The Stock to Flow model
The Stock to Flow (SF) model is generally relating to natural resources. The SF ratio is the amount of a particular resource held in reserves divided by the amount it is capable of producing.
The SF ratio shows us the amount of new stock (flow) which enters the market each year for a particular resource, relative to the total supply (stock). The lower the SF ratio, the higher is the new stock entering the market. In theory, a resource with a high SF ratio should hold its value well over the long-term. On the other side, consumable goods (FMCG, for example) usually have a low SF ratio.
# Gold, for example.
In total 190.000 ton of gold has ever been mined, in other words, the total supply or stock. Every year 3.000 ton can be mined; this amount can we refer to as the flow. Based on those two numbers, we can calculate the SF ratio.
Total Supply / flow = Stock to Flow ratio
190.000 ton / 3.000 ton = 63,3
The result is 63,3, so with the current yearly production, it would take 63,3 years to mine/produce the total supply. Gold is not rare; there is 190.000 ton in circulation. The SF ratio implies that it is valuable due to yearly production compared to the total supply is relatively small.
Total Supply * Current rate = Market Capitalization
190.000.000 kg * € 50.550 = € 9.604.500.000.000
The exact numbers are unknown; these are estimates of the World Gold Council, but the SF model remains the same.
Stock to Flow and; Bitcoin
The SF model is perfect for applying on Bitcoin
; there is a preprogrammed total supply of 21 million & a scheduled release of new coins (flow). At the time of writing, there is a circulating supply of ± 18.000.000 Bitcoins
and an annual new supply (flow) ± 700.000. So, the SF ratio for Bitcoin is ± 25. After the upcoming halving in May'20, the SF ratio will double to ± 50 as the annual new supply will halve.
The SF is an exciting model for measuring the scarcity of a particular asset, although it does not account all parts. Models are only as strong as their assumptions. In this case, the SF model assumes that the measured scarcity will drive value.