development, DeFi integration)

If investors approach with humility, combining the S2F model with other analytical frameworks, and remain sensitive to market dynamics, they can better seize opportunities and manage risks in this still-young asset class.

Frequently Asked Questions

Q: How does the S2F model specifically predict Bitcoin prices?
A: The model calculates the current Bitcoin stock-to-flow ratio (stock divided by annual new supply) and infers price levels based on historical correlations. A higher ratio indicates greater scarcity, theoretically corresponding to higher prices.

Q: How accurate have past S2F model predictions been?
A: The model has been relatively reliable in predicting the long-term direction after halving events but often deviates in exact values and timing. Some optimistic targets (like $1M) have not been realized, indicating it is not a perfect forecasting tool.

Q: How will future halving events influence the S2F model’s predictions?
A: Halving mechanically increases the stock-to-flow ratio, which, according to the model, should favor higher prices. However, actual effects depend on demand, regulatory environment, and global economic conditions at that time, so the model alone should not be used for decision-making.

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