How to Value Bitcoin
PlanB’s Bitcoin S2F Model and Phase Transitions
Who is PlanB?
PlanB is a high profile and well respected anonymous Dutch bitcoin analyst. In real life, he’s an institutional investor with a legal and quantitative finance background who’s an investment manager running a multi-billion dollar balance sheet. Hence, his anonymity. His twitter is PlanB@100trillionUSD.
Why do we care?
PlanB published some of the most widely recognized models evaluating bitcoin’s value and price trajectory — Modeling Bitcoin Value with Scarcity (S2F), Efficient Market Hyothesis and Bitcoin S2F, and Bitcoin’s Stock-to-Flow Cross Asset Model (S2FX). These models have been critiqued and adopted by most crypto enthusiasts, translated into 21 languages and referenced by institutional investment managers, such as Fidelity. His conservative price prediction for bitcoin is $289k by 2024. We’ll be diving into the first and last articles published by PlanB.
Modeling Bitcoin Value with Scarcity
In PlanB’s first article published on March 22, 2019, he argues that bitcoin has value because it’s the first scarce digital object the world has ever seen similar to silver and gold, but can be sent over the internet, radio and satellite. But how much value? He quantifies scarcity using the stock-to-flow model, which is used to evaluate the scarcity of commodities.
The stock-to-flow (S2F) ratio of a commodity is used to calculate the yearly growth rate of new supply (flow) coming into existence against the existing supply (stock).
S2F Ratio = stock / flow
Gold has the highest S2F of 62, which means it takes 62 years of production to get to the current gold stock. Silver was second with a S2F of 22. These high S2F ratios make them monetary goods as opposed to other less scarce and less costly commodities to produce such palladium (1.1) and platinum (0.4). At the time of writing this article, bitcoin’s stock-to-flow was 25 (17.5M coins in circulation — stock / 700k new coins coming online — flow). After the May 2020 halving, bitcoin’s current stock to flow has more than doubled to ~56.
Bitcoin’s supply is fixed. There will never be more than 21M bitcoin. New bitcoins are created in every new 1MB block of transaction data. Blocks are created every 10 minutes (on average), when a miner finds the hash that satisfies the Proof of Work (PoW) required for a valid block. Every 4 years, bitcoin’s immutable software cuts its new issuance in half, therefore bringing exponentially less bitcoin into circulation and doubling the the stock-to-flow ratio. This is why it’s considered an inflation hedge asset and makes it a very attractive investment in the current global macro environment — mass fiscal (government) and monetary (central bank) stimulus. While exponentially more dollar units explode into the financial system and devalue the currency; bitcoin is doing the exact opposite by becoming a harder and more scarce currency. A more sound money. Below is a chart detailing bitcoin’s stock-to-flow ratio over the next hundred years. As you can see bitcoin’s halving has a massive impact on its scarcity. By the next halving, bitcoin’s S2F will have increased to 123.69 in 2024 and by 2036 bitcoin’s S2F will have crossed 1,000. It’s anyone’s guess on how this will affect price, but if PlanB’s model is correct, bitcoin will be valued in the millions of dollars in the next 5–10 years.
PlanB closes his article articulating where he sees the money coming from to send bitcoin’s market cap into the trillions of dollars.
“People ask me where all the money needed for $1trn bitcoin market value would come from? My answer: silver, gold, countries with negative interest rate (Europe, Japan, US soon), countries with predatory governments (Venezuela, China, Iran, Turkey etc), billionaires and millionaires hedging against quantitative easing (QE), and institutional investors discovering the best performing asset of last 10 yrs.”
Bitcoin Stock-to-Flow Cross Asset Model
In this article, PlanB is solidifying his stock-to-flow argument, by removing time from the equation and examining other assets such as silver and gold, the BTC S2F cross asset (S2FX) model. But, before getting into the model he describes the concept of phase transitions and a new way of thinking about bitcoin and S2F. This is a very interesting lens to view the evolution of bitcoin and evaluate the asset. The three examples of phase transitions are: water, US dollar and bitcoin.
The classic example of phase transition is water. Water exists in four different phases (states): It’s all water, but it has totally different properties in each phase.
Phase 1: Water as a solid
Phase 2: Water as a liquid
Phase 3: Water as a gas
Phase 4: Water ionized
He goes on to describe how phase transitions are present in finance by looking at the US Dollar.
Phase 1: The US Dollar transitioned from a gold coin (One dollar = 371.25 grains of pure silver = 24 grains of gold)
Phase 2: Transitioned to paper backed by gold (“gold coin payable to the bearer on demand”)
Phase 3: Transitioned to paper back by nothing (“this note is legal tender for all debts, public and private”).
The bitcoin narrative shares these phase transitions over time.
Phase 1: Proof of Concept — post Bitcoin white paper, S2F 1.3 and market value of $1M
Phase 2: Payments — 1BTC = $1, S2F 3.3 and market value of $58M
Phase 3: E-Gold — after 1st halving in Nov’12, almost 1BTC = 1 ounce of gold, S2F 10.2 and market value $5.6B
Phase 4: Financial Asset — after 2nd halving in July’16, Bitcoin network is seeing $1B transaction per day, legal clarity in Japan and Australia, futures markets at CME and Bakkt, S2F 25.1 and market value of $114B
Phase 5: Reserve Asset — after 3rd halving in May’20, bitcoin is being used by corporations and sovereign nations as treasury reserve asset, S2F 56 and market value of $240B
PlanB then plots the bitcoin phase transition price clusters against the other assets in his Bitcoin S2F Cross Asset Model (S2FX). Below you can see bitcoin’s monthly market value data clustering around specific S2F ratios as it climbs closer toward’s the silver and gold market values. It’s important to note that the model forms a perfect straight line through all asset classes.
In conclusion, his S2FX model estimates a market value of the next BTC phase / cluster will be $5.5T (gold is ~$10T), which translates to a BTC price of ~$289k. We’re currently in Phase 5 with a stock-to-flow ratio of ~56 and publicly traded companies like MicroStrategy, Square and others are now using bitcoin as a reserve asset. It’s only a matter of time before the first central bank announces it’s buying bitcoin.
$5.5T / 19M BTC = $289,473.68
The current price of bitcoin is $13,100 with a market cap of ~$242B. If we’re using PlanB’s models then bitcoin is extremely undervalued.
We hope this article was helpful and you can learn more about PlanB — here.
2021 should be a very exciting year for bitcoin investors.
**This is not financial advice. Investing in bitcoin and cryptocurrency is extremely risky. Please do your own research. The ideas and news presented in this newsletter are my personal opinions and meant for informational and entertainment purposes only.