Is Bitcoin outshining gold?
The stock-to-flow approach originating in commodity-market analysis serves to quantify the “hardness” of an asset. Applied to Bitcoin, an unusually strong correlation emerges between the market value of this cryptocurrency and the ratio between existing stockpiles of Bitcoin (“stock”) and new supply (“flow”).
When it comes to making forecasts on the basis of this model, however, we would counsel caution. Even the best statistical model can fail miserably when seeking to predict the future. A major challenge for the stock-to-flow model is the next Bitcoin halving (50% reduction in supply growth) which is due to take place next year.
Nevertheless, the stock-to-flow approach is a good heuristic for understanding Bitcoin. It becomes clear that Bitcoin is designed as an ultra-hard type of money. Next year, it will already exhibit a similarly high degree of hardness as gold. In 2024 (when halving is set to take place again), Bitcoin’s degree of hardness will again increase massively.
Whereas gold has had to earn its high stock-to-flow ratio “the hard way“ over the course of millennia, Bitcoin’s purely digital character enables “supply engineering,” which causes the stock-to-flow ratio to rise at a breakneck pace.