What is bitcoin Stock-to-flow ratio (S2F)?

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1. Bitcoin steadiness.

The S2F ratio is easy to grasp. Bitcoin’s yearly supply increased roughly by 1.7% in 2021. From 2020 to 2024, bitcoin blockchain will create 900 bitcoins per day, or 238.500 bitcoins a year. Unlike gold or any other precious metal, Bitcoin’s rate of increase will decrease every four years, eventually reaching 0 once the 21 million´s cap is reached in 2140. / But what’s happening between each halving? The supply is steady and predictable. What is not predictable is the demand, but historically it has been going up every year and 2021 adoption’s rate skyrocketed as institutional investors entered the game. Thus, between halving and halving the rate of supply increase is declining slowly due to the increase of people wanting to own some bitcoin.

2. Increase in mining spending.

The price of bitcoin skyrocketing should create incentives for existing mining companies to mine bitcoin at a quicker rate and new companies to invest in mining operations. But unlike gold, bitcoin mining per se doesn´t change the BTC price. It must be combined with the number of people buying it. The increased energy spent to mining bitcoin will not change the supply rate which is embedded in the code. In other words, mining new bitcoins is not affecting the total number of coins which will ever exist. Unlike gold, the inflation rate is decreasing. As Bitcoin’s price goes up, more resources will be dedicated to its mining but for instance, between 2020 and 2024, the daily number of bitcoins mined will remain consistent (900 per day) regardless the number of miners plunged in the ecosystem. We will see in further chapter which mechanisms are at work in the regulation of bitcoin production. In conclusion, the idea is that low supply and constant increasing demand create “hard assets” – contrasted with the dollar or the euro.

3. What is Stock-to-flow Model?

The S2F model indicates how many bitcoins enter the market each year (238.500 BTCs) relative to the total supply (nearly 19 million bitcoins are in circulation at the beginning of 2022). Bitcoin has a high S2F ratio because less and less bitcoins enter the market relative to the total supply. High S2F ratio, means, in theory, that the asset retains its value very well over the long-term.