The trillion-dollar asset manager Fidelity is scrutinizing a popular and controversial Bitcoin price model.
A recent report from Fidelity Digital Assets analyzes the stock-to-flow ratio, which divides the amount of a commodity in circulation by the amount mined per year.
Using the correlation between an asset’s price and its S2F ratio, the pseudonymous crypto analyst PlanB has predicted that Bitcoin’s value will soar to $1 million by 2029.
Although there is a fierce debate on whether the stock-to-flow ratio is an accurate way to forecast Bitcoin’s trajectory, Fidelity says the model is a credible tool for analyzing scarce assets. The firm says historically, the metric is a sound way to judge whether a given commodity will become a successful store of value.
“Commodities with a stock that is difficult to double due to a low rate of production relative to existing supply have historically served as superior stores of value. Such commodities are largely used for investment purposes, and occasionally industrial uses. On the other hand, consumable commodities that are susceptible to large increases in supply, are less effective in storing value.
In the Bitcoin Standard, Saifedean Ammous adapted stock-to-flow to compare bitcoin to commodities used for investment and consumption and the use of the metric has since expanded and even given rise to models based on the ratio. Gold, the most resilient store of value through the ages, has the highest stock-to-flow ratio, followed by Bitcoin (today) and silver. Following the recent halving (May 2020), the gap between the gold and Bitcoin ratio compressed. Bitcoin’s stock-to-flow will eclipse that of gold following the next halving (2024).”
Grayscale echoes Fidelity’s assessment that commodities with high S2F ratios are typically sought after by investors. The investment giant looks at Bitcoin to illustrate the positive correlation between an asset’s price and its S2F ratio.
“Commodities with high stock-to-flow ratios such as Bitcoin, gold, and silver have historically been utilized as stores of value. Figure 10 shows a popular model that uses Bitcoin’s historical relationship between price and stock-to-flow to estimate a future price.”
However, Grayscale cautions that the S2F price model does not guarantee an increase in the asset’s value.
“While it’s true that price has followed this stock-to-flow model with high correlation, the relationship may be spurious and does not take into account the requisite demand for price appreciation.”
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