Three reasons why PlanB’s stock-to-flow model is not reliable

In
the
last
couple
of
years,
the

stock-to-flow
model

proposed
by

PlanB

has
become
very
famous.
A
quantitative
study
published
on
the
site
planbtc.com
shows
the
model
and
the
prediction
that
Bitcoin
(BTC)
could
reach
the
capitalization
of
$100
trillion.
Obviously,
the
crypto
industry,
including
myself,
was
fascinated
by
the
logic
of
the
model
and
even
more
so
by
the
idea
that
it
could
reach
and
exceed
$100,000
as
early
as
2021.

In
fact,
the
stock-to-flow
model
assumes
that
there
is
a
relationship
between
the
amount
of
a
precious
metal
that
is
mined
each
year
(flow)
and
the
amount
already
mined
previously
(stock).

For
example,
the
gold
that
is
mined
each
year
is
just
under
2%
of
the
gold
in
circulation
(held
by
central
banks
and
individuals).
It
takes
over
50
years

at
today’s
rate
of
extraction

to
double
the
stock
in
circulation,
effectively
making
gold
a
scarce
commodity.

PlanB
hypothesizes
that
Bitcoin,
considered
by
many
to
be
digital
gold,
may
follow
this
relationship
between
the
quantity
in
circulation
and
quantity
mined
in
the
year,
and
proposes
a
Cartesian
plane
(with
logarithmic
axis
in
both
the
X
and
Y
axes)
where
Bitcoin’s
growth
over
time
follows
a
growth
describable
by
a
regression
line
(with
power-law
formula).

The
bounces
found
every
four
years
or
so
are
due
to
halving,
or
halving
the
expected
remuneration
for
each
mined
block.
The
protocol
of
Bitcoin
provides
that
every
210,000
blocks
there
is
a
halving
of
the
number
of
Bitcoin
assigned
to
each
block
to
the
miner
who
wins
the
cryptographic
test.



Related:




Forecasting
Bitcoin
price
using
quantitative
models,
Part
2

Probably,
Satoshi
Nakamoto,
when
he
thought
of
the
halving
phenomenon,
had
done
so
to
assume
a
doubling
of
the
price
every
four
years.
Meanwhile,
PlanB
has
shown
that
in
the
first
10
years
of
history,
Bitcoin
has
moved
around
an
exponential
function
which
means
that
with
each
halving,
the
price
increases
tenfold
instead
of
doubling.

Reason
#1

The
first
reason
is
the
following:
Can
we
really
assume
that
Bitcoin
will
reach
$1
billion
in
value
around
2039?

One
billion
per
Bitcoin
would
mean
that
the
capitalization
would
reach
about
$20,000
trillion,
“only”
130
times
the
current
value
of
the
stock
markets.
Not
to
mention
that
in
the
following
years,
the
value,
according
to
this
model,
would
be
destined
to
increase
tenfold.

Obviously,
this
is
inconceivable,
even
and
especially
for
the
next
two
points.

Reason
#2

The
second
reason
is
that
the
model
does
not
keep
into
consideration
the
demand
but
only
scarcity,
and
Bitcoin
is
now
no
longer
the
only
crypto
asset
in
circulation.
Its
dominance
is
waning
due
to
the
many
emerging
projects
that
inevitably
grab
attention
(and
investment)
away
from
digital
gold.

In
fact,
it
is
precisely
the
failure
to
consider
the
effect
arising
from
demand
that
makes
the
stock
to
flow
model
incomplete;
a
scarce
asset
has
value
if
people
want
to
buy
it.
A
painting
by
an
unknown
artist,
even
if
beautiful
and
even
if
belonging
to
a
collection
of
a
few
paintings,
is
worth
nothing
if
there
is
no
interest
arising
from
someone
who
wants
to
own
it.

I
discussed
this
in
my
article
a
few
months
ago
when
I
proposed
a
model
of
Bitcoin
prediction
based
on
demand
instead
of
scarcity.
According
to
this
model,
for
Bitcoin
to
get
to
be
worth
a
billion,
it
would
take
about
four
trillion
wallets
in
circulation

quite
inconceivable
as
a
scenario.



Related:




Forecasting
Bitcoin
price
using
quantitative
models,
Part
3

Reason
#3

The
third
reason
comes
from
the
stock-to-flow
construction
itself.

If
instead
of
doing
the
regression
from
the
beginning
to
today,
we
assumed
we
had
done
it
at
the
end
of
each
period
before
the
halving,
the

regression
would
have
always
been
different
.

If
we
had
calculated
the
stock
to
flow
at
the
end
of
the
first
halving,
the
predictions
would
have
been
to
reach
the
capitalization
of
diamonds
worldwide
as
early
as
September
2016.
However,
at
the
end
of
the
second
halving
in
August
2016,
the
regression
line
indicated
that
Bitcoin’s
capitalization
would
reach
that
of
gold’s
in
2021
while
we
are
still
one-tenth
of
the
way
there.



Related:




Forecasting
Bitcoin
price
using
quantitative
models,
Part
4

So,
the
path
of
Bitcoin
in
the
Cartesian
plane
with
a
double
logarithmic
axis,
proposed
by
PlanB,
most
likely
cannot
be
considered
a
straight
line
but
a
curve
(with
a
mathematical
description
yet
to
be
studied)
that
tends
to
flatten
over
time,
effectively
invalidating
the
overly
optimistic
prediction
of
the
stock-to-flow
model
proposed
by
PlanB.


This
article
does
not
contain
investment
advice
or
recommendations.
Every
investment
and
trading
move
involves
risk,
and
readers
should
conduct
their
own
research
when
making
a
decision.


The
views,
thoughts
and
opinions
expressed
here
are
the
author’s
alone
and
do
not
necessarily
reflect
or
represent
the
views
and
opinions
of
Cointelegraph.


Daniele
Bernardi

is
a
serial
entrepreneur
constantly
searching
for
innovation.
He
is
the
founder
of
Diaman,
a
group
dedicated
to
the
development
of
profitable
investment
strategies
that
recently
successfully
issued
the
PHI
Token,
a
digital
currency
with
the
goal
of
merging
traditional
finance
with
crypto
assets.
Bernardi’s
work
is
oriented
toward
mathematical
models
development
which
simplifies
investors’
and
family
offices’
decision-making
processes
for
risk
reduction.
Bernardi
is
also
the
chairman
of
investors’
magazine
Italia
SRL
and
Diaman
Tech
SRL
and
is
the
CEO
of
asset
management
firm
Diaman
Partners.
In
addition,
he
is
the
manager
of
a
crypto
hedge
fund.
He
is
the
author
of

The
Genesis
of
Crypto
Assets
,
a
book
about
crypto
assets.
He
was
recognized
as
an
“inventor”
by
the
European
Patent
Office
for
his
European
and
Russian
patent
related
to
the
mobile
payments
field.

read original article here