Stock-to-Flow Ratio

What Is the Stock-to-Flow Ratio?

The stock-to-flow ratio is a metric used to measure the scarcity of a commodity, particularly precious metals and cryptocurrencies. It is calculated as the current stock (the total amount of the commodity that exists) divided by the annual production flow (the new supply of the commodity that is produced each year).

The idea behind the stock-to-flow ratio is that commodities with higher stock-to-flow ratios are generally considered to be scarcer and thus, more valuable. For example, precious metals like gold and silver have high stock-to-flow ratios because the current stock of these metals is large, but the annual production is relatively small. On the other hand, commodities with low stock-to-flow ratios, like food crops, are considered to be less scarce because their annual production is large relative to their current stock.

The Stock-to-Flow Ratio and Bitcoin

Read more: What Is Bitcoin Stock to Flow (S2F) model and How to Use It?

How Do You Calculate the Stock-to-Flow Ratio?

The stock-to-flow ratio is calculated by dividing the current stock of a commodity by the annual production flow.

Taking Bitcoin as an example, you would start by determining the current stock of Bitcoin, which is the total number of Bitcoins that have been mined to date. 

Next, you would determine the annual production flow, which is the number of new Bitcoins that are expected to be mined each year. Bitcoin has a predictable monetary policy that limits the maximum number of bitcoins to 21 million and reduces the rate at which new coins are produced through a process known as halving. Based on this information, the annual production flow of Bitcoin can be estimated.

Finally, you would divide the current stock by the annual production flow to arrive at the stock-to-flow ratio. 

The stock-to-flow ratio is a dynamic metric that can change over time as a commodity's current stock and annual production flow change. The ratio will change as new BTCs are mined and the current stock increases, or as the annual production flow decreases through halvings.

Is Higher Stock to Flow Better?

Higher stock-to-flow ratios are generally considered a positive factor for the perceived scarcity and value of a commodity. For example, precious metals, like gold and silver, have high stock-to-flow ratios, which makes them attractive to investors who view them as safe-haven assets. However, it's important to note that the ratio is just one factor that can be used to evaluate the potential value of a commodity. Other factors, such as market sentiment, technological developments and regulatory changes, can also significantly impact the perceived value and price of a commodity. 

Limitations of the Stock-to-Flow Ratio

The stock-to-flow ratio also has several limitations:

1. Market sentiment: Market sentiment can significantly impact a commodity's perceived value and price.
2. Technological developments: Although not applicable to Bitcoin, other commodities can be impacted by advancements in mining technology, which increase the flow of a commodity.
3. Political and economic factors: Changes in government policies or economic conditions could impact the production or demand for a commodity, affecting its perceived value regardless of the stock-to-flow ratio.
4. Other factors: These can be regulatory changes, geopolitical tensions and environmental factors.

Is the Bitcoin Stock-to-Flow Ratio Broken?

1. The demand for Bitcoin is not solely driven by its issuance schedule and relative scarcity but also by other factors, such as events that negatively affect demand.

2. The fact that the stock-to-flow ratio doesn't drive the price of gold, another commodity, suggests that it's not an accurate predictor of the value of Bitcoin.

3. The stock-to-flow ratio is not the main driver of a cryptocurrency's value, as seen by other cryptocurrencies with similar structures that do not enjoy the same valuations as Bitcoin.

4. The model requires exponential growth in new demand for Bitcoin, but eventually, there will come a saturation point where exponential growth is no longer sustainable. This leads to a reduction in institutional demand and decoupling from the SF model.