Bitcoin Stock To Flow Model

Understanding the Stock to Flow Ratio

The Stock to Flow (S/F) Ratio is a popular model in the world of cryptocurrency, primarily because it suggests that scarcity is a key driver of value. This ratio is determined by dividing the current stock of a commodity, such as Bitcoin’s circulating supply, by its flow, or the rate of new production (in Bitcoin’s case, the number of newly mined bitcoins).

Historically, the price of Bitcoin has closely followed its S/F Ratio, making it a reliable tool for investors to use when predicting future prices. This model was introduced by an analyst named PlanB, and has become a central theory for many in the crypto space.

How To Apply The Stock To Flow Model

One of Bitcoin’s most unique features is that the exact amount of new supply entering circulation each year is predetermined. This allows Bitcoin's stock-to-flow to be modeled with a high degree of accuracy, unlike other commodities that rely on less reliable estimates for mining and supply.

The total supply of Bitcoin is capped at 21 million coins, with nearly 19.2 million already mined. New Bitcoins are created as miners validate transactions on the blockchain, following a set schedule. The final Bitcoin is expected to enter circulation around the year 2140.

Currently, miners are rewarded with 6.25 BTC per block. Since one block is mined approximately every 10 minutes, this translates to an annual flow of 328,500 BTC. Based on this, the current stock-to-flow ratio for Bitcoin is:

19,171,050 / 328,500 = 58.35

However, the supply of Bitcoin does not increase in a straight line. Bitcoin halving occurs every four years, reducing the number of Bitcoins miners receive for validating a block by half.

The most recent halving took place in May 2024. When that happened, the block reward decreased to 3.125 BTC, which cut the flow in half and effectively doubled the stock-to-flow ratio.

Trading Rules From The Stock To Flow Model

One basic trading strategy is to buy Bitcoin six months prior to a Bitcoin halving and sell 18 months after.

This tactic is designed to capitalize on Bitcoin’s recurring price cycles, allowing traders to benefit from the sharp price increases that often accompany the halving, while avoiding the bear markets that usually come afterward.

This Strategy has been proven to outperform buy and hold, if timed correctly.

Here is a short video of Plan B explaining this simple trading rule.