- Why is Stock-to-Flow Model Used?
- Is It Reliable?
In cryptocurrencies, technical analysis has been very important in determining the general sentiment of the market. Traders heavily rely on charts to predict the next trajectory of the prices of digital assets. One such model that is often used for predictions in Bitcoin is the stock-to-flow model.
This model is mostly used with natural resources like gold and silver, for having a limited supply. With the supply of Bitcoin also being limited, the stock-to-flow model seemed to be the most appropriate choice.
Why is Stock-to-Flow Model Used?
PlanB in an article mentions that precious metals like Gold, having limited supply has a high value; the same is the case with Bitcoin, its value increases when there is a decline in its fresh supply after every four years.
PlanB says that the stock-to-flow model can be used by investors to predict the future of the USD market capitalization of Bitcoin. The stock-to-flow model also gives validity for the prices of Bitcoin to reach $100,000.
However, we should remember that no model is completely accurate, there are many unpredictable events like COVID 19 outbreak that occurs unexpectedly and make the prediction go wrong. The same happened with cryptocurrency, the epidemic cause the crypto market to crash initially.
Is It Reliable?
The prices of Bitcoin didn’t rise as they were predicted through the stock-to-flow model. There was a huge gap between the prediction and the actual price of Bitcoin. It was predicted that by the end of 2021, Bitcoin may pass the $450,000 mark or in the worst case $135,000 mark, which never happened as reality was very far from this. The price of Bitcoin by the end of 2021 was around $50,000. The stock-to-flow model also predicted that Bitcoin would reach the $1million mark by July 2025, which is yet to be seen.
The stock-to-flow model has received huge criticism from various experts. Many experts believe that models like stock-to-flow make a prediction based on historical data, which at times may be of assistance in determining the overall direction of the market, but cannot be completely reliable.
Experts also added that the stock-to-flow model for Bitcoin was deployed in 2019; at that time the demand for the model was completely different from what it is now. A lot has changed since 2019; institutional adoption of Bitcoin has increased. Another major factor is the COVID 19 that has been around for almost two years. During the pandemic the adoption of Bitcoin increased, as USD supply inflated, people started looking for other options to invest in.
With the huge difference in the prices of Bitcoin from what they were predicted to what they are, it is safe to say, no analytical approach can be considered to be accurate
Disclaimer: The article is just to provide information and shouldn’t be considered as any financial advice. It is advisable to conduct thorough research before investing in any cryptocurrency.
Photo by – russgfx on Pixabay