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S2F Model and its Uncanny Bitcoin Price Prediction Accuracy
08 June 12:15
Preface
As we all know, the cryptocurrency market is highly volatile and the prices of cryptocurrencies are very unpredictable. Despite this, from small-time retail investors in the cryptocurrency world to professional investment giants, everyone tries to profit by predicting price trends. Only time will tell if these predictions will be proven correct or not.
In March 2019, a prominent crypto-asset analyst named Plan B published "Modeling Bitcoin Value by Scarcity". It was an article on how scarcity can be calculated from inventory/liquidity (S2F) to predict Bitcoin price trends. Since the release of the model, Bitcoin price has been mostly in line with the model's predicted price. However, after "Black Wednesday" on May 19th, 2021, prices were very different. Bitcoin price dropped to $36,771.81, compared to the model's prediction of $56,094.94.
Principle of the S2F (Stock to Flow) Model
When measuring the scarcity of a commodity in economics, two forms of data are often taken into account. The amount of stock the commodity has and the level of flow or new production the commodity has. This results in the following formula:
1.S2F = Stock/Flow, i.e. commodity inventory/commodity flow
2.1/SF = 1/(Stock*Flow), which is the growth rate of commodity supply
When the value of S2F is higher, i.e. more stock or less flow, the more scarce the commodity is and the lower the growth rate of its supply.
Source: medium.com
In Plan B's original article, he gives data for four metals: gold, silver, cymbal and platinum. As you can see, gold has the highest S2F (62) and the lowest growth rate in supply (1.6%), i.e. it would take 62 years of production to reach the current stock level. At the same time, gold has the highest total market value of the four, confirming its scarcity. Platinum (platinum), on the other hand, has the lowest SF (0.4) and the highest growth rate of supply (266.7%). Its market value is the lowest of the four.
Plan B goes on to explain below, "The S2F for commodities like cymbal and platinum are not high, with some just barely above 1. For these commodities, production is very important because once someone starts storing them up, it causes prices to rise, which in turn drives production up and eventually causes prices to fall back down. "
To Apply the S2F Model to Bitcoin, One Must First Reposition Bitcoin
The S2F is usually applicable to the amount of tokens collected by users. If we want to apply the S2F model to Bitcoin, it has to have this characteristic.
According to the World Gold Council, about 197,576 tons of gold have been mined, while the untapped underground gold stock is about 50,000 tons. The current global gold mining output is about 2,500-3,000 tons of new gold per year. Excluding some resources that are not suitable for mining due to the current high development cost, the global gold mines will be mined out in about 20 years. However, the rate of gold mining will vary depending on the difficulty of the mining itself. As the easy-to-mine gold mines are gradually exhausted, the remaining mines will become more difficult to mine and the rate of mining will gradually decrease.
Mining.com
Bitcoin is in a sense very similar to gold: By 2140 all 21 million Bitcoins will have been mined. There are currently 18.72 million Bitcoin in circulation, with 2.27 million to be mined over the next 119 years. The output of Bitcoin is not constant, meaning that every once in a while the production will halve. With Bitcoin's block reward down to 6.25 since the third halving in 2020, and an annual production of about 328,000 Bitcoins, we can calculate that Bitcoin's S2F is about 57.1, which is quite a bit higher than silver's S2F (22), second only to gold.
However, it is not enough to compare the data in this way. Plan B decided to collect the data of Bitcoin price, quantity, and block speed in the last 10 years, and added the S2F values of gold and silver to come up with a linear regression chart. It can prove that the scarcity of Bitcoin is similar to that of gold and silver, thus improving the credibility of the model. Readers who are interested can read the original Plan B article via the link at the end of this article.
Source: medium.com
The S2F Model's Predictions and Controversies
According to the model's projections, Bitcoin price will break $100,000 in the second half of 2021, $300,000 in 2025, and is expected to break $1 million a per coin after all Bitcoin has been mined.
The S2F model has also sparked discussion among many celebrities in the cryptocurrency world. Vitalik Buterin, the founder of Ethereum, has expressed his disagreement with this prediction. He tweeted publicly that the theory that the halving of Bitcoin production caused Bitcoin price to rise is not proven and that there is no absolute correlation between the two.
Image source: Vitalik Twitter account
In addition to Vitalik Buterin, various people have raised doubts and criticisms about the mode, including Charlie Morris, founder of BytTree, and Nico Cordeiro, CIO of Strix Leviathan(a cryptocurrency quant fund). They allege that the model ignores market factors, regulatory policy factors, investor sentiment, etc. These aspects can lead to changes in Bitcoin price.
From S2F to S2FX, Is the New Model Really More Reliable?
In April 2020, Plan B released a new model by removing the time factor and adding other assets (gold and silver) to the model as a base, and named it the Bitcoin S2F cross-asset model, or S2FX.
In the new S2FX model, Plan B introduced the concept of "phase change". It compared the three-stage change of water and that of the US dollar, to the four-stage change of Bitcoin.
1.The "concept" phase: After the Bitcoin white paper was published, the S2F is about 1.3 and the total market cap is about $1 million.
2.The "payment" phase: When the price of Bitcoin reaches $1, the S2F is about 3.4 and the total market cap is about $58 million.
3.The "electronic gold" phase: When the price of Bitcoin reaches the price of one ounce of gold, the S2F is approximately 10.2, with a total market capitalization of approximately $560 million.
4.The "financial asset" stage:When accepted by the financial markets, S2F is about 25.1 with a total market value of $11.4 billion.
Plan B then added gold and silver data to the model and found that the six data pairs were basically on a straight line.
Source: Medium.com
According to the latest S2FX model, the Bitcoin price is predicted to top $250,000 by the end of 2021 and $1 million by 2025.
Source: Medium.com
The Significance of the S2F/S2FX Price Forecast Model
Plan B, the author of the S2F and S2FX price prediction models, wrote in his article that S2FX built on top of the S2F model. It consolidated the known facts of his research and provided new research ideas for Bitcoin's transition to Phase 5. However, the S2FX model is still in its infancy and has not yet been validated by others. Please remain prudent.
Up until the May crash, the S2F model had consistently demonstrated amazing accuracy in predicting Bitcoin price trends. Even though there had been short term sharp swings and price deviations, the price had returned to the model's predicted range shortly afterwards. But at the current price of Bitcoin ($37,506.91 at the time of writing), both the S2F prediction of $100,000 by the end of 2021 and the S2FX model's prediction of $250,000 are not consistent with the model. Plan B pointed out that if by 2022 Bitcoin price hasn’t reached $100,000 and above, S2F will have failed.
But whether or not the model ends up failing, there is no denying that the S2F and S2FX models offer a whole new way of thinking. By introducing the concept of "commodity scarcity", we see how Bitcoin is becoming more and more like silver and gold. It is no longer an average cryptocurrency to be traded, it is becoming a unique financial asset.
Expanded Reading.
Plan B - S2F Modeling to Predict Bitcoin Scarcity: Modeling Bitcoin Value with Scarcity
Plan B - Bitcoin S2F Asset System Model: Bitcoin Stock-to-Flow Cross Asset Model
S2F model live chart: Bitcoin stock to flow model live chart
S2FX model live chart: Bitcoin stock to flow cross asset model live chart
By Gate.io Researcher: Gazer.C
*This article represents the views of the researcher and does not constitute any investment advice.
*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all other cases, legal action will be taken due to copyright infringement.
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