Bitcoin is on track to be one of the year’s best performing assets, despite a recent retraction—but that’s not stopped bitcoin bulls from fighting on Twitter.
The bitcoin price has climbed through much of 2020, adding some 40%, with the bullish stock-to-flow model—that predicts a massive $288,000 bitcoin price before 2024—working “like clockwork,” according to its anonymous creator.
However, a number of high-profile bitcoin analysts and entrepreneurs have clashed over the stock-to-flow model this last week, with the anonymous PlanB accusing his critics of trying to unmask him and his model derided as “absolutely useless.”
“The [stock-to-flow] model is based on the most fundamental errors which render it absolutely useless,” warned Alex Kruger, an economist and cryptocurrency analyst, speaking over the phone.
The stock-to-flow pricing model, created by anonymous Twitter user PlanB, who claims to be a Dutch institutional investor with a legal and quantitative finance background that manages around $100 billion in assets and tweets from the handle @100trillionUSD, calculates a ratio based on the existing supply of an asset against how much is entering circulation.
Commodities such as gold–with the largest stock-to-flow ratio of 62, meaning it would take 62 years of gold production to get the current gold stock–have a higher stock-to-flow ratio and are valued by investors for their scarcity. Silver has a stock-to-flow ratio of 22 years for its production to reach the current silver stock.
Bitcoin’s stock-to-flow ratio is now 50 following bitcoin’s third halving earlier this year, which saw the number of the number of bitcoin rewarded to those that maintain the bitcoin network, called miners, cut by half—dropping from 12.5 bitcoin to 6.25.
However, Kruger, along with many other analysts in recent months, has warned the model is based on faulty comparisons and a “spurious relationship” between price and scarcity.
“The whole model rests on the wrong assumption that there is cointegration [a long-running relationship between two or more variables] between price and scarcity,” Kruger said, who explained that without cointegration it’s “nonsensical to think that bitcoin stock-to-flow, a number that goes up programmatically, and everybody knows what it will be at any point in time, can be used to predict price.”
Criticism of the stock-to-flow model and its creator have bubbled up recently, with the chief executive of bitcoin buying app Swan Bitcoin, Cory Klippsten, posting what PlanB considered to be identifying information on Twitter before deleting it and saying he was “wrong to post any personal information” about PlanB and adding anonymous bitcoin users “should have the right” to stay anonymous.
“It’s extremely important to be bullish for the right reasons,” Klippsten said via Twitter, explaining his opposition to the popularization of the stock-to-flow model. “Otherwise you’ll have weak hands when your belief is proven false.”
Klippsten, speaking via Telegram, said he supported the stock-to-flow pricing model until late 2019 when he “looked into the models and realized they’re invalid” and “have zero predictive power.”
PlanB, who disputed the relatively vague information posted by Klippsten before sharing it himself on Twitter, claims the stock-to-flow pricing model shows bitcoin will reach $288,000 before the next bitcoin halving in 2024. PlanB has also argued that assets that have a high stock-to-flow have a high value, pointing to gold, silver, diamonds and real estate in a chart posted to Twitter.
Meanwhile, PlanB has played down the potential accuracy of the model, saying earlier this year: “A model is a simplification of reality, and all models are wrong, but some are useful.”
Elsewhere, others have supported PlanB’s modelling—not as a price predictor but as an observation of a trend.
“One should think about @100trillionUSD’s S2F model like Moore’s Law: it’s just an observation and speculative projection an observed trend may continue,” Adam Back, the founder and chief executive of Canada-based bitcoin and blockchain technology company Blockstream, said via Twitter, referencing Moore’s projection that the number of transistors in microprocessors would double every two years.
“[The stock-to-flow model’s] predictions should not be relied upon as an exact estimate,” bitcoin analyst Nick Emblow said via Twitter. “What the model does do is give us some evidence to show [stock-to-flow] is an important variable in understanding bitcoin value.”
Critics of the stock-to-flow model, including Alex Kruger, aren’t convinced, however.
“The beauty of the model is that it’s open-ended,” said Kruger, who fears PlanB’s stock-to-flow analysis will be used to convince people to invest in bitcoin with the promise they can’t lose their money. “You can always keep pushing the deadline until you find what you’re looking for.”
“True believers will hold [their bitcoin] no matter what. There are others that will get wrecked when the model is completely off try to recoup their losses.”