Beyond the stock to flow model, why bitcoin may eat gold first, then fiat
So we notice everything looking so good until 2028, but at 2032 we see the price start appearing a little bit too high, by 2040 is almost 4 billion per coin, by 2076 is already 3.4 quintillion and by 2136 is an astronomical big number that I don’t even know how to name it, just before turning infinity when the last bitcoin gets mined on 2140.
So what is going on? PlanB suggest not to extrapolate too much into the future as we will go into an scenario we have never seen before, I honestly don’t find it reasonable and I have to disagree on that, why would we assume this model will work until 2025–2030 and stop working after that, why would we put a limit just after our goal is met and ignore the rest of what the math is telling us from there, it just doesn’t make sense and the assumption will be biased on my opinion.
However, I do think the model is correct we don’t need to put any special limit and the outputs is giving are completely reasonable, let me explain:
Do I think bitcoin will reach an astronomical purchasing power so that we may be able to buy the hole Earth by spending 1 sat? HAHA, NO!
Then it has to be the dollar is going into a hyperinflation, then when bitcoin reaches infinity is because the dollar will be worth nothing, not enough of nothing will be worth something, that makes sense! mmm, not really…
I think we all are getting confused just because we are using dollars as the unit of account here, let’s forget about this financial system that just happened we were born in, and go back to fundamentals to start looking at it from an abstract and objectively perspective, everything will make more sense, I promise.
I don’t think I has to explain why bitcoin would not reach an infinity purchasing power, so what about the hyperinflation scenario?
I am not saying it won’t happen, the thing is, there is no way for this model to actually know it, there is not information about the fed making QE, what the US national debt is, if we are going to have a recession, if the markets will crash, none of that is in the data-set, so for believing the model is forecasting this, it needs to be some king of prophecy.
In fact the value of things has nothing to do with the dollar or any other currency really, everything has some value compared to everything else and this is driven for supply and demand only
Just to make this clear let’s change the unit of account to cuts of coffee, let say a cup of coffee is $2 at today’s value, so if we run the model again comparing the price against cuts of coffee instead, then gold would not be a 8 trillion dollars market cap but a 4 trillion cups of coffee market cap, we can create a new model based on our new unit of account and we will see a slightly different function but still a 95% fit, and with the same pattern in the long run, bitcoin being able to purchase a ridiculous amount of coffee, does that mean cups of coffee will go into hyperinflation as well, of course not.
We can see a clear correlation that we can’t ignore and I believe this is showing the relative value of an asset against the rest of the market, which market? The store of value market.
In order to understand why this phenomenon of scarcity drives the value of things I have a hypothesis, for this we need to go back to the free markets because as we are told what to use and what not to use we are not letting nature really act by itself, and everything starts getting pretty confusing.
Now, let’s image the value of everything disappears, we all forget what everything is worth, so all there is is all the physical and digital things.
At the start everything will be wildly volatile as nobody will know what to bid or ask for the goods, our brains would need a point of reference so that we can measure things easily, we need a unit of account, it can really be anything like beans.
We also have another problem, what if you want to trade with me for some goods but I don’t like what you have to offer me, what if I don’t want anything right away, should I stop providing my service until I need something again, would be nice if there was something we can trade and I can hold to it and trade it at any point in the future for another thing, so that I don’t have to claim the reward of my service right away.
If the price of things is driven by supply and demand if I want to hold something I want to pick something that devalues as less as possible or if it gains value is even better! Let’s say bitcoin doesn’t exist, I may not know about the SF model so I will probably silly pick something like aluminium, but on a macro scale on some period of time, society will pick gold again, because directly or indirectly people will just notice gold holds pretty well it’s value because of the low inflation rate, so gold will have value not because it has “intrinsic value” but because it holds its value (as weird as this sounds).
Silver at the second place will still have value as store of value, how much? Our hypothesis says that it depends on the difference between the gold and silver SF, the store of value market will pick a price so that when the distance between those SF increase the distance between prices do as well on another order of magnitude, the store of value market cap will not increase because of this but will balance accordingly, this is the pattern we are seeing reflected in the SF model, if gold did not exist, silver would be many times more valuable, but just because of its existence silver would be on its shadows forever, unless gold’s SF decreases or silver SF increases.
Let’s take wood for example, why don’t people hold wood instead? simple, why would you hold wood thinking is valuable when the hole stock of wood doubles every year, look at gold it doubles every 50 years, that is definitely difficult to get and also puts less selling pressure on the market. So assuming wood has a SF of 1, using the SF model you will see its store of value will be nothing relative to gold, so while mathematically wood will still have some peace of the store of value cake, realistically it is zero.
If we all use the same store of value and is also divisible and fungible we call it money and we use it as unit of account as well, unless government step in and says you are forced to use this paper, that is completely out of the equation.
What is wealth? Is important to understand that all world’s wealth is fixed, all there is is 100%, everything has a value compared to everything else and when something increases or decreases on value it’s because the value is just moving into something else, is impossible to create or destroy wealth, if you ever feel like that is happening, it is not, is just changing hands, so a wealthy person is somebody that just happens to own things that at the current exchange rates is way bigger percentage of what the average person own at current exchange rates, so the most you can have is 100% (you own the world), 0% (you own nothing) or something in the middle, not man can change this fact, but build pump and dump schemes around it.
What is the store of value market? It consists of the bunch of things people will buy not only because they want it but because they plan to sell at any time in the future (buying things with it is also selling), for example a computer is a terrible store of value, nobody really buys a computer pretending to sell for other thing in the future, they buy it because they want or need it, not the same about a Rolex watch you may like the watch, but the value holding part is implicit on its price, what about gold? most of the people would not buy it if is not for selling later, or fiat, who doesn’t want a pretty printed paper? all assets are competing in the market for this purpose.
What defines the store of value market cap? Supply and demand, what a surprise, as more people are trying to save wealth they will buy into the store of value market, this will cause the market cap to grow and as wealth can’t be created then it is taken from the rest of the non store of value assets, effectively lowering their price but there is a catch as more people is willing to spend their saved wealth the market cap will decrease, effectively increasing the price of everything else, at some point the market will find an equilibrium market cap where there is equal amount of saving and spending and prices will stay relatively stable.
This makes it clear that if gold didn’t exist, silver and other store of value assets will have a higher value, since store of value market cap is defined by the demand for saving, non existence of gold would not stop a person from saving, they will just pick another asset, and market will balance based on the SF of remaining assets. The same will happens if there were a better asset that is just like gold but with higher SF (lower inflation), this will not create more savers, so the store of value market cap would not increase but once again, balance accordingly to our new friend :).
Now that we are in context, let’s run some numbers. We will not treat the model numbers as dollars anymore, but just a measure of relative value, so we can calculate what the value of bitcoin as store of value would be compared to gold and silver at different halvings.
Let’s start by reference by just charting gold an silver, by combining both market caps as today, silver and gold represents 3.52% and 96.48% correspondingly, lets see what the SF model predicts it should look like:
Let’s try with 2016 bitcoin (25 SF), according to the model on this scenario bitcoin should already surpass silver, well that never really happened but we have to remember there are human factor that can influence this, like distrust on the market but because of the power of law relationship being at 50% or 25% of the target is way closer that you may think, because of the exponential grow the chances of being on this range by chance are pretty damn low, as PlanB himself said.
Let’s see what the scenario looks like for 2020 (50 SF), we would see bitcoin will be taking a big bite from gold, the model is predicting an 50 SF asset to look like this against an 62 SF asset like gold.
According to the 2024 bitcoin will take the crown over gold, this is the predicted scenario for a 100 SF asset against a 62 SF asset.
Now, as I said at the start what is important here is the correlation and the way it grows because of the power of law relation, if this power of law relation holds true, then it doesn’t matter if the model is perfect but just close enough, because long run will look pretty much the same, for instance let’s take a look at 2 more halvings:
From here the pattern is clear, simply bitcoin should absorb the 0.22% remaining of the store of value market until 2140 where it becomes 100%, at least mathematically, realistically after 2028–2032 gold would no longer hold any value as store of value, not to even talk about silver, of course gold and silver would not be free but their price will be based on supply and demand for electronics, jewelry, etc. But not for holding into it for wealth preserve, if that were the case you would be better holding bitcoin.
But wait, does this exponential grow in preference based on the SF make any sense at all? Yes it does for me, see:
Let’s assume there are two assets A and B that looks exactly the same but with different inflation rates:
If A and B have 10% and 40% yearly inflation rate respectively, SF model says people will ultimately choose A as store of value over B, A market cap would not be 4 times bigger than B, but way more, it will be around 99x times bigger than B, this may not come as surprising but let’s now change the scenario a little bit.
This time A and B have 0.5% and 2% yearly inflation rate respectively, this may look like the difference is smaller but is the same decision after all, even if A and B are better stores of value now, B still devalues 4x times faster than A, so A market cap will still be around 99x bigger than B.
Now for this we are assuming A and B are exactly the same apart from their SF, in case of bitcoin this is not true, if somebody doesn’t trust the blockchain or think it will get hacked, banned, or whatever, they will ratter hold an asset with smaller SF than lose everything, this is because fear is overcoming greed.
This is the difficult part and from here the most we can do is speculate over some scenarios.
I think this is very unlikely at current state, if this were to happen it would have happened while ago, but this still a possibility that I am not completely discarding, we need to remember bitcoin is a pump and dump scheme, just like gold and our current financial system, if early investors were to dump their bags without enough buyers to support it, that will be it, thanks for participating.
Bitcoin not respecting SF model next cycle
If bitcoin doesn’t respect SF model, like going sideways or into a extended bear market post halving, then this article may be invalidated and I would not be able to predict much.
Bitcoin respecting SF model during next cycle
Here is where things gets interesting, if bitcoin price is driven by SF people are expecting something like this to happen:
while still possible, I don’t expect that to happen, I find something like this more likely to happen:
I know you might think that is ridiculous if not delusional, not even a moon boy will predict such scenario, but I believe this is quite possible and I am not counting for hyperinflation here, this will be somewhat the equivalent on today’s dollars value (5x more, x5 less). Not many people will profit from this, even today’s crypto holders will make small profit if not losses during such scenario, let me explain:
Nobody anticipated the first halving bull run, people not even realized what happened, after 2016–2017 bull run followed by 2018 bear market in which retailers think bitcoin died, smart money and crypto enthusiast start recognizing a pattern here, smart money starts putting the feet in the market, they can’t go all in because if they do the price will be pumped significantly producing losses for them in form of gains for retailers and traders, more important than that is just too risky, nobody really knows what is going to happen, we are all speculating here in some form.
The next halving cycle is important, I call this the confirmation cycle, if bitcoin rallies respecting the SF model in comparative to gold, the pattern will be so clear here that nobody will be able to trash talk bitcoin without sounding dumb, not even if is going down on price, the mania will come again for retailer, probably alts will rally again, bitcoin will be in the mouth of the population, bitcoin price will be reported daily on news and documentals will pop up everywhere explaining bitcoin history, the cycles and how it will headed to a million dollars withing the next 10 years to finally become the currency of the future.
But there is something everybody seems to be ignoring, most people think if bitcoin is going up either you make money or you don’t, there is no way you can lose money if an asset is going up and that is incorrect, bitcoin as the pump and dump scheme it is, if it is headed to let’s say 10 million a coin (inflation away), you may think if you buy at 5 million you will 2x your money when it hits 10 million, reality is if end goal is 10 million, at 5 million a coin you are already on a loss, is either you lose twice as much or you don’t, there is a turning point.
We need to remember again that wealth can’t be created is only distributed, if I bought bitcoin at 1$ and I hodled it through the hole pumping, now I have many times more wealth that I initially put in, where is that wealth coming from? obviously from other buyers. So there is no way in hell that everybody can jump on at different points and everybody will end up with same wealth or bigger.
Assuming everybody will jump in and never out until is fully pumped, it can be visualized like this:
With a final price of a million notice in the example the price distance between every box is 10x, this has a finite end (not counting for inflation), the “breaking even” box will not be half the final price but price divided by 1000, in this case everyone buying after $1000 would be paying for the others gains.
Now this is just an unrealistic and over simplified example just to show a point, thankfully bitcoin doesn’t work like that’s because of people fear and greed, they keep jumping in and out at different prices making a less brutal distribution and pushing the breaking even zone to the up side.
Nevertheless the breaking even point do exists, while is very hard to calculate, if you know everybody will be joining the scheme for sure (because of SF will choose it as the ultimate store of value over gold in the future), you will first be greedy trying to get into the green side, as everybody will try to do the same naturally there will be no room for everyone and the price will be quickly pushed into the breaking even zone and here is where fear and anxiety really kicks in.
Now that we understand how pump and dump schemes work, let’s see how in my opinion the wealth distribution should ideally look like:
I am not obtaining these numbers from any source, is just a wild guess, ideally the store of value market cap should pump once until is big enough to fit the demand for saving of the society in which point it will pump and dump at the same rate and goods and services value will be stable relative to them, if at any point society increases the saving culture it will grow, if saving decreases it will decrease, notice nobody should put wealth on the store of value market thinking it will grow just by being there but for later spending, if they want to increase their wealth they will need to outperform the society by providing better goods and services than the average people do.
Now this is how I think actual wealth distribution look like:
There is a reason why life seems to be more expensive now and middle class is disappearing, the financial system is a group of markets in which people put their wealth not for storing it but “make it grow”.
I explained how wealth can’t be created and as a market grows it has to take wealth from other markets, making everything else cheaper in comparison.
You may think that’s a contradiction as things look more expensive now, but they are not, they are cheaper but only for the people that got in the financial system markets before the “break even” area of this enormous pump and dump scheme, we pass the break even zone a while ago we were born in negative, is either you get into those markets now or you keep losing more.
You will notice the “investor” mindset society has built normalizing the system, we are told from young that working is for poor people and successful people don’t work for money but money work for them, for sure money will “work” really well for me if i had bought bitcoin at $1, now try at $5 million, see how rich you get.
But the are good news, this system has a flaw, it is finite as wealth is, there is a ridiculous amount of wealth that is held that is way bigger of the saving demand of the society, as initial investor are incredible rich they are very incentivized to spend their wealth on goods and services and therefore popping the bubble, why are they not doing so?
Simple, like any ponzi scheme there is always some kind of incentive to prevent “investors” from taking profits so that it keeps growing, in this case “investors” are waiting for another rally on the markets as there are some methods out there to “guarantee” it happening essentially taking wealth from whoever is not in the market.
If such rally doesn’t happen or if doesn’t compensates enough for big whales to hold their profits, they will consider leaving as they know other whales are considering leaving and is unsustainable without further rallying.
They need to exit just before everybody else to take the bigger piece, but their wealth is so gigantic that they may not be able to spend as fast, they are looking for a so called “safe heaven” so that they can put it in there and slowly spend through generations or “make it grow” even more.
Right now gold is considered the ultimate safe heaven as it is the best non ponzi store of value, if the SF/price hypothesis turns to be true the future of bitcoin will be priced in way early as a lot wealth would be moved into such safe heaven, because for sure gold mathematically will be a better store of value for a few more years, but not anymore if everybody knows it.
Let’s wrap it up, this is what I think may happen
Bitcoin will rally based on SF, less miners selling pressure and FOMO, at some point bitcoin will confirm the macro trend, confirm the SF correlation with gold, people will be using TA, fractals and many things to predict the cycle top and take profits.
Bitcoin will make a high that will surpass people’s expectations just before a big pull back that will seems to indicate the start of the new bear market.
That’s it, here we go, what a rally! news will be calling for the top by analysis “experts”, there would be big selling pressure as people would be taking their fiat profits or losses, some kids will finally buy their lambos, traders will be opening their leveraged short positions, everybody is all the sudden great traders, now everybody knows they need to accumulate as much as possible during bear market for the 2024 new bull run so that we can all moon.
So bad everybody is forgetting one important key for a bear market to happen, fear. There is not fear in the market after the confirmation cycle, bears were obliterated, all there is is greed and bulls acting like bears so that they can buy cheaper, is like if we all were whales manipulating the market, who will continue the downwards trend if there is no fear? If we all know it will rally on 2024, the only reason to sell is to buy cheaper.
People is waiting in the sidelines for lower prices to buy and hodlers would not sell not matter what, the lower it goes, the closer it is getting to “the bottom”, selling for buying cheaper is too risky at some point, would be better to just start dollar cost averaging in, that is exactly what everybody will do, that will be the bottom and as whales realizes that all they are doing by dumping is losing money and traditional markets are full of fear, they will start DCA way faster breaking previous all time high, this will break macro market structure, shorts stop losses will trigger followed by a immense flash pump and equivalent flash crash on traditional markets, this will shock the world.
Quickly it will pass the “break even” imaginary mark where profits are a thing of the past and losses starts to be taken in order to avoid further losses, specially from big players that can’t afford losing billions and governments as they will use their “wealth transfer machines” to buy all they can with their citizens money.
Almost any retailer that took fiat profit would refuse to immediately re-buy as they will feel stupid by doing so, the same reason people didn’t buy low in previous cycles as they just saw lower prices previously and ends up buying the most based on fomo at ATH, or refuse to sell during bear markets as they missed the chance to sell the top holding their losses until the bottom where they finally sell based on fud.
Mining will become ridiculously profitable, asic miners and gpus prices will go to the roof, there would not be enough hardware for mining such big reward, so energy cost will increase multiple times to compensate, this energy cost will gradually decrease as more people starts mining and after halvings reward cuts.
Is hard to tell how much time this pump will take from start to finish, or any specific price targets, no to even consider inflation here. There may be liquidity problems slowing it down.
And yet again, just like in the past, greed will be punished and whoever did hodl would outperform almost any trader out there.
How the economy will heal
After such pump most of the stored wealth will probably go directly to the goods and services market and ponzi schemes as people tries to keep “growing” their money, the rest will be kept in bitcoin.
As bitcoin doesn’t have a mechanism for discouraging spending (like promises for future gains) people with huge gains may start buying goods and services as the store of value market cap deflates to what it is supposed to look like, and while most people lost most of their life savings during the wealth transfer, making it back would be a lot easier now and middle class will rise again as their work will be correctly priced now.
I think this is more likely to happen that everybody expected scenario, but it stills pure speculation, at the end nobody really knows exactly what will happen, do your own research and proper risk management before taking any decision.
Stock to flow/store of value relation is yet to be proven by the confirmation cycle, the following years will be at least interesting.
Special thanks to PlanB once again for releasing such incredible model, showing a relation most people were completely ignoring.
Now I am curious to see a model taking a bunch of commodities at different SF except gold or bitcoin, each commodity having a weight on the model based on their market cap as the lower a market cap is, most probably is for it to be off priced than a bigger one. Then see how good gold and bitcoin will fit on such model.
Let me know your opinion about my SF analysis or price prediction, in which parts you agree or disagree, thank you for reading.
Everything is appreciated :).