PlanB stock-to-flow for dummies

Published in

Coinmonks

5 min readSep 13, 2021

Introduction

PlanB is a Dutch investor and known for his in-depth knowledge of legal and quantitative finance topics. PlanB is well-known within the crypto community. He created a fascinating model called the ‘stock-to-flow’ (STF) model. This model explains the value of Bitcoin using the scarcity of these coins. Let’s try and figure out together what this is all about, shall we?

Scarcity and Stock-to-Flow

Bitcoin is the first digital object that can be used as money. Bitcoin is scarce as we know Bitcoin has a maximum supply of 21 million coins. It’s hard to obtain new Bitcoins, just like mining gold deep underground. Both gold and bitcoin are expensive to obtain, for that matter. You have to invest money to obtain both gold or bitcoin.

Bitcoin can be acquired by ‘donating’ computing power. Fast servers called nodes can do this. They are optimized for this task. These nodes help secure the Bitcoin network and connect the blocks filled with transaction specifications on the blockchain. As a reward, these nodes will receive Bitcoin. Hence, we can assume it’s pretty hard to obtain right?
We call this process proof-of-work (PoW). Fiat money like USD does not have anything of this. It can just be printed. It can also be faked pretty easily. It’s not scarce at all.

SF = STOCK / FLOW
We already determined Bitcoins are very hard to acquire. Actually, doubling our efforts to acquire more Bitcoin will not even work as the network will automatically increase the difficulty of acquiring new Bitcoins. Anyway, we will measure the current stock of Bitcoin against the new yearly production of Bitcoin. (stock -> flow) A high ratio indicates more scarcity. More scarcity will indicate a higher value.

Around the year 2022 Bitcoin’s stock-to-flow ratio will overtake gold it’s stock-to-flow ratio!

Stock-to-flow ratio for gold, silver, palladium, and platinum.

It takes 62 years to produce the current stock of gold. Silver takes 22 years, while platinum seems to be the easiest to produce.

Bitcoin has a stock of 18.8 million coins. About 900 bitcoins are mined every day. That's 328.500 bitcoins yearly. We can determine the SF = 57.2. This ranks Bitcoin just below gold.

Halvings
Every four years, the creation of new bitcoins will be cut in half. We call these events ‘bitcoin halving’. These halvings are obviously extremely important regarding the stock-to-flow ratio. The SF will increase because of these halvings! And so will the price as the monetary inflation lowers.

Value impact

We determined scarcity, measured by SF, impacts the value. The price chart of Bitcoin over the years actually shows this theory is right. Value tends to be higher. Pretty cool right? This guy might have found something!

MODEL
PlanB’s next step was to create a model based on the SF values. He used the following data to build a model:

Bitcoins monthly SF ratio
Amount of new Bitcoins per month flowing into the economy
Correction for lost coins. The first million coins are disregarded.
Historical Bitcoin price data
Gold and Silver data

The results are exciting:

Charts made with gnuplot and gnumerics by PlanB

RELATIONSHIP
I think we can clearly determine a relationship between price development and SF. For gold, silver, and Bitcoin. The chance this is caused by randomness is close to zero. The dominant price influence seems to be the SF ratio. Of course, other influences impact the bitcoin price like hacks, news, regulations, etc. But these only have a minor impact.

Also, watch the similarities between gold, silver, a bitcoin. These actually confirm this model.

Bitcoin SF model

PlanB also made a model of the Bitcoin price directly visualized against the SF ratio. The result seems to be the same. This chart has recently been uploaded on PlanB’s Twitter feed.

2021–2022 predications regarding Bitcoin and SF ratio

Power Laws and Fractals

A power law is a relationship between two quantities. In this case, the power-law tells us the Bitcoin value increases 10x when a Bitcoin halving occurs. During the halving event, the SF doubles. So, there is a relationship between these three quantities.

Power laws are interesting because they reveal an underlying regularity in the properties of seemingly random complex systems.

Follow PlanB: PlanB@100trillionUSD or PlanBTC.com

Verification

PlanB did NOT write this article. The original article can be found here. I have rewritten the article the ‘crypto for dummies’ way to make it easier to read.

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