There’s A ‘Big Misunderstanding’ About the BTC Stock-to-Flow (S2F) Model: PlanB
Since falling to $3,850 last week, Bitcoin has been keeping above $5,000. Though there have been a few bumps along the way, the leading digital currency is stabilized around $5k for the most part. Over a billion-dollar worth of bitcoin meanwhile continues to exchange hands.
At the time of writing, BTC/USD has been trading at $5,120 with 24 hours gains of 0.31% while down 29.41% in 2020. Despite being down 50% from 2020 high above $10,500, it is interesting that the price is clearly following the stock-to-slow model. Analyst PlanB said,
“There is a big misunderstanding about the stock-to-flow model: that 1 red dot outside the blue bands invalidates the model.”
“That is not true! Red dots have been below the band in 2010,2012,2016,2019 and above in 2011,2013,2017. But cointegration is strong, even now at $5300.”
During the past month, bitcoin continued to drop lower to go to its lowest point of $3,850 and PlanB repeatedly shared that the crash in bitcoin price hasn’t broken the S2F model. It is simply intact. This can be checked out at btconometrics.com (Engle-Granger Test).
Also, it doesn't mean nothing can invalidate the model as that will make the model useless. So, when will it be invalidated exactly? The analyst explained that the model will be invalidated “If S2F and BTC price are no longer co-integrated,” PlanB said.
Temporary dislocations don't break the model
A severe drop in bitcoin price has fazed the investors that are looking for ways to feel confident about the long term value of bitcoin while the S2F model detractors feel this to be the perfect time to bash it.
As one user commented, traders are taking it to be invalidation when a line is broken in a trade analysis chart as support and resistance are what they must be seeing in the S2F-Bitcoin chart instead of a cointegration model. “I think TA is the reason for most misunderstanding,” acquiesce PlanB. Founder of BurgerCrypto, a crypto investment consultancy boutique said,
Like to add: the cointegrating relation will break if price follows a different direction for a long time. Temp dislocations don't break the model. It breaks in case test statistics clearly show cointegration is falling apart.
Not broken until proven otherwise! https://t.co/31KZiCHYjX
— ₿urger (@BurgerCryptoAM) March 17, 2020
According to the scarcity-based stock-to-flow model, bitcoin’s S2F value is currently around metals like silver. But bitcoin’s S2F will double after the supply shock in May 2020 putting it closer to gold, the asset with the highest S2F value. Although some like veteran trader Peter Brandt believes,
“Bitcoin halving = Grossly overrated. The daily trading volume of BTC = the REAL supply of BTC. The daily reduction of mined BTCs (NEW supply) equals approx 2/100th of 1% of REAL supply. Reduction of NEW supply b/c of halving as % of REAL supply = chump change.”
As per this model, Bitcoin will be worth either $50k or $100k by the end of 2021. The analyst himself believes in the latter price target and that the digital asset would overshoot this figure just like it did in the past bull rallies.