Bitcoin vs Gold: The Stock-to-Flow Model Comparison

The Stock-to-Flow (S2F) model has become a popular tool in the world of financial analysis, especially within the realms of cryptocurrency and precious metals. This model is used to assess the value of assets like Bitcoin and gold based on their scarcity. To understand the impact and relevance of the Stock-to-Flow model, it is crucial to compare Bitcoin and gold, two assets that are often compared due to their roles as stores of value.

What is the Stock-to-Flow Model?

The Stock-to-Flow model is a method used to evaluate the scarcity of an asset by comparing its current stock (the total amount of the asset available) to the flow (the annual production or supply). The higher the ratio, the more scarce the asset is.

Formula:

$\text{Stock-to-Flow Ratio}=\frac{\text{Total Stock}}{\text{Annual Flow}}$Stock-to-Flow Ratio=Annual FlowTotal Stock​

For instance, if an asset has a total supply of 1,000 units and produces 10 new units per year, its Stock-to-Flow ratio would be 100.

Bitcoin and Gold: Basic Comparisons

1. Gold:

• Total Supply: Gold is a naturally occurring element with a finite supply. Estimates suggest that about 200,000 metric tons of gold have been mined throughout history. New gold is mined annually, adding a small fraction to the total supply.

• Annual Flow: The annual gold production is around 3,000 metric tons.

• Stock-to-Flow Ratio: Gold’s Stock-to-Flow ratio is quite high due to its large stock and relatively low annual production. This ratio has been estimated to be over 60.

2. Bitcoin:

• Total Supply: Bitcoin has a capped supply of 21 million coins. This cap is embedded in its protocol, making it a deflationary asset.

• Annual Flow: The production of new Bitcoin is controlled through a process called "halving," which occurs approximately every four years. As of now, new Bitcoin is mined at a rate of about 328,500 BTC per year (as of August 2024).

• Stock-to-Flow Ratio: Bitcoin’s Stock-to-Flow ratio increases over time due to its fixed supply and diminishing new issuance. Currently, Bitcoin’s Stock-to-Flow ratio is estimated to be around 50.

Detailed Comparison: Bitcoin vs Gold

Scarcity and Value Predictions

The primary argument behind the Stock-to-Flow model is that increased scarcity should lead to higher value. This concept is particularly prominent in the Bitcoin community, where proponents argue that the high Stock-to-Flow ratio of Bitcoin compared to traditional assets like gold makes it a better store of value.

Gold:

Gold’s relatively stable Stock-to-Flow ratio indicates a steady level of scarcity. However, the gold market is also influenced by factors like geopolitical stability, technological advancements in mining, and changes in industrial demand, which can affect its value.

Bitcoin:

Bitcoin's Stock-to-Flow ratio is projected to increase as the total supply approaches its maximum limit of 21 million coins. This anticipated increase in scarcity has led to predictions of significant future price appreciation. Historical data shows that as Bitcoin’s Stock-to-Flow ratio increases, its price has tended to rise, although past performance is not always indicative of future results.

Market Behavior and Historical Performance

Gold:

Gold has a long history as a store of value. It has been used as currency and a reserve asset for centuries. Its price tends to be less volatile compared to Bitcoin. Historically, gold has provided a hedge against inflation and economic uncertainty.

Bitcoin:

Bitcoin, being a relatively new asset, exhibits high volatility. Its price can experience dramatic swings within short periods. However, Bitcoin has also shown significant long-term appreciation. The Stock-to-Flow model suggests that as Bitcoin’s scarcity increases, so too should its price, provided other factors remain constant.

Empirical Data and Predictions

To better understand the Stock-to-Flow model's effectiveness, let’s look at some empirical data.

Table 1: Historical Stock-to-Flow Ratios

Table 2: Historical Price Trends

The data shows that Bitcoin's price is highly volatile but has shown substantial growth over the past decade, while gold’s price has been more stable but with moderate long-term growth.

Challenges and Criticisms of the Stock-to-Flow Model

Gold:

• Complex Market Dynamics: The gold market is influenced by many factors beyond scarcity, such as industrial demand, central bank policies, and macroeconomic conditions.

• Mining Efficiency: Advances in mining technology can affect the annual flow of gold, potentially altering the Stock-to-Flow ratio.

Bitcoin:

• Market Speculation: Bitcoin’s market is highly speculative. External factors, including regulatory changes and technological developments, can impact its price significantly.

• Model Limitations: The Stock-to-Flow model is based on historical data and assumptions that may not hold true in the future. The model does not account for changes in demand, technological innovations, or regulatory impacts.

Conclusion

The Stock-to-Flow model offers a unique perspective on asset valuation by focusing on scarcity. When comparing Bitcoin and gold, Bitcoin’s higher projected Stock-to-Flow ratio suggests a higher level of scarcity compared to gold. This has led many to view Bitcoin as a superior store of value in terms of scarcity.

However, both assets have their own sets of challenges and market dynamics. Gold’s long history and stability contrast with Bitcoin’s high volatility and speculative nature. Investors should consider these factors and conduct thorough research before making investment decisions.

The Stock-to-Flow model provides valuable insights but should be used in conjunction with other analytical tools and market assessments to make informed investment choices.

References

1. PlanB. (2019). "Modeling Bitcoin’s Stock-to-Flow." PlanB’s Medium Article
2. World Gold Council. (2023). "Gold Demand Trends." World Gold Council