Stock-to-flow

The stock-to-flow model is a financial metric used to evaluate the scarcity and value of an asset by comparing its existing supply (stock) to the annual production rate (flow). Originally applied to precious metals like gold and silver, the model has gained popularity in cryptocurrency markets, particularly in analyzing Bitcoin. The higher the stock-to-flow ratio, the greater the scarcity of the asset, which can drive up its value due to the limited supply. Bitcoin's finite supply of 21 million coins and its predictable halving events make it an ideal candidate for the stock-to-flow analysis.

The stock-to-flow ratio is calculated by dividing the total supply of an asset by the annual production or issuance rate. For Bitcoin, the stock is the total number of Bitcoins in circulation, while the flow is the number of new Bitcoins mined each year. As Bitcoin undergoes halvings every four years, its flow decreases, leading to a higher stock-to-flow ratio over time. Proponents of the model argue that as Bitcoin becomes increasingly scarce, its price will continue to rise, following the principles of supply and demand.