Bitcoin has had a rollercoaster year thus far. By March, the crypto asset prices had doubled compared to those at the start of 2021; and by July had fallen down to the end of 2020 levels once again. Bitcoin is yet to achieve stability and it is still difficult to say whether the Bitcoin pricing model is actually going to work in the long run.
As has always been the case, analysts and econometricians are still having trouble valuing crypto currencies, Bitcoin amongst them. Main reason being that there’s no cash flow nor interest generated with crypto, so using traditional quantitative valuation models to value it is pretty much impossible.
There’s no solid valuation model for crypto… thus far at least. One of the most popular and tested options is the stock-to-flow ratio model, which measures the relationship between the supply (stock) of any commodity (gold or oil vs Bitcoin) – and its production (flow). It’s an economic concept more than anything, used to model Bitcoin’s trajectory to make statements and predictions of its future. It has always been optimistic of Bitcoin’s future and thereby understandably gained some perhaps unfair popularity. It has had many revisions, but is still criticized a lot for actually not providing any bulletproof information.
Bitcoin has a very high stock-to-flow ratio. It has high divisibility, durability, transportability and scarcity. It clearly possesses strong characteristics that would make it very suitable as „real“ money. The more Bitcoin will become a real-world monetary alternative, the higher its price will rise. That’s a fact.
In general monetary theory, the high stock-to-flow ratio that Bitcoin possesses is extremely likely to translate into low volatility as the time goes by. Traditional commodities such as oil have provided examples. Oils stock-to-flow ratio is low, so it’s price is known to fluctuate a lot in case of supply-side disruption.
What does it mean for Bitcoin?
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Monetization is and will continue to be key. The process of monetization is going through the so-called S-shaped adoption curve now. Once it reaches completion, Bitcoin is going to become less volatile as it will steadily grow and grow it’s stock-to-flow ratio.
Everything we now know about monetary theories and different concepts strongly suggest that the steady growth of the stock-to-flow ratio is going to bring us a stable Bitcoin.