Much ink has been spilled lately about the failure of PlanB’s infamous S2F model . Macro Global Director of the giant fund Fidelity, Jurrien Timmer thinks he knows why and explained himself in a thread on Twitter.

What is the S2F ( Stock-to-Flow ) model?

As its name suggests, the Stock-to-Flow ratio relates a stock to a flow . For example, the global gold stock and the amount of gold mined each year on earth.

The S2F ratio  is very simple. Simply divide the total stock by the annual production. In other words, it simply represents the number of years required to double the stock of a given element according to its annual production.

For example, according to the World Gold Council , 187,200 tons of gold have been mined since the beginning of civilization. If you divide these 187,200 tons by the number of tons of gold mined each year (3000 tons), you get a ratio of 62. It therefore takes 62 years to double the stock of gold at the current rate of extraction.

In the case of bitcoin, the current stock is 19 million BTC. As 6.25 BTC are mined per block (~328,500 BTC per year), we get a ratio of 58.

PlanB is known for creating a model related to bitcoin’s S2F ratio (which is ultimately just a crude indicator of supply and demand). The model has proven to be formidable in predicting the evolution of BTC/USD until 2021, but not today:

“BTC is 60% below the value of the S2F model. Some think the S2F is dead. Others know that we have another 2 years to reach the $100,000 average. You choose. »

Incidentally, gold is indeed still a bit rarer than bitcoin, but everything will change from the next halving since the reward received by BTC miners (the supply) will be halved.

The S2F ratio will therefore be multiplied by two and will indicate that it takes more than 100 years to double the stock of BTC. For comparison, we still haven’t reached peak gold mining…

The failure of the PlanB model

The chart below shows the fundamentals of bitcoin. Here you can see the blue supply curve expressed by Plan B’s S2F model, and the purple demand curve determined by network growth ( Metcalfe’s law ):

Bitcoin supply and demand Models

Metcalfe is an American engineer pioneer of the Internet who gave his name to his famous eponymous law that “the utility of a telecommunications network is proportional to the square of the number of users”.

But the square function (x²) is a function that rises very quickly…

Long story short, Jurrien Timmer, who shared this chart, notes that “until recently, bitcoin often outperformed its intrinsic value (S2F) during bull markets, and underperformed on the downside during bear markets.”

The Fidelity strategist believes that those days are over and bitcoin has ceased to correlate to the S2F pattern and now follows the pattern based on Metcalfe’s law (pink curve). In other words, the price of bitcoin is influenced more by demand than by supply.

“Although the S2F model has been an efficient model in the past, I believe the demand curve will be the dominant driver from now on ,” he wrote.

Timmer believes that institutional investors are likely already using the demand model to determine whether bitcoin is on sale or not. The entry point is important:

“For example, if the demand-based model (Metcalfe’s law) says that the intrinsic value of bitcoin is $50,000 today and $100,000 in two years (my thesis), then bitcoin will be much more interesting at $30,000 than at $70,000. This is the difference between a gain ~3x and ~1.5x. Of course, 1.5x is already a good performance. But with a volatility of 50, the Sharpe ratio would only be 0.5, which is an unsavory risk profile. The entry point is important for all assets, including bitcoin. »

In short, Fidelity argues that bitcoin is evolving more and more like a traditional asset with less extreme volatility as a result. There will soon be “more accumulation when bitcoin crashes, and more resolute selling when it soars.”

This would bode well for the arrival of institutional investors for whom double-digit volatility is intolerable. At the same time, inflation is also in double digits…

What's your reaction?

Leave a comment

Minimum 4 characters