Riffing on the Stock-to-Flow Model

In the jungle of the fiat world, there are crafty creatures known as scammers who have a distinct trait: they never admit they're wrong. You could proclaim, "Hey, this isn't working!" They'd shake their heads, waggle a finger, and claim you simply misunderstood. Suggest that Bitcoin would be a more useful route? They'd passionately argue for a convoluted token system. Even if you stated the obvious - that the sky is blue - they'd spin doubts about your statement by talking about its purple hues.

You see, scammers, like poker players, know that a single misstep can shatter the illusion of trust they've carefully built up with their victims. They've been so deeply conditioned to lie that they'll parry any perceived attack, all to maintain their delicate house of cards.

Now, let me make it clear, I'm aiming to be brutally honest with myself. I've previously analyzed the stock-to-flow model and, with conviction, declared it the only price model that made sense with me. While that hasn't changed entirely (though that says more about price models than this particular one), I've realized that something making sense doesn't necessarily make it true.

The past 18 months have been a philosophical sabbatical from the price-driven narrative of Bitcoin, mainly because this particular set of models have let us down. It was wrong, and there's nothing like a major error to trigger some deep self-reflection. So, armed with introspection and hopefully, some humility, I pen this article.

Let's revisit the source - the stock-to-flow model. My understanding of it, and I suspect, many others, hails from Saifedean Ammous's enlightening work, *The Bitcoin Standard*. It suggests that the existing stock of an asset, coupled with its annual increase, reveals how challenging it is for us humans to accumulate or create more of it. This is the core concept, and it's a handy tool for understanding relative scarcity and the effort needed to obtain a certain resource.

However, the model is a very different thing. Initially, the S2F model was a clever method to link an asset's stock-to-flow ratio with its market cap. At first glance, it seemed plausible; scarcity does, after all, influence price. But, as I reflected, I realized that scarcity is just one cog in the vast machinery of price determination.

Scarcity can nudge supply and possibly demand, but there's so much more involved. When it comes to supply, think about the influence of knowledge, technology, labor, and time. On the demand side, factors multiply - potential uses of the asset, liquidity, portability, and so on. So, the price, and thus, the market cap of an asset, isn't a straightforward equation of a single variable like scarcity.

In retrospect, I see now that many of us, myself included, yearned for this model to hold true. We were seduced by the possibility that since the supply of Bitcoin is so predictable and known, we could perhaps also do the same with price. The S2F/S2FX models promised the allure of future knowledge in the rollercoaster ride that is Bitcoin's global adoption.

Could there still be a model out there that accurately mirrors price? Possibly. But as with any hypothesis, it must stand the test of accuracy. If it doesn't hit the mark, it's time to swallow our pride and admit we got it wrong. It didn't and I was wrong.