The Reason Why Bitcoin May Never Hit the $1 Million mark
Early in 2019, a Dutch analyst identified as Plan B popularized a concept used to project the future value of an asset. This concept was known as the stock-to-flow model. Based on this model, Bitcoin will reach the $1 million mark by July 2025.
The S2F model has scarcity and supply as its foundation. In line with the model, the value of an asset class like Bitcoin inevitably rises exponentially when its supply decreases.
The Stock-to-Flow Formular
The formula for determining the S2F of an asset is quite simple, much easier than rocket science. The S2F value is the result of dividing the circulating supply of BTC (stock) by the volume produced per year (flow). In line with this concept, the value of Bitcoin will keep increasing progressively and may one day hit the $1 million mark.
With a current circulating supply of 18.9 million and 328500 Bitcoins mined yearly, the S2F value for BTC is currently 57.7. With this value, it will take roughly 57.7 years to produce 18.9 million BTC at the current mining rate.
More so, Bitcoin halving occurs every four years. The final halving is set to take place sometime around 2024. Halving implies that the quantity of minable Bitcoin is reduced to halve the previous volume. So, in this case, it is expected that after the halving, the yearly mining of BTC will produce only about 164250 BTC, rather than 328500 BTC. This will contribute to the scarcity of Bitcoin.
Limitations of the Stock-to-flow Model
Interestingly, the S2F model has been used to make near-accurate projections for the value of BTC in the past two years. However, this model has some limitations and has fallen short of accuracy in some instances. The model also does not account for several other factors that influence the price of Bitcoin.
Demand and Supply or Supply Only?
Basic economics suggests that both demand and supply determine the price of an asset. When an asset has high demand and low supply, the value “moons.” The S2F model, however, does not account for the demand for Bitcoin. It simply rests solely on the limited supply of the digital asset.
About ten years ago, Bitcoin was the only existing cryptocurrency. However, today there are thousands of other crypto assets. Many of these crypto-assets have better use-cases than Bitcoin. As a result, the projected future demand for Bitcoin has been called into question. If other assets exist that solve the same problem Bitcoin solves, will the top-tier digital currency still be high in demand? Undoubtedly, scarcity alone isn’t enough reason for an asset to be highly-priced. A scarce item that no one wants is as good as useless.
Extreme Volatility and Black Swan Events
The S2F model does not account for extreme volatility and unforeseen adverse events. For example, when the COVID-19 pandemic became intense in March 2020, the stock market collapsed, and so did the price of Bitcoin. Severe events like this usually lead to negative volatility, causing the value of BTC and similar assets to plummet intensely. Predictions made using the S2F model do not give room for these.
An Alternative Model?
The S2F model projected a $100k value for Bitcoin by 2021. Another model known as the time-based model predicted $30k for BTC by December 2021. Interestingly, none of these projections accurately played out. Bitcoin traded from around $47k to $56k in December.
No model can be used to accurately determine the future price of Bitcoin or any other financial asset. It is safer for analysts to combine two or three models when making value projections. Maybe, in the next few years, Bitcoin will eventually hit the $100k milestone.
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