What is the Stock-to-Flow Ratio?
The stock-to-flow ratio describes the rarity of a good. The valuation model comes from the traditional financial market and has been used for many years to value commodities such as gold and silver. It can also be applied to the digital asset Bitcoin. The higher the stock-to-flow ratio, the rarer the asset.
Precious metals and Bitcoin have the same problem when it comes to valuing them. Both assets have no cash flow. Therefore, the stock-to-flow ratio is often used as a valuation method for these assets, which uses the scarcity of a commodity, rather than their cash flow, for valuation.
Stock-to-flow ratio means the ratio of stock to inflow. Stock is the current quantity of the commodity or good, i.e. the inventory. So in the case of gold or silver, this would be the total amount that has been mined throughout history. Flow is the quantity that is added annually to the already mined stock.
The stock-to-flow ratio was first described by Hungarian Professor Fekete in 1997. The model puts with goods the already existing stock in relation to the annual increase by the production.
The stock-to-flow ratio is calculated with the formula S2F = [Stock] / [Flow]. It indicates the time in years, which is needed to produce the currently available quantity of the good again. Thus, the scarcity of the good expressed in number of years.
Gold, one of the rarest metals on Earth, has a very high stock-to-flow ratio. According to the World Gold Council, over 205,000 tons have been mined as of 2017. In recent years, an average of about 3,100 tons of gold has been mined. Due to this rarity, gold has been the most stable money of all time.
Gold occupies a special role among commodities. The reason for this is that the industry consumes very little gold. The majority of the mined quantity therefore still exists somewhere. Mostly in the form of bars as a store of value.
This fact is also a reason for the good security and stability of gold. The annual production is very low compared to the total amount of gold, therefore the S2F ratio is high. Thus, a loss of production or overproduction has almost no impact on the price of gold.
As of September 2022:
205,000 tons (Stock) / 3,100 tons (Annual Flow) = 66 years
For platinum, the S2F ratio is just about one year. For silver, a ratio of 22 years has been documented. So while it only takes about one year for current platinum production to double the current stock, it takes about 22 years for silver.
The maximum amount of bitcoin is set by protocol. This maximum is 21 million bitcoin.
In bitcoin, stock, or inventory, refers to the amount of bitcoin or Satoshis already mined and in circulation. As of September 2022, the stock is approximately 19.1 million bitcoin.
Every 10 minutes a new block is mined and currently, as of 2022, is rewarded with the payout of 6.25 bitcoin per block. So per year this is about 52'560 blocks and 328'500 Bitcoin.
So the current annual flow is these 328'500 bitcoin. The stock-to-flow ratio is thus around 58 years, which is close to gold, which is currently around 66 years.
What is special about Bitcoin, however, is that the flow is reduced on a planned basis every four years. Every four years, or every 210,000 blocks, the payout per block, also known as block subsidy, is halved.
This halving of the reward for successfully mining a block is called halving. Durch diesen Mechanismus wird die Gesamtmenge an Bitcoin erst im Jahr 2140 vollständig geschürft sein. Somit steigt auch das Stock-to-Flow-Verhältnis im Laufe der Zeit immer weiter an.
As of September 2022:
19’142’000 BTC (Stock) / 328’500 BTC (Annual Flow) = 58 years
Bitcoin Halving March 2024:
19’687’500 BTC (Stock) / 164’250 BTC (Annual Flow) = 119 years
Bitcoin is seen as a limited resource and therefore considered a scarce commodity. Scarce goods are physically rare or hard to find, such as precious metals. Once a commodity reaches a certain level of scarcity, it can be used as a store of value as long as there is a demand for it.
In Bitcoin, future supply is very transparent and demonstrably scarce through mathematics. The bitcoin price has historically risen sharply after each halving.
This indicates a long-term positive trend in the bitcoin price. However, the price is subject to high short-term market overreactions and therefore fluctuates wildly.
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