Ebb and flow: How Bitcoin’s Stock-to-Flow ratio points to a prosperous future
Bitcoin is the cryptocurrency that has made a habit out of confounding critics. For all the talk of the currency behaving like a bubble that’s ready to burst – Bitcoin is still thriving. It may not have rediscovered its late 2017 form, but considering that this is an asset that’s been trading at a value of over $7,500 Dollars for the majority of 2019, investors will have few complaints.
This is exactly what Bitcoin has become: a credible investment strategy that’s produced multi-millionaires overnight. Of course, many investors have also lost out on this particular form of digital finance, but to take the world by storm in a ten year period demands recognition.
One of the key factors behind Bitcoin’s exponential rise in value stems from its excellent Stock-to-Flow ratio. This ensures that the cryptocurrency is scarce enough to retain and gain value in a similar way to how gold is revered worldwide.
As the table above shows, there are some speculators who expect Bitcoin’s Stock-to-Flow ratio to drive the currency towards attaining a value of $1,000,000 within ten years. Fanciful? Maybe, but Bitcoin is clearly showing some form of correlation that supports the notion of more sustained rises in value. But what actually is Stock-to-Flow ratio? And how can it help to skyrocket the value of the world’s most famous digital currency? Let’s take a deeper look at the metrics that matter:
Stock-to-Flow ratio, in a nutshell
So, what actually is Stock-to-Flow? And why is it such an important factor in determining the value of Bitcoin? Essentially, the Stock-to-Flow ratio of a commodity relates to how much of the asset is held in reserves, divided by the overall amount of it that’s produced each year.
Because of this, the higher the Stock-to-Flow ratio, the lower the level of inflation that occurs on the asset yearly. This means that assets with a higher Stock-to-Flow ratio will be preferred by investors because of their market scarcity.
Gold on the ceiling
Stock-to-Flow ratio is a key reason behind why gold is such a sought after asset worldwide. Today, the total value of the gold market is thought to be worth around $7.8 trillion – with just 10-15% of this price coming from common usages like jewellery, electronics, dentistry and other practically aligned industries.
The vast majority of the gold market comprises of speculation that’s founded on the principle that gold is a scarce asset that’s always in strong demand. Because of this, gold is universally recognised as one of the world’s most respected commodities for its high Stock-to-Flow ratio that’s invariably led it into becoming a leading reserve currency that’s held mostly by large corporations, nation-states and banks.
Bitcoin hasn’t quite reached the level of Stock-to-Flow ratios that has led to gold’s prevalence in society today. However, as Jim Brysland notes while writing for Medium, “Bitcoin’s software has a core component cooked into the protocol in the form of an event called ‘the halvening’.”
“‘The halvening’ is an event that happens every 210,000 blocks or roughly every 4 years where the block reward given to the miners for securing the network gets halved.”
Upon Bitcoin’s formation in 2009, its block reward sat at 50 BTC, while today, ten years on, it currently sits at 12.5, with the next halvening set to occur sometime midway through 2020 – taking the reward down to 6.25 BTC. This significant lowering of block rewards will significantly boost Bitcoin’s scarcity in a way that may lead to a large-scale rise in the cryptocurrency’s Stock-to-Flow metrics.
Statistically, Bitcoin has been remarkable in its rise. In the short term, its value will be influenced by the arrival of wealthy backers in government and banking – all of whom will be eager to buy into the burgeoning cryptocurrency market.
Today, Bitcoin can’t quite measure up to the market prowess of gold, but in twelve months’ time, this may not be the case. Next year’s ‘Halvening’ event will boost Bitcoin’s scarcity in a way that could cause it to catch up with gold – making the digital currency an increasingly attractive option as the best available alternative currency on the market.
There are certainly some twists in the road, and investors looking at utilising Bitcoin as a store of value in the near future will no doubt need to see a higher degree of crypto-market stability before they decide to dip their toes. But if Bitcoin’s Stock-to-Flow ratio continues to correlate in line with its forecasts, the pipedream of seeing a cryptocurrency head towards values upwards of $1,000,000 may seem a little bit less like pure fantasy.