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Originally Posted by TheGodson
I'm assuming that S2F graph came from https://digitalik.net/btc/
It seems that the person who built that graph used 111 data points from December 2009 to February 2019 and shoe horned it into a formula giving out arbitrary numbers
It sounds like you haven't actually read the stock to flow article by the originator
which can be found here or gotten into the weeds of his subsequent commentary. The purpose of the original model was to predict the
market cap of Bitcoin after the 2020 halving. It was never meant to provide ongoing predictions for the price 20, 50 or 100 years out. He's stated on numerous occasions his models are only meant to predict the next 2-3 halving cycles as beyond that we will be in uncharted territory as there are no other commodities on Earth with a S2F of what Bitcoin will soon be (125x, 250x, 500x etc.).
You routinely take really strong opinions on subjects where it's clear you're out of your depth. Just a bit of advice.
MAR 22, 2019 - Modeling Bitcoin Value with Scarcity
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The hypothesis in this study is that scarcity, as measured by SF, directly drives value. A look at the table above confirms that market values tend to be higher when SF is higher. Next step is to collect data and make a statistical model.
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Fitting a linear regression to the data confirms what can be seen with the naked eye: a statistically significant relationship between SF and market value (95% R2, significance of F 2.3E-17, p-Value of slope 2.3E-17). The likelihood that the relationship between SF and market value is caused by chance is close to zero. Of course other factors also impact price, regulation, hacks and other news, that is why R2 is not 100% (and not all dots are on the straight black line). However, the dominant driving factor seems to be scarcity / SF.
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The predicted market value for bitcoin after May 2020 halving is $1trn, which translates in a bitcoin price of $55,000. That is quite spectacular. I guess time will tell and we will probably know one or two years after the halving, in 2020 or 2021. A great out of sample test of this hypothesis and model.
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People ask me where all the money needed for $1trn bitcoin market value would come from? My answer: silver, gold, countries with negative interest rate (Europe, Japan, US soon), countries with predatory governments (Venezuela, China, Iran, Turkey etc), billionaires and millionaires hedging against quantitative easing (QE), and institutional investors discovering the best performing asset of last 10 yrs.
The 95% R2 and more importantly, the cointegration, are what they are because of the price data.
OCT 4, 2019 - What Bitcoin Did: Plan₿ on Bitcoin’s Stock to Flow
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Yeah, the correlation that I first spotted was with the market values of gold, silver, Bitcoin and the stock to flow values that were related to that. So you see an almost $10 trillion gold market and a very high 60+ stock to flow and you see all of those commodities with stock to flows around 1 and very low, $10 billion, $100 billion range market values. So that that was the first hunch that there was a correlation between stock to flow and market value.
Then when you map it out, you get this weird high 95% correlation that you seldom see. I mean in real life I don't see that, but maybe it's also good to point out that it's not so much the correlation, but the co-integration that is interesting and that's a technical term, I'll try to explain it. A correlation means that the two variables, stock to flow and the price, move together. So stock to flow goes up, price goes up and if that goes lockstep, you have a correlation of 100% and 95% is of course very high already.
But we also know if stock to flow goes up after a halving, price doesn't go up right away. It usually lags a little bit and maybe in the future we'll front run it, who knows? But it's not lockstep up and down and especially in the four year period off a halving thing, the halving increases slightly, but the price can fluctuate wildly around it. So the correlation there is also not perfect. But what's even more interesting is the co-integration.
Co-integration means that the difference between the stock to flow and the Bitcoin price is constant, well not constant, but the distribution is stationary. So today they move together, like if they're connected with a rubber band or something. So if the price can go far away from the stock to flow, but it will always return. It can go below the stock to flow, but it will return to the model value and that's exactly what you see.
So every single year for last 10 years, the actual Bitcoin price was above the model price and below the model price every single year. So that's what you can expect for the future and it doesn't matter if the price goes right away after the halving up or half year later, you know it will go up.
At least that's the hypothesis, that's also what the math and the statistics say. So yeah, I have very high confidence in that. But the next halving will of course, be the big test, the big outer sample test for this hypothesis. But yeah, it's good to know that it's the co-integration and not so much the correlation that is interesting from an investment point of view.
He tried recreating the model for Litecoin and the result was Bitcoin has genuine digital scarcity/unforgeable costliness, and Litecoin/shitcoins do not.
Everyone is free to believe what they want to believe. Stock to flow has proven divisive but more often than not when I see people dismissing it it becomes clear they haven't done enough research on the matter.
The scarcity of Bitcoin in my opinion is related to two factors: the first is obvious which is built into the protocol halving every 4 years. The second is arguably more important and difficult to replicate: a global consensus among investors that Bitcoin is an asset to hold. Achieving consensus among unrelated and self-interested parties is incredibly difficult and is in many ways a self-fulfilling feedback loop, which means it is equally hard to undo because once people are invested, it is in their self-interest to maintain it.
As a result, most other cryptocurrencies should fade away except those that are being backed by institutions (ie: Ethereum being added to corporate balance sheets, products being added to Grayscale trusts).
Last edited by johnnyBuz; 04-24-2021 at 11:04 PM.
