The stock-to-flow model is a popular tool for valuing stocks which estimates the fair value of a company by calculating its future cash flows and dividing them by current shares outstanding. This article examines three reasons why the model may not be reliable when predicting perfect hindsight, it also explores ways to improve this method.
The “$100 trillion stock-to-flow” is a model that has been used to predict the future of stocks. The model predicts how many shares will be issued by a company in a year. However, the model is not reliable and there are three reasons why it is not reliable.
The stock-to-flow concept described by PlanB has gained a lot of traction in recent years. According to a mathematical research released on the website planbtc.com, Bitcoin (BTC) might achieve a market valuation of $100 trillion. Obviously, the crypto industry, including myself, was enthralled by the model’s logic, and much more so by the prospect of it reaching and beyond $100,000 by 2021.
The stock-to-flow model, in reality, presupposes that there is a link between the quantity of a precious metal mined each year (flow) and the amount mined before (stock).
The gold produced each year, for example, accounts for slightly under 2% of the gold in circulation (held by central banks and individuals). At today’s pace of extraction, it would take more than 50 years to double the stock in circulation, thereby making gold a rare commodity.
PlanB proposes a Cartesian plane (with logarithmic axes in both the X and Y axes) where Bitcoin’s growth over time follows a growth describable by a regression line, assuming that Bitcoin, widely regarded as digital gold, follows this relationship between quantity in circulation and quantity mined in the year (with power-law formula).
Every four years or so, the bounces are caused by half, or halves the anticipated compensation for each mined block. The Bitcoin protocol stipulates that every 210,000 blocks, the quantity of Bitcoins awarded to each block to the miner who passes the cryptographic test is halved.
Part 2 of a two-part series on forecasting Bitcoin price using quantitative methods
When Satoshi Nakamoto imagined the halving phenomena, he most likely imagined the price doubling every four years. Meanwhile, PlanB has discovered that Bitcoin has followed an exponential function over the first ten years of its existence, meaning that each halving boosts the price tenfold rather than doubling.
The first point is this: Can we really expect Bitcoin to reach $1 billion in value by 2039?
At one billion dollars per Bitcoin, the market capitalization would be over $20,000 trillion, or approximately 130 times the present stock market value. Not to mention the fact that, according to this estimate, the value will expand tenfold in the next years.
This is obviously implausible, even and particularly in light of the next two facts.
The second argument is because the model solely considers scarcity rather than demand, and Bitcoin is no longer the only cryptocurrency in circulation. Its hegemony is eroding as a result of the plethora of new ventures that ultimately divert attention (and money) away from digital gold.
In truth, the stock to flow model is flawed because it fails to account for the influence of demand; a scarce item has value if others wish to acquire it. Even if a painting by an obscure artist is lovely and is part of a collection of a few paintings, it is worthless if no one wants to buy it.
This is something I spoke about in my post a few months ago, when I offered a model for Bitcoin prediction that was based on demand rather than scarcity. According to this calculation, it would require around four trillion wallets in circulation for Bitcoin to reach a billion dollar value, which is an impossibility.
Part 3 of a three-part series on forecasting Bitcoin price using quantitative methods
The stock-to-flow architecture itself is the third factor.
The regression would have always been different if, instead of conducting it from the beginning to today, we imagined we had done it at the conclusion of each period before the halving.
If we had estimated the stock to flow at the conclusion of the first halving, we may have predicted that we would achieve the global capitalization of diamonds by September 2016. However, the regression line predicted that Bitcoin’s capitalization will approach that of gold in 2021 at the conclusion of the second halving in August 2016, even though we are still one-tenth of the way there.
Part 4 of a four-part series on forecasting the price of bitcoin using quantitative methods
As a result, the path of Bitcoin in the Cartesian plane with a double logarithmic axis proposed by PlanB is most likely not a straight line but a curve (with a mathematical description yet to be studied) that flattens over time, effectively invalidating PlanB’s overly optimistic stock-to-flow model prediction.
There is no financial advice or suggestion in this article. Every investing and trading choice has risk, and readers should do their own due diligence before making a decision.
The author’s views, ideas, and opinions are entirely his or her own, and do not necessarily reflect or represent those of Cointelegraph.
Daniele Bernardi is a serial entrepreneur who is always on the lookout for new ideas. He is the creator of Diaman, a company committed to the creation of lucrative investment techniques that just launched the PHI Token, a digital currency that aims to combine conventional finance with crypto assets. Bernardi’s research focuses on developing mathematical models that make risk reduction decision-making easier for investors and family offices. Bernardi is also the CEO of asset management business Diaman Partners and the chairman of investors’ magazine Italia SRL and Diaman Tech SRL. He is also the manager of a cryptocurrency hedge fund. He wrote a book on crypto assets called The Genesis of Crypto Assets. For his European and Russian patents in the area of mobile payments, he was acknowledged as a “inventor” by the European Patent Office.
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The “Plan B’s stock-to-flow model is not reliable” is a blog post by the CEO of PlanB, which discusses why their stock-to-flow model is not reliable. The article includes three reasons as to why the model cannot be used. Reference: what is plan b crypto.
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