The Scarcity Code of Bitcoin: An In-Depth Analysis of the Stock-to-Flow Model

Since its inception in 2009, Bitcoin has completely rewritten people’s understanding of currency with its fully digital, transparent, and supply-fixed characteristics. As the leader in the cryptocurrency space, Bitcoin reached a historic high of over $69,000 in November 2021, attracting global investors’ attention. However, this upward trajectory has not been smooth—cyclical bull and bear markets have made the volatility of this digital asset a major concern for investors.

Faced with this uncertainty, many investors have begun seeking a scientific valuation framework. The Stock-to-Flow (S2F) model has emerged in this context by analyzing Bitcoin’s scarcity to predict price trends and guide investors.

Core Logic of the Stock-to-Flow Model

To understand this model, two key concepts must be grasped:

Stock (Supply) refers to the total amount of Bitcoin that has been mined and is in circulation—this is a result of historical accumulation.

Flow (New Supply) is the amount of Bitcoin mined each year—this represents a continuous incremental addition.

The ratio of the two is the S2F coefficient. The higher the ratio, the smaller the new supply relative to the existing stock, indicating greater scarcity. For example, gold has an S2F ratio exceeding 50, primarily because its annual production is far below the above-ground stock, making gold a long-term store of value.

How Does the S2F Model Work in Bitcoin?

Bitcoin’s design inherently has a deflationary nature—the total cap is fixed at 21 million coins. This strict supply limit, combined with the halving events approximately every four years (which halve mining rewards and reduce new supply), causes Bitcoin’s S2F ratio to continually increase.

Each halving is a critical milestone. When mining rewards drop from 12.5 BTC to 6.25 BTC, then to 3.125 BTC, the inflow of new Bitcoin slows significantly. According to the stock-to-flow logic, increasing scarcity should lead to higher prices—historical data has, to some extent, validated this.

From this perspective, Bitcoin is more akin to digital “gold,” with its value rooted not in utility but in its irreplaceable scarcity.

Other Factors Affecting Bitcoin’s S2F Ratio

Besides halving events, a series of variables influence this ratio:

Mining Difficulty Adjustment — approximately every two weeks, the Bitcoin network adjusts mining difficulty to maintain a stable block generation rate. An increase in difficulty reduces the speed of new supply.

Market Adoption — whether by individual investors, institutions, or payment scenarios, demand for Bitcoin impacts its price. With supply fixed or decreasing, rising demand pushes prices higher.

Regulatory Environment — policies ranging from encouragement to suppression in various countries directly affect mining costs and transaction demand. Looser policies favor ecosystem expansion, stricter ones do the opposite.

Technological Innovation — mature second-layer solutions like Lightning Network enhance Bitcoin’s usability, influencing demand.

Market Sentiment Fluctuations — global economic conditions, geopolitical risks, media hype, etc., can temporarily shift investor sentiment, but these factors usually do not alter Bitcoin’s long-term scarcity characteristic.

Competition from Other Cryptocurrencies — the emergence and innovation of alternative assets may divert attention and investment away from Bitcoin.

Macroeconomic Cycles — inflation expectations, fiat currency devaluation, economic crises, etc., may lead investors to view Bitcoin as a risk asset or a safe haven.

These factors interact to ultimately influence the supply-demand balance of Bitcoin.

Attempts to Predict Bitcoin Price Using the S2F Model

The creator of the model, PlanB, and its followers have made a series of price predictions based on the S2F framework. Notably, they forecast Bitcoin reaching around $55,000 before and after the 2024 halving, and hitting $1 million by the end of 2025. The underlying logic is that as the growth rate of supply declines, the scarcity premium will push prices higher.

Historical charts show that Bitcoin’s price has often followed the S2F curve, especially during halving cycles. However, there are significant deviations—markets are not driven solely by scarcity but also by speculation and sentiment.

Multiple Perspectives on Bitcoin’s Future

Experts hold divergent views on Bitcoin’s future. Proponents of the S2F model believe that scarcity is the fundamental support for Bitcoin’s valuation. Critics—including Ethereum co-founder Vitalik Buterin—argue that the model is “overly simplistic” because it ignores variables like utility, technological progress, and market demand.

Some predict Bitcoin could reach $1 million, while others consider this unrealistic. This disagreement reflects a fundamental issue: our understanding of Bitcoin’s ultimate value remains inherently uncertain.

How to Apply the S2F Model in Practical Investment

Acknowledge the Model’s Limitations — S2F is not suitable for short-term trading; frequent daily fluctuations can generate false signals. It is best suited for long-term holders.

Validate with Multiple Dimensions — do not rely solely on S2F. Consider technical analysis (candlesticks, volume), fundamentals (adoption rate, active addresses), and sentiment data (media buzz, community discussions).

Diversify Investment Strategies — even if optimistic about Bitcoin’s long-term prospects, allocate a reasonable portion within your overall asset portfolio. Avoid putting all your eggs in one basket.

Risk Management — set stop-loss levels and understand your risk tolerance. Crypto markets can crash suddenly.

Stay Updated and Flexible — monitor regulatory news, technological developments, macroeconomic trends, and adjust your investment approach accordingly. The market evolves, and so should your framework.

Adopt a Long-Term Perspective — if you believe in Bitcoin’s scarcity value, prepare for volatility over 2-4 year cycles. Short-term noise should be ignored.

Controversies Over the Accuracy of the S2F Model

The predictive accuracy of the S2F model is a hotly debated topic. Supporters point out its success in predicting price increases before halving events. Opponents cite failures, such as not predicting the 2018 bear market bottom or the 2022 decline.

The key question is: does past performance guarantee future accuracy?

From a statistical standpoint, the answer is “not necessarily.” As Bitcoin’s ecosystem matures and market participants change, the factors influencing prices may subtly evolve. The model requires ongoing adjustment and refinement rather than being regarded as infallible.

Intrinsic Flaws of the Model

1. Ignores Demand Side — S2F focuses almost entirely on supply, but price is ultimately determined by supply and demand. If demand plummets, scarcity alone cannot prevent price drops.

2. Assumes Static Relationships — the model presumes that historical correlations will persist, but market conditions change. New competitors, technological breakthroughs, or regulatory shifts can break old correlations.

3. Insufficient Information Filtering — actual market pricing results from complex judgments of countless participants; no single model can fully capture this complexity.

4. Risks for Beginners — some newcomers may overly rely on S2F predictions, chasing high prices or panicking at lows, ultimately becoming “victims of market manipulation.”

Summary and Outlook

The Stock-to-Flow model offers a useful framework for understanding Bitcoin’s scarcity premium. However, it should be considered one of many tools in your investment decision-making process, not the sole basis.

Bitcoin’s future will be shaped by scarcity, technological progress, market adoption, regulation, and macroeconomic cycles. Rather than blindly chasing model predictions, cultivating a multi-dimensional understanding of the market and maintaining risk control are more prudent.

Currently, Bitcoin trades at $88,620 (a pullback from the all-time high of $126,080), sitting in a critical valuation zone. Regardless of what signals the S2F model provides, prudence and rationality are always the foundation for long-term success.