Looking ahead to 2024, a growing number of investors are expecting the price of Bitcoin (BTC -2.41%) to surge in value. Some expect Bitcoin to soar past the $100,000 level, and still others expect Bitcoin to skyrocket past the $1 million mark.
But just how realistic are any of these predictions? After all, sometimes it feels like Bitcoin price predictions are based on nothing more than hope and a prayer. But there's one popular Bitcoin valuation model that has the attention of investors, and it's currently sending out some very bullish signals right now. Let's take a closer look.
The Stock-to-Flow model
While there are a variety of ways to model Bitcoin's future price, one of the most popular is known as the Stock-to-Flow (S2F) model. Simply stated, this is a way to model the future price of Bitcoin by treating it like a store-of-value commodity, much like gold, silver, or platinum. That makes sense, on a certain level, because Bitcoin has often been called "digital gold."
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The Stock-to-Flow model attempts to calculate the relative scarcity of Bitcoin in order to arrive at a valuation for the cryptocurrency. You simply divide the current existing supply of Bitcoin by the amount of new production that's coming online each year from Bitcoin miners and then plug this number into a simple mathematical formula. The Stock-to-Flow model relies on two primary inputs -- the amount of total circulating Bitcoin supply and the rate at which Bitcoin is currently being mined -- and both of these numbers are publicly available.
Right now, for example, the total circulating supply of Bitcoin is 19.444 million coins. From the original Bitcoin white paper, we know that the total lifetime supply of Bitcoin is capped at 21 million coins and that the final Bitcoin will be mined in the year 2140. Thus, 92.6% of all Bitcoin has already been mined, and over the next 117 years, there will be a race to mine the remaining 7.4% of Bitcoins that are yet to be produced. As the scarcity of Bitcoin increases over time, we would expect the value of Bitcoin to increase as well.
The Bitcoin halving
In 2024, things get really interesting because that's when the next Bitcoin halving takes place. In a halving event, the total reward for mining a new block of Bitcoin drops by one-half. This is determined algorithmically and can not be changed. This halving obviously impacts Bitcoin miners because it changes the amount of Bitcoin that they can mine. All things being equal, the same number of Bitcoin mining machines working at the same rate next year is going to produce half the amount of Bitcoin that they will this year.
This is important because it has an impact on calculations for the Stock-to-Flow model. If Bitcoin is being produced at a 50% lower rate (as a result of the mining reward being cut in half), that immediately changes the denominator of the Stock-to-Flow model, which in turn produces a much higher suggested value for Bitcoin. According to the Stock-to-Flow model, we would expect the value of Bitcoin to "jump" every four years, which is when every new halving takes place. And indeed, this has been the case in 2012, 2016, and 2020.
Drawbacks to this model
However, there are several drawbacks to using this model. For one, it only takes into account the supply of Bitcoin. It does not factor into account demand (i.e., all the potential use cases of Bitcoin). And, as anyone knows from an introductory course in economics, the way you arrive at a price of an asset is by taking into account both supply and demand. That's why other valuation models for Bitcoin might have more predictive power.
The other big drawback is that this model can come up with some pretty ridiculous price targets. During the last big crypto boom, for example, Fidelity Investments used this same model to come up with a theoretical price of $100 million for Bitcoin. (Yikes!) The latest Bitcoin price target is anywhere from $100,000 to $1 million, according to PlanB, the anonymous creator of the Stock-to-Flow model.
What happens to Bitcoin next?
If the Stock-to-Flow model is correct, then Bitcoin should be worth quite a bit more than it is now. Just how much higher, though, is still open for debate. Remember, as Warren Buffett once remarked, "Price is what you pay; value is what you get." So, just because a valuation model says Bitcoin should be worth $100,000 by 2024 doesn't mean that's the price that people are going to be willing to pay for it.
