S2F Model: Predicting $100,000 in Bitcoin in 2022 Will the Miracle Continue?

In this article, I will try to present the principle of S2F Model and its limitations, as well as some of my thoughts from a non-technical point of view, in layman’s terms.

On March 22, 2019, Twitter analyst PlanB published the article “Modeling Bitcoin Price with Scarcity”. Since the S2F Model was released more than two years ago, the bitcoin price has been tracking the model’s predicted price with a high degree of accuracy.

S2F Model: Predicting 0,000 in Bitcoin in 2022 Will the Miracle Continue?

(Image credit: Twitter @dan_pantera)

The S2F model predicted that the bitcoin price would reach $62,968 on April 15, and as a result the bitcoin price broke that prediction on April 13. Using Cryptocurrency data, Bitcoin hit a new high of $64854 on April 14. Previously, bitcoin had taken no more than 15 days at most to reach the price predicted by the S2F Model.

Although investors have occasionally questioned the S2F Model, saying that it is impossible to predict the market, the high accuracy shown by the model is truly amazing.

However, this “law” came to an end in May, when the S2F Model predicted that the price of bitcoin would reach $74,474 around May 15, and in fact, according to Coin Security, bitcoin closed at only $46,762.99 on May 15. It’s still struggling to get back to the $40,000 mark, and is almost doubling from the model’s predicted price on June 15.

This article stands from a non-technical point of view and tries to present the principle of S2F Model operation and its limitations as well as some thoughts from myself in layman’s terms.

Stock to Flow Ration in Economics

In economics, SF is often used to measure the scarcity of goods, which leads to two formulas.
① S2F (SF/StFR): Stock-to-Flow = stock/flow = commodity inventory/commodity circulation
② 1/SF = growth rate of commodity supply

and the resulting related definitions.

① StFR average, which shows the average height of the annual growth rate of supply, the larger the average, the more suitable it is to act as a currency

(ii) StFR extreme deviation, which shows the expectation reached by extreme anomalies in the long run, the smaller the extreme deviation, the more suitable it is to act as a currency

(3) The median annual growth rate of StFR, which shows the average short-term fluctuation, the lower the median, the more suitable it is to act as a currency

In economics, in order to quantify the availability of a currency, it is common to compare the SF value of the currency with that of gold and silver to determine a reasonable value, as shown in the following table.

S2F Model: Predicting 0,000 in Bitcoin in 2022 Will the Miracle Continue?

(Image source: Nowandfutures.com, Incrementum AG)

Gold, for example, has a StFR of about 67.1, which means that it would take 67.1 years of gold mining to produce the current stock of gold in circulation. Silver has a StFR of 74.3.

In the article “Modeling Bitcoin Prices with Scarcity,” Plan B says that gold has an SF value of 62 and silver has an SF value of 22, with high SF values making them a store of value. Historically, both gold and silver have been circulated as currency. In addition, it can be seen that SF values change, with the absolute value of silver SF values decreasing significantly. In the article, Plan B also states that the BTC-SF is 25 (total number of bitcoins issued as of the 2019 posting / 2018 supply).

BTC: Stock-to-Flow Model
Once the definition in economics is understood, the idea behind the BTC-S2F Model becomes clear – treating bitcoin as comparable to stores of value such as gold and silver.

There are roughly six stages to getting gold onto the market: exploration, mining, beneficiation, smelting, processing, and sales, with exploration, mining, and beneficiation being the three most time-consuming and costly stages. From a supply-side perspective, it is difficult to increase its supply on a large scale. Bitcoin is very similar in that its supply is capped and has a unique halving mechanism that halves bitcoin production every four years, so that 21 million bitcoins are mined by 2140. And mining also requires a lot of power and computing power. This makes bitcoins a store of value comparable to gold, as they are both relatively scarce.

As the scarcity of bitcoins increases, so does their price, which is the core principle of the BTC-S2F model created by Plan B.

Based on this principle, Plan B collected monthly bitcoin price data for the past ten years of 2019 and fitted the collated extracted data with a linear regression using the natural logarithm of the SF value as the independent variable and the bitcoin price as the dependent variable (which is a straight line) and found a positive correlation between the SF value and the market price. The fit was then adjusted with the bitcoin halving cycle to form the familiar S2F model and used this model as a forecast for the bitcoin price.

The BTC-S2F Model, based on the BTC-SF values as a result of forecasting the price of Bitcoin, is shown in the following figure (April 27).

S2F Model: Predicting 0,000 in Bitcoin in 2022 Will the Miracle Continue?

(Image source: lookintobitcoin.com)

Plan B has said that if we don’t witness $100,000 a bitcoin by 2022, the model will fail. But at least until May, the results based on the BTC-S2F Model predictions are still quite accurate.

Questioning

After understanding the fundamentals of the model, I’m sure most investors will have the question: Can simple supply and demand really justify an investment decision? Because in the vast majority of people’s perception, the return of any asset has uncertainty.

The most criticized by investors is that the model ignores market factors, such as changes in mining computing power, investor sentiment, etc.; policy factors, national policies and regulations regulation, etc. These factors are generally difficult to add to the model as quantitative factors, and prices often rise or fall inseparable from the changes in these factors.

So take a look at what happened in May that made the bitcoin price gradually deviate from the S2F Model predicted price. The chart below (June 1) shows that.

S2F Model: Predicting 0,000 in Bitcoin in 2022 Will the Miracle Continue?
S2F Model: Predicting 0,000 in Bitcoin in 2022 Will the Miracle Continue?

(Image source: lookintobitcoin.com)

On May 12, Musk announced that Tesla would no longer accept bitcoin payments based on global environmental considerations, and the bitcoin price fell by over 12% that day in response.

On the evening of May 18, the China Payment Clearing Association and other joint announcements clarified that financial institutions and payment institutions shall not carry out business related to virtual currency, and on May 19, the price of bitcoin fell by more than 14%.

On the evening of May 21, the minutes of the 51st meeting of the Finance Committee, mentioned cracking down on bitcoin mining and trading practices. In the follow-up, the price has still not seen an upturn due to negative factors such as the closure or relocation of mining sites in relevant areas and the shutdown of exchange-related businesses.

In addition, there are factors such as the Biden administration’s potential introduction of interest rate hikes that continue to fester, domestic policies that remain unclear, excessive leverage, market panic funding disagreements and other factors that keep the downturn spreading in May.

As can be seen, once at a certain point, by extreme external news, heavy policy and other factors and internal factors such as high leverage, speculative sentiment exuberance and other excessive interference, S2F Model does not fully take these factors into account and forecast prices will be distorted.

Some thoughts based on the S2F Model

The SF value was introduced in economics to measure the scarcity of a commodity, while the BTC: S2F Model uses the SF as a “reference” for the price in turn. On closer inspection, this seems to assert that the price of a commodity is directly derived from the rate of growth of its supply, which is gradually becoming insufficient or scarce. It is a widely known theory in Marxist economics that the price of a commodity is determined by value, and that prices fluctuate up and down around value under the influence of supply and demand; the value of a commodity is determined by the socially necessary labor time to produce that commodity (this could account for the cost of mining bitcoin, which is reflected as part of the price). From a theoretical standpoint alone, there is some shortcoming in using SF backwards, as there is no evidence, even for gold and silver, that their prices are directly determined by supply.

But anyway, as of May, the BTC-S2F Model does show a surprising accuracy. Although the actual price currently deviates significantly from the predicted price, past predictions show that after deviations, the bitcoin price eventually returns, moving in the established direction predicted by the S2F Model, and based on Plan B’s reverie, there are still six months to go until 2022, so will history repeat itself again?

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/s2f-model-predicting-100000-in-bitcoin-in-2022-will-the-miracle-continue/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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