What is Bitcoin?
Before we bring you up to speed on everything you need to know about bitcoin stock to flow, let’s refresh your memory a bit.
Bitcoin has been generating a lot of buzz since it launched in 2009. And just so you know, bitcoin is the first digital asset that cannot be copied, pirated, duplicated, or forged. These incredible attributes are what make bitcoin pretty unique from other asset classes out there.
While bitcoin is the first digitally scarce asset we have come across, within its inner workings sits an incredible mathematical mechanism that will ensure that the number one cryptocurrency by market cap continues to rise in value.
For starters, it’s important you know that each bitcoin is mined what is called blocks. While the concept of block may sound pretty confusing, we would like to bring you up to speed on everything you should know about bitcoin blocks. To start with, a block is a 1MB piece of information that houses and describes all transactions executed within a period of time. In terms of its design, the bitcoin network is designed to generate a new block roughly every 10 minutes.
Since the bitcoin network launched several years ago, it has continued to generate new blocks uninterrupted. The first Bitcoin block called the genesis block was mined on the 3rd of January 2009. This block came with a 50 bitcoin mining reward. While every subsequent block had the same mining reward, after 210,000 blocks were generated, the bitcoin network goes through a process called halving. This event essentially cuts in half the reward for finding new blocks. Simply put, once 210,000 blocks have been mined, the reward is halved to 25 BTC. Also, once, 420,000 blocks have been mined, another halving takes place, further cutting the reward to 12.5 BTC. The process continues until the last bitcoin is mined. And since blocks are mined every 10 minutes, it means that halving events occur after every 35,000 hours or every four years.
Why are halving events important?
Halvings are an integral aspect of the bitcoin network and the process will continue until the reward for miners reaches 0 BTC. Since bitcoin’s value has 8 decimal places, it means that the value of the reward will reach 0 BTC after the 33rd halving. With 33 halvings and 4 years between each halving, it means that it will take nearly 132 years for the last bitcoin halving to take place. For those who are still a little bit confused about our explanations above, it means that that last bitcoin will be mined into existence precisely in the year 2140. And yes, it will be the 21 millionth bitcoin to be in existence and the last. After the last bitcoin has been mined, it will be impossible to create any more bitcoin. From that point onwards, the number one cryptocurrency will become truly deflationary, since printing, mining, or minting new coins will no longer be possible. And should owners of bitcoin continue to lose their private keys, as they currently are, it means that the supply of bitcoin will continue to deflate by that lost-keys ratio.
Bitcoin stock-flow: What is it?
Bitcoin stock flow is a number that shows how many years, at the current production rate are required to attain the current stock. And yes, the higher this number is, the higher the price.
Why does this chart rely on a 463-day time span?
Preston Pysh is the brain behind the number 463-time span. And that is because he believed that bitcoin cycles happen in three phases. We have the Bull Run, the Correction, and the Reversion to the Mean.
- He estimated that there are nearly 200,000 blocks in every cycle
- There are three unique phases per cycle
- And 144 blocks every single day.
Let’s work out the maths, shall we?
How does this affect the price of bitcoin?
Like we mentioned right from the get-go, it’s is impossible to duplicate, copy or forge bitcoins, especially considering that the max supply of bitcoin is limited. And since all transactions that happen on the bitcoin blockchain are written in blocks and an alterable, it means that nobody can spend coins that belong to someone else’s address.
For people who are new to the bitcoin ecosystem, it will interest you to know that the bitcoin address is pretty much similar to a traditional bank account. Using this address, you can make deposits. The only difference between a bitcoin address and your regular bank account is that with bank accounts, you don’t need private keys before you can spend the money in your bank account. And because bitcoin is designed to be scarce, you can expect the value to continue to increase.
The dictionary definition of scarcity refers to something that is difficult to come across, pretty similar to precious metal. The minute anything becomes scarce by design, it has value and can be used as money. Stock to flow is defined as a relationship between production and the current stock that is out there.
S/F= Stock / Flow
To get the correct stock to flow, you’ll need to divide the total stock by year production (flow). This number essentially tells us how many years are required at the current production rate to produce what is in the current stock. For instance, the precious metal gold has a production rate of nearly 3,000 metric tonnes. As per gold, the current stock in the entire world is estimated to be 185,000 metric tonnes. To this end, if we put this into consideration using the previous formula, we will get something thus:
Given the current production rate, the entire world will need nearly 62 years to mine out all gold that is currently in circulation. And like we mentioned, the greater this number, the greater the scarcity. Now, that we have taken a close look at gold stock to flow, let’s take a minute to relate this to bitcoin. At the moment, there are over 18 million bitcoins in circulation, with nearly 1,800 BTC generated every day (657,000 per year). To this end, if we put those numbers in stock to flow formula:
It will mean that we need 27 years at the current bitcoin production rate in order to produce the current stock. While this number is pretty smaller than that of gold, still bitcoin has something that gold is missing- the halvings we spoke about earlier. After the last bitcoin halving event that happened in May 2020, the bitcoins produced daily dropped to 900 BTC per day. At that time, the was nearly 18,375,000 BTC in circulation. After that halving event, the stock to flow climbed to 52, which brings it a little closer to gold. With the next halving slated for 2024, the stock to flow will rise to 113. While gold has a stock to flow of only 62, it is missing halving events. Now, the contrast between bitcoin’s dynamic stock to flow with that of gold, will likely not increase. Just to show you the bigger picture, imagine what would happen to the price of gold, if it were to be halved one day?
In 2019, there was a great article written about the bitcoin stock-flow model with the mathematical model used to calculate model price during the time:
ModelPrice USD= exp(-184). SF3.36
Let’s assume for a minute that we include the current stock flow value into the above formula, we will get a value of 10,750. Keep in mind that this price isn’t generated haphazardly but by the model. Nevertheless, there is still one more component that we would include in the calculation. There are a lot of theories out there about Satoshi Nakamoto mining 1 million bitcoins during the first year of its launch. While we can’t say whether or not those coins are lost or satoshi is just waiting to sell them later, but from available data, those coins haven’t moved ever since. This is the reason for the correction in the stock-flow model calculation. What we did is simply decrease the stock amount by 1 million BTC. To this end, the stock-flow value would be:
And with the applied model formula we get the model price in USD:
exp(-1.84) .S/F3.36= 8,879 USD
If you look at the chart featured in this post, you can clearly see this formula in action. It is calculating model price from 2010 ( since bitcoin wasn’t trading before that. Plus the price information is difficult to obtain) all the way until 2026. Let’s give you a more detailed description below:
Price of end of day
The colored dots on our chart is used to represent the end-of-day actual price (Y-axis right side) in the selected currency. The different colors further represent how many days are left until the next bitcoin halving event takes place. From the chart, you can clearly see the color scale presented on the right side of the chart.
Stock to flow 10 days
The stock to flow 10 days on our chart is indicated by a purple line showing what the price is in the selected currency. Like we mentioned earlier, the stock to flow is a relationship between total stuck vs yearly productions. By looking at the 10-day line, what we are doing is taking 10 days of production, divide it by 10, and then multiply it by 365 to arrive at the estimated yearly production. Once we do that, we calculate to stock flow.
Like many other readers, you may be wondering why this line doesn’t appear a little flatter, well the reason is that the time between blocks is 10 minutes only, in the real case. While it could sometimes be less, it can also be more. While in ideal cases, we should have at least 144 bitcoins mined daily, in reality, it isn’t always the case.
Some days have more blocks, while others have fewer. And the reason is that the processing power of all hardware around the world doesn’t work at an optimum all the time. The reality is that new mining hardware is going on and off by the minute. To this end, blocks won’t be mined at the same rate. For instance, if more hardware is added to the bitcoin mining network, it would increase the total hashrate, resulting in blocks being generated faster. That said, the bitcoin network has a unique mechanism in place to deal with this by tweaking difficulty levels. Similarly, this block is a lot more flatter for future days and that’s because we can’t say for sure how many blocks will be generated. Nevertheless, we go with the assumption that it will most likely be equal to the average time between blocks in the last 365 days.
Stock to flow 463 days
The stock to flow for 463 days is indicated by a blue line on our chart. Compared to the stock to flow for 10 days, this one appears to be more flatter and that’s because in this case, we are looking at the 463 days before the observed day on the chart to count how many bitcoins were produced in total. Once we have that, we can now calculate the stock to flow value.
Diff model price
The value of the diff model price is indicated by a red line on the chart. This red line indicates the model price as per difficulty. The formula used to calculate difficulty is 0.000 * difficulty ^ 0.51. To calculate difficulty, the average daily value is used.
The four cards below the chart
This one indicates the most recently calculated stock to flow value. It features two numbers. The first one, (10d) displays the calculated value based on 10 days production, divided by 10 and multiplied by 365 days. You can also see the time when it was calculated on the 4th card called the last update.
Current model price
This section provides information to calculate the model price in a selected currency based on the most recent data. It displays two values. While the first one is calculated based on ten days, the second one is calculated based on production in the last 365 days.
Next halving estimates
This shows the exact day the next halving event is billed to take place. This estimation is arrived at based on an average interval between blocks in the last 365 days. And like we mentioned earlier, in a real case scenario, blocks aren’t generated within 10 minutes intervals. That’s why we are using the average for the last 365 days. The small number in the bracket indicates the number of days to go.
This section displays the last time since the chart was updated.
We strongly urge readers to not take the information on this page as financial advice. Before making any move, it’s always smart to do your due diligence.