Even as the most mature coin in the world of cryptocurrency, Bitcoin continues to be volatile and marked by speculation. Investors are always on the lookout for new tools and models to give them an edge over the market’s volatilities. The Stock-to-Flow (S2F) model is one such popular forecasting tool. It aims to forecast Bitcoin’s value based on its scarcity. It’s important to keep in mind the model’s strengths and weaknesses, and the ways it could be used or misused in today’s market.

Li Wei is a blockchain content strategist who has far-reaching connections within China’s technology ecosystem. He provides great perspective on the S2F model and its implications for Bitcoin investors, in general. She illustrates what it means to understand the model’s past accuracy and the importance of knowing the model’s limitations. More importantly, she reveals how it fits into a larger investment plan.

Understanding the Stock-to-Flow (S2F) Model

The Stock-to-Flow (S2F) model is an idea taken from classical economics, mostly applied to commodities such as gold and silver. This measure provides a calculation of the lack of an asset. This analogy compares what is currently stored in reserves, called the “stock,” with the annual production rate – the “flow.”

For Bitcoin, the S2F model tries to quantify its scarcity and in turn predict the price of Bitcoin based on this ratio. To figure the S2F ratio for Bitcoin, take its total stock of roughly 18 to 20 million coins and divide that by the annual production of new coins. For comparison, today, only 657,000 new coins are minted a year. The model’s derived equation is Model Price_{USD} = exp(1.84) \cdot SF^{3.36} SF=Stock-to-Flow ratio. This formula can be interpreted to mean that as the SF ratio grows, the value of Bitcoin should grow.

The model became popular after being introduced by the pseudonymous economist PlanB in a 2019 Medium post. At first, it appeared to do so with uncanny precision, especially during the 2020-2021 bull run. The restricted supply constantly minted every four years through the halving cycle, only 21 million bitcoins will ever exist. This scarcity is compounded by the fact that new coins are being mined at an ever decreasing rate. The S2F model takes into account the halving events that occur every 210,000 blocks (~4 years). These events halve the rewards miners receive for mining new blocks, thus slowing the entry of new coins into circulation.

Has the S2F Model Lost Its Luster?

Though the S2F model blossomed in its infancy, its reliability has since been challenged. The actual price of Bitcoin has for the most part greatly exceeded their predicted price. By 2025, the model had far outlived its usefulness. It’s true that Bitcoin prices rocketed past all-time high prices of $120,000 thanks to myriad influences far outside this bubble gum supply-side change courtesy of the Bitcoin Halving.

Critics argue that the model is overly simplistic and doesn't account for the complex interplay of factors that influence Bitcoin's price. These factors are market demand, regulatory changes, technological advancements, and general economic conditions. As shown on PluggedIn, critics blasted the model’s predictions for their extreme oversimplification. They countered that simply assuming a decrease in new supply would instantly drive up prices ludicrously overlooked potential changes in demand.

Vitalik Buterin, co-founder of Ethereum is one of several who have raised eyebrows at the S2F model’s promised accuracy. He and his fellow TAD creatives argue that relying only on scarcity as a predictor of value is a broken model. PlanB’s biggest fear is a strong price collapse which he thinks will occur if demand for Bitcoin collapses. This is the case even with the increasing SF ratio due to halvings. Such a price decrease would shift investor sentiment and demand, in turn causing a loss of demand and a further decline in price.

Navigating Potential Market Corrections with the S2F Model

Despite its flaws, the S2F model has some real worth to investors. Just be sure to use it judiciously and in conjunction with other analyses for maximum benefit. It’s very important that investors do not use the S2F model in isolation to make investment decisions,” Li Wei stresses. Here's how investors can use the S2F model to inform their investment strategy during potential market corrections:

  • Diversify Investment Strategy: Use the S2F model as one aspect of your investment strategy to make a more structured decision during market corrections.
  • Understand Scarcity: Recognize that Bitcoin's design introduces a deflationary aspect, especially evident during halving events, which cut the mining reward by half approximately every four years, subsequently reducing the flow of new Bitcoins and increasing the S2F ratio.
  • Long-term Focus: Long-term investors who do not care about the peaks and valleys of day-to-day trading appreciate the S2F model's consistency in predicting Bitcoin's potential value based on scarcity.
  • Combine with Other Analyses: Use the S2F model in conjunction with other analyses and technical indicators to get a comprehensive view of the market during corrections.
  • Evaluate Historical Correlation: Consider the historical correlation between the SF ratio and Bitcoin's price, making it a popular methodology for forecasting future BTC price valuations.

Finally, investors should realize that the model has its limitations. Since the S2F model doesn’t consider short-term market volatility at all, a period of heightened speculation could cause extreme price moves.

Bullish vs. Bearish Perspectives

The current market situation presents both bullish and bearish perspectives on Bitcoin:

Bitcoin's fixed supply and upcoming halving events continue to support the long-term bullish narrative. Regardless of whether the S2F model is entirely on the mark or not, the basic idea of scarcity is still a potent force for value. For long-term investors, these price corrections are likely viewed as opportunities to stack up more Bitcoin.

Concerns about regulatory crackdowns, macroeconomic uncertainty, and potential black swan events could lead to a significant drop in demand for Bitcoin, regardless of its scarcity. Investors and market participants must be on guard for continued price drops and position themselves to protect their risk.

That said, the S2F model is only part of the story. As always, investors should do their own due diligence and consider their own risk tolerance. Equally important, it’s always smart to get advice from financial professionals before you invest. Keeping a finger on the pulse of things and remaining flexible is the best way to thrive in the quickly evolving world of cryptocurrency.