The Flaw in Stock-to-Flow Model Used for Bitcoin Price Forecast
The infamous stock-to-flow model that was flawlessly forecasting the direction of Bitcoin’s movement until the enormous fall that we witnessed in May and June forecasts that the first cryptocurrency will hit $72,000 this week, but it is very doubtful that this will really occur.
In the past, a Fidelity analyst provided an explanation for why S2F is not accurate now and would not be accurate in the future. The scarcity of the asset is the primary basis for S2F’s predictions; yet, this factor, by itself, is not sufficient to determine price, particularly in contemporary markets.
When it comes to Bitcoin, we need to combine scarcity with acceptance if we want to see greater outcomes. Even if we compare it to other technologies like mobile devices or the internet, it is nearly difficult to precisely determine the adoption rate of the technology in the future. This is the case even though we can compare it to other technologies like mobile devices.
The present departure from the price model is one of the largest the market has ever experienced in the whole history of its existence. This suggests that stock-to-flow cannot longer be utilized as a method for projecting future price levels of Bitcoin.
The inability of retail traders to drive the price of digital gold as high as the model implies is the reason why S2F’s price projection is unlikely to come true. This is because retail traders cannot do it alone. As a result of the recent decline in the value of cryptocurrency markets, institutional investors have dumped Bitcoin holdings worth over $500 million.
It is not yet clear when institutional investors will return to the cryptocurrency market, which is especially concerning in light of the debacle that occurred on Ethereum’s lending and borrowing market, which resulted in a massive cascade of liquidations and margin calls. Despite this, it is not yet clear when institutional investors will return to the market. After the price of Ether fell below $900, numerous organizations, including 3AC and Celsius, were forced to close their doors and discontinue operations.