Bitcoin to surpass stock-to-flow ratio of gold within 5 years
Stock-to-flow is a measure of scarcity used typically to value gold. The same indicator applied to bitcoin shows it will surpass the scarcity of gold next year.
There are a few reasons why gold is so valuable. Like any asset, gold is simply worth what someone will pay for it. Gold has been used as a store of value for thousands of years, and its track record and network effect means there’s strong confidence in it. Across cultures, civilisations and very different economic circumstances, gold is still the go-to store of value.
Part of its appeal comes down to its scarcity. There isn’t much gold in the world, and much of what there is has already been mined. Unlike dollars, you don’t need to worry about massive new supply coming onto the market.
This reality is formalised in a metric known as the stock-to-flow ratio. This is simply the ratio of the amount of the asset available – the stock – compared with new supply coming onto the market, or the flow. For bitcoin, as Stephan Livera recently commented, it can be taken as a measure of digital scarcity.
Roughly 170,000 tonnes of gold has already been mined. Meanwhile around 2,400 tonnes of gold is mined every year, ending up on the market. Gold’s stock-to-flow ratio is therefore 170,000:2,400, or 71. To put it another way, gold’s ‘inflation’ is very low. If you hold gold in your portfolio, you don’t need to worry about it being devalued by massive new supply coming onto the market: it’s just not realistic to think that mining companies can increase production significantly.
As ‘digital gold’, what is Bitcoin’s stock-to-flow ratio? Right now, supply is around 17.6 million BTC. 1,800 new BTC are mined every day, or 657,000 BTC per year. So Bitcoin’s stock-to-flow ratio is just under 27. But it won’t stay that way.
By the next halving, around May 2020, Bitcoin’s supply will be approaching 19 million. Since block rewards will fall to 6.25 BTC every 10 minutes, flow will be 328,500, making its stock-to-flow ratio nearer 58 – not far off gold. And four years after that, when block rewards halve to 3.125 BTC, that ratio will rise to well over 100. So in five years’ time, Bitcoin’s stock-to-flow ratio will be far in excess of gold’s.
Of course, that doesn’t guarantee bitcoin’s place in history as digital gold, but it is another piece of evidence to suggest it’s in a good position.