How do you define Bitcoin?
A decade ago, Bitcoin was created with the initial intention of becoming an electronic cash system, thus putting it in the currency bracket.
Today it has evolved to the point where Bitcoin resists any attempts at clear categorization.
Economists and traders struggle to fit Bitcoin into neat buckets and old mental models. Nevertheless, a growing consensus seems to view Bitcoin as part of the 'commodities' family, alongside similar assets such as gold.
When we categorize Bitcoin as a commodity, we're essentially defining it as a scarce, valuable, durable, divisible, tradable and transportable digital good. It also opens up Bitcoin to valuation models that are relevant to commodities.
How does S2F work?
Building on earlier work from Saifedean Ammous, Plan B splits the entire supply of Bitcoin into two categories.
Bitcoin’s stock refers to the supply of Bitcoin already mined into existence (18,763,587 BTC at the time of writing, as is the case with all commodities.
Bitcoin’s flow is the annual production of a commodity, which in Bitcoin’s case refers to the number of new bitcoin’s mined each year.
The scarcer a commodity is, and hence the more valuable, the higher it’s stock to flow ratio.
According to Plan B’s data, gold has a stock-to-flow ratio of 65, which means it would take 65 years to produce the current stock of gold at today’s rate.
Gold's S2F: 185,000 tons of gold circulating in the world, and 3,000 tons are produced every year, the S2F for gold can be calculated by dividing supply by flow to get a figure of roughly 65.
Silver has a S2F ratio of 22. Meanwhile, commodities like zinc, copper and palladium generally have a S2F ratio closer to one. This makes them fairly replaceable and abundant.
And what about Bitcoin? Well lets calculate that shall we.
Bitcoin’s stock is currently around 18.5 million coins. When it comes to the flow of Bitcoin, it’s important to remember that the Bitcoin halving in May 2020 cut down the issuance of new Bitcoin by half, making an already scarce commodity that much harder to come by.
As of now, 6.25 new Bitcoin are mined every 10 minutes. This works out to 52,560 new blocks a year, putting the flow of Bitcoin at 328,500.
Accordingly, Bitcoin’s S2F ratio is 18.5 million/328,500 = 56. As measured by S2F, Bitcoin is much scarcer than even silver, coming second only to gold.
However, by the time Bitcoin production will get cut in half once again in 2024, it’s S2F ratio will be as high as 103!