By far, Bitcoin has had a rollercoaster year. By March, the crypto asset prices had doubled compared to those at the start of 2021 and by July they had fallen down to the end of 2020 levels once again. Bitcoin is yet to achieve its stability and it is still difficult to say for sure whether the Bitcoin pricing model is actually going to work in the long run. We believe it will. Read on to find out why.
Like always, the analysts and econometricians are still having trouble valuing crypto currencies, Bitcoin amongst them. Main reason being that there’s no cash flow nor interest generated with crypto, so using traditional quantitative valuation models to value it is nearly impossible.
There’s no solid valuation model for crypto… at least for now. One of the most popular and approved options is the stock-to-flow ratio model, which measures the relationship between the supply (stock) of any commodity (gold or oil vs Bitcoin) – and its production (flow). It’s mostly an economic concept, used to model Bitcoin’s trajectory to make statements and predictions of its future. It has always been optimistic of Bitcoin’s future and therefore understandably gained some perhaps unfair popularity. It has had many revisions, yet is still criticized a lot for actually not providing any bulletproof information.
Bitcoin has a really high stock-to-flow ratio. It has very high divisibility, durability, transportability and scarcity and clearly possesses strong characteristics that would make it a very suitable alternative to „real“ money. The more Bitcoin will become a real-world monetary alternative, the more its price will rise. That is for sure.
In general monetary theory, the high stock-to-flow ratio that Bitcoin has is very likely to translate into low volatility as the time goes by. Traditional commodities such as oil have provided examples. Oils stock-to-flow ratio is low, so it’s price is known to fluctuate a lot in case of supply-side disruption.
What does it mean for Bitcoin? Monetization is and will continue to be the most important aspect. The process of monetization is going through the so-called S-shaped adoption curve now. Once it reaches completion, Bitcoin will become less volatile as it is going to steadily grow and grow it’s stock-to-flow ratio.
So, in conclusion, everything we now know about history, financial theories and different concepts strongly suggest that the steady growth of the stock-to-flow ratio is going to bring us a stable Bitcoin.
Kiara Sofia Smith
My current focus is blockchain technology and cryptocurrency. One could even call me a blockchain “enthusiast.” I have worked for almost a decade on several financial projects related to the stock market news, fundamental research and technical analysis for several blogs.
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