Bitcoin stock-to-flow model accurately predicted the price dip in Aug and Sept. Where does it say we’re headed in October?
In June, this model successfully predicted prices of 47k in August and 43k in Sept. Will there be another BTC dump soon?
A new stock-to-flow model was developed by Twitter user Plan B (@100trillionUSD), and it has caused quite a fanfare online. This Twitter user developed a revised stock-to-flow model which successfully predicted the price of Bitcoin in August and September. In Plan B’s Tweet sent in June, BTC will reach 47k in August, but plummet to 43k in September.
Indeed, Plan B’s predictions matched the average prices in August and September. This was despite all the FUD from China banning cryptocurrency and the massive sell-offs in September.
The price of BTC in August traded at approximately 47k, and September at 43.5k.
Now that you’ve just seen how surprisingly accurate this model is. You’re probably wondering: “what is the stock to flow model?”, and “how was it able to successfully predict these prices?”.
Stock-to-flow model
Simply put, the stock-to-flow model measures how rare Bitcoin is.
This approach was traditionally used by Wall Street Analysts to predict future prices of rare commodities such as gold and silver.
However, the Twitter user, Plan B, proposes that Bitcoin price can also be predicted with stock-to-flow models. The halving of Bitcoin mining creates scarcity. And as more people use Bitcoin, the rarity of it increases.
Stock-to-flow can be calculated by dividing the existing amount of existing Bitcoin (stock) by the yearly production (flow).
Stock-to-flow = stock/flow
This provides us with the stock-to-flow ratio.
Change in Bitcoin’s function
Plan B suggests that while Bitcoin was once considered a form of payment with the USD parity (1 BTC = 1 USD), Bitcoin is now considered a financial asset. Essentially, the function of BTC has changed.
This change in function is called “phase transitions”. To illustrate the change in function, Plan B graphed the market value of BTC (how much Bitcoin is worth) against its stock-to-flow (rarity) and found 4 distinct clusters. Each cluster corresponds to the different purposes Bitcoin held over the years.
Credits: PlanB
It evolved from a proof of concept to a payment system, to e-gold, and now, as a financial asset.
In simpler terms, the price of Bitcoin seems to be related to its function. Moreover, as Bitcoin becomes rarer, the price of BTC seems to increase.
Price prediction
To predict the price of Bitcoin, a simple regression analysis was performed. This is to estimate how related stock-to-flow and the price of BTC are.
This model had a R² of 99.7% which indicates that the price of BTC and its stock-to-flow is extremely related. Essentially, as the stock-to-flow increases, the price of BTC should increase.
This model predicts that BTC will reach $288k by 2024.
Price prediction for October
To more accurately predict the price of Bitcoin in the short run, other indicators such as the Relative Strength Index (RSI) have to be considered.
With RSI factored in, Plan B estimates the price of BTC in October to be $63k. By next year, we could expect a price of $135k.
Currently, as of writing, the price of BTC is creeping close to $60k.
To read the full article of Plan B, check out this article.
How reliable is stock-to-flow?
Stock-to-flow is one of the most basic forms of financial valuation. It is generally used as a ballpark figure in financial estimations.
Moreover, this stock-to-flow model by plan B removed time-series factors and included gold and silver in the regression analysis. This means that the model did not account for any time-related effects on Bitcoin price. The addition of gold and silver into the analysis could also explain why there was such a strong correlation between stock-to-flow and bitcoin price.
Since publishing the paper, this model has been refined by Plan B. If the past successes are indicative of the future predictions, we could expect BTC to hit 63k in October.
If you’re super bullish about Bitcoin, it’s still wise to control your risks. You can check this article on how to manage your risks.
This article is meant as educational content and not meant as financial advice. Please perform your own research before making investment decisions.
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