„There are many reasons why the price of Bitcoin can go up or down, but Stock-to-Flow is not one of them,“ says the author of the report.
A report by the ByteTree research team aims to „dismantle“ one of the most popular Bitcoin valuation models (BTC), the Stock-to-Flow model. The model provides a very optimistic prediction for Bitcoin System, stating that within one year we should see price levels above $100,000.
BytTree co-founder and chief investment officer Charlie Morris devotes the entire fourth chapter of the report to „taking it apart“. Stock-to-flow models have been applied for decades to predict the price of commodities such as gold and silver. Stock“ is the existing supply of the asset and „flow“ is the additional new supply being generated. Applied to Bitcoin, it depends on the fact that its inflation or flow will progressively decrease, while the average stock-to-flow will progressively increase. Therefore, it creates „sky’s the limit“ predictions for the price.
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Morris argues that the price of Bitcoin is not dictated at all by supply-side economics. In an economy, Morris said, the market adjusts on both sides: supply and demand until the new balance is reached. Since the supply of Bitcoin is fixed, it’s left to the demand side of the equation to determine the price, he concludes.
Morris believes that another problem with the model is that it overemphasizes newly mined coins, as if they were the only ones available for sale, „but anyone who has Bitcoin is free to sell. He also noted that the dynamics of the network have changed:
„When the network has a large supply and a relatively small flow, it’s the supply that matters. As the flow decreases, it becomes less important in influencing market prices.
In addition, the co-founder also suggests that the role of the Bitcoin miners has declined over time, as indicated by the decline in average earnings and market capitalization:
„The miners once earned 50% of the market capitalization each year. At that time, they had a big influence on the price, but at 1.7%, they don’t. Similarly, they used to represent 68% of the value of all transactions, which has fallen to 3.9%.
He acknowledges that the miners continue to play an important role as maintainers of the network „but their economic footprint is decreasing.
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Morris provided another criticism of the model, saying that the model does not take into account the actual use and adoption of Bitcoin, which he believes gives the intrinsic value of the network:
„I would say that Bitcoin represents a powerful digital network that is thriving. It’s a kind of technological action without profit or a CEO, but with great security, growing distribution and application. There are many reasons why the price of Bitcoin can go up or down, but S2F (Stock-to-Flow) is not one of them.
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It’s worth noting that the price lagged behind the model’s predicted level in the months since the third Bitcoin halving.