Stock-to-Flow Ratio

The stock-to-flow ratio is a measure of scarcity that divides the total amount of an asset already in existence, the stock, by the amount added each year, the flow. A high ratio means new production is small compared with what already exists, so supply grows slowly. The idea has long been used by analysts of precious metals to explain why gold and silver have kept value over centuries, and it gained wide attention in crypto after it was applied to bitcoin in 2019.

That application, published by a pseudonymous analyst known as PlanB, went further than measuring scarcity: it proposed a statistical relationship between bitcoin's stock-to-flow ratio and its market value. The resulting stock-to-flow model became one of the most widely shared charts in crypto during the 2020 and 2021 bull market, and later one of the most criticized after prices diverged sharply from it. The ratio itself remains a simple, useful description of supply; the model built on it is far more contested.

Imagine a lake fed by a small stream. The lake is the stock, everything already there; the stream is the flow, what arrives each year. If the stream is tiny compared with the lake, the water level barely changes from year to year, however hard anyone tries to add more. That is a high stock-to-flow ratio.

Now imagine a puddle beneath a running tap. The flow is large compared with the stock, so the puddle can double quickly. Things that are easy to produce in large quantities, like most crops or manufactured goods, behave like the puddle. Gold behaves like the lake, because the gold mined in a year is a small addition to all the gold mined throughout history. Bitcoin's fixed issuance schedule makes it behave increasingly like the lake too.

The ratio is calculated as:

• $\text{Stock}$ is the total existing supply of the asset.
• $\text{Flow}$ is the new supply produced over one year.

The result is often read as the number of years current production would take to create the existing stock. For an illustration with bitcoin, after the halving of April 2024 the block reward fell to 3.125 bitcoin. With about 144 blocks mined a day, roughly 450 new bitcoin are created daily, or about 164,000 a year. If the existing stock is taken as 19.8 million bitcoin, the ratio is 19,800,000 divided by 164,000, which is about 121. Each halving roughly doubles the ratio, because the flow is cut in half while the stock keeps growing slowly towards the cap of 21 million bitcoins.

In March 2019, PlanB, who describes himself as a former institutional investor in the Netherlands, published an article titled "Modeling Bitcoin Value with Scarcity". It plotted bitcoin's market value against its stock-to-flow ratio on logarithmic scales and found that the points fell roughly along a straight line, a so-called power law. Fitting that line produced a formula linking each level of scarcity to a market value, which implied that bitcoin's price would rise steeply after each halving as the ratio jumped.

PlanB later extended the work into a cross-asset version, placing bitcoin alongside silver and gold on the same curve. The charts, coloured by time until the next halving, spread widely on social media and in exchange research. Supporters saw them as evidence that bitcoin's programmed scarcity would drive its value and that it was becoming a store of value comparable to gold.

The model faced criticism on several grounds:

• It ignores demand. Price depends on how much people want an asset as well as how much exists. A scarce asset that nobody wants has little value, and the model contains no measure of adoption, interest rates or investor appetite.
• Statistical weakness. Critics argued that both bitcoin's supply measure and its price rose over time, so a strong correlation between them could be spurious. Some econometric tests found the relationship did not hold up when the trend was accounted for.
• Known in advance. Bitcoin's issuance schedule is public, so if the halvings alone determined value, markets would have priced them in long before they happened.
• Performance. Bitcoin's price ran well below the values implied by the model from 2022 onwards, after the market fell from its late 2021 peak. Even some former supporters stopped citing it.

Economists also note that the ratio for gold reflects centuries of accumulation and wide industrial and cultural demand, which do not automatically carry over to a digital asset. The stock-to-flow ratio is best understood as a description of supply, one of many inputs into supply and demand analysis, rather than a pricing formula. Like any economic model, the bitcoin version simplifies reality, and it offers no reliable forecast of future prices. Bitcoin's issuance policy, by contrast with fiat money, is fixed in code, which is why discussions of its inflation rate and stock-to-flow ratio continue regardless of the model's fate.