What makes something valuable? Scarcity.
How does PlanB arrive at a price prediction of 288,000 dollars per bitcoin? The answer starts with one principle: scarcity. Both the stock-to-flow model and PlanB's more extensive S2FX model revolve around the question of how scarce something is, and what that means for the price. Before we dive into the models, first the basics.
Scarcity means that something is not easy to get. Or that it takes a lot of effort to make. Or that demand is greater than supply. Think of toilet paper in March 2020: suddenly nowhere to be found, suddenly worth a lot.
Gold is one of the best-known scarce goods. Demand is high, as an investment, as a raw material, as a material for jewellery. At the same time it costs a lot of money and effort to get gold out of the ground. That gives gold a high price.
Gold has another property that makes it valuable: it is almost impossible to counterfeit. Fake gold exists, but an expert spots it straight away.
Copy those properties to the digital world and you get something that resembles digital gold. That is exactly what bitcoin is. You can copy an mp3 file endlessly, a bitcoin you cannot. All bitcoins are checked by thousands of computers worldwide, on the blockchain. That makes bitcoin verifiably scarce.
What is the stock-to-flow ratio?
Back to PlanB's model. The stock-to-flow, S2F for short, is the current stock of a good divided by the annual new production. In other words: how long does it take to double the stock?
Gold ranks high on the scarcity ladder. It takes about 58 years to double the current gold stock.
Bitcoin is well on its way to matching that. In May 2020, when PlanB published his model, there were 18.3 million bitcoins in circulation, with a daily production of 900 new bitcoins. That comes to 328,500 new bitcoins per year. Divide the stock by the flow and you arrive at an S2F of 55. Almost equal to gold.
In theory, that is, because there will never be more than 21 million bitcoins in circulation.
Good to know: the figures in the section above are from May 2020, the moment PlanB published his S2FX model. Because of the halvings (see below) the S2F has doubled several times since then.
Halvings double the scarcity
Every four years the inflow of new bitcoins is halved. That event is called the bitcoin halving. The effect on the S2F is immediate: it doubles.
And if demand for bitcoin stays the same while the inflow halves? Then the price has to rise. At least, that is the hypothesis PlanB wants to examine with his model: does a higher S2F lead to a higher price?
Model 1, Stock-to-flow (2019)
In his first model, published in 2019, PlanB predicted a bitcoin price of 55,000 dollars in 2021.
The chart below tells the whole story.
Three things to know:
- The chart is logarithmic. Every box upwards is times ten. That way you see the exponential growth of bitcoin at a glance.
- The coloured dots are monthly bitcoin prices in dollars. The colour indicates how many blocks the network produced that month.
- The black line is the model price: what the model says bitcoin should be worth at that moment. The formula: 0.4 × stock-to-flow³.
That sounds like random numbers, but PlanB points to a confidence interval of 95 percent, as bitcoin followed the model surprisingly accurately in the ten years before that.
Model 2, S2FX, the extended model (2020)
In April 2020 PlanB came with a follow-up: the S2FX model. The X stands for "cross-asset". The idea: bitcoin goes through different phases, and every phase changes how investors look at it. The further bitcoin is in its development, the higher the value, not only through scarcity but also through maturity.
PlanB distinguishes four phases that bitcoin has already gone through:
Phase | What | When |
|---|---|---|
1 | Bitcoin as a concept | The first years. An idea from Satoshi, used by a handful of enthusiasts. Barely any value. |
2 | Bitcoin as a means of payment | From the moment 1 BTC = 1 dollar. Bitcoin is no longer a toy. |
3 | Bitcoin as e-gold | After the first halving. 1 BTC reaches the value of an ounce of gold. Mainstream media call it "digital gold". |
4 | Bitcoin as a financial asset | After the second halving. More than 1 billion dollars in daily volume. CME Group and Bakkt launch bitcoin futures. |
What does the model say about phase 5?
According to PlanB, bitcoin is on its way to phase 5. What exactly that phase involves? Hard to say, we are in the middle of it.
That is why PlanB looks at two well-known references: silver and gold.
- Silver has an S2F of 33 and a total market value of 561 billion dollars.
- Gold has an S2F of 58 and a market value of 10,088 billion dollars. Not a typo: ten thousand billion.
Plot these two as phase 5 and phase 6 in the chart and a striking pattern emerges: all six phases lie on one straight line. PlanB speaks of a confidence interval of 99.7 percent.
Translate that line back into a price per bitcoin (instead of market value) and in the next phase you arrive at 288,000 dollars per bitcoin.
A model is not a guarantee. PlanB's models are hopeful, but do not fixate on them. Unexpected events, regulation, a macroeconomic shock, a technological breakthrough elsewhere, can always send the price a different way. The data so far fits the model, but that is no promise for the future.
Always do your own research. Never invest more than you are willing to lose.
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