Are you ready to trade bitcoins? But you’re not sure how to analyze the markets and decide when to buy or sell BTC? With a bit of research, you’d likely discover that there are different techniques you can use. To anticipate the evolution of its price and place trading orders. Technical analysis and fundamental analysis are among the most popular market analysis methods.
But there is one particular trading tool often used to forecast bitcoin’s direction when learning how to trade bitcoin: the “bitcoin stock-to-flow model”, or BTC S2F. Let’s discover this prediction model. And, how you can use it in your crypto-trading.
What is the bitcoin stock-to-flow model?
Most recently popularized by the anonymous trader that goes by the Twitter handle PlanB. The S2F model has been predicting the future price of assets by evaluating their scarcity for decades.
The number we arrive at after this equation is the number of years. It would take to produce the existing stock at the current rate of production. Most of the time we’re referring to precious metals here. But it is now widely used for BTC because it is also limited in supply, with just 21,000,000 total BTC available.
How could this model be useful to crypto-investors?
To calculate this model you’ll need to divide the current stock, on hand globally, by the current production rate. The higher the resulting number, the greater the scarcity. Greater scarcity generally leads to higher demand and therefore should result in higher prices.
Historically, the S2F model has correlated well with the price of BTC. So it is seen by many as at least somewhat useful. It’s just one part of the picture of forecasting BTC prices. And, does not take into account factors such as volatility, demand, and geopolitical environment. And other scenarios involving government regulations, etc. Which are all fairly significant factors when determining the future pricing of assets.
Because of its limitations, the topic of S2F is widely debated. And, has many high-profile traders cautioning against using it in isolation to predict prices.
What are crypto-traders expecting now based on this model?
The equation for BTC is somewhat different from precious metals. As we have to take into account the concept of ‘halving’. Halving is an event that happens every time 210,000 blocks of BTC are mined (about every four years). The value of BTC for the person mining it is essentially cut in half from that point on. Making the last 2 million or so BTC much more difficult to mine.
Since there are just over 19,000,000 bitcoins in circulation (June 2022) and close to 328,500 are mined annually. This gives us the S2F value of just under 58.
The next halving is due to occur in March 2024, which will bring the S2F value up to 124.
Considering these occurrences, plus the rate of mining going forward it’s estimated that it will be the year 2140 before all the BTC is completely mined.
Last February, PlanB predicted that the estimated price per BTC will be approximately $100,000 by 2023, but given its recent dramatic loss in value in early to mid-2022, it’s understandable that many will take that prediction with a grain of salt. Having said that, the downturn in the price of BTC in 2017 to 2018 where it lost more than 80% of its value did eventually bounce back to record highs in 2021.