One of the most important features of Bitcoin is its scarcity. Unlike fiat currencies that can be printed at will by central banks, Bitcoin has a fixed supply of 21 million coins that will ever be created. This makes Bitcoin a scarce asset, similar to gold and silver, which have limited supplies and are valued for their rarity. But how does Bitcoin’s scarcity compare to gold and silver? How can we measure the scarcity of different assets and what does it mean for their value?
One way to measure the scarcity of an asset is to look at its stock-to-flow ratio. This is the ratio of the existing stock of the asset (how much of it is available) to its annual flow (how much of it is produced each year). A higher stock-to-flow ratio means that the asset is scarcer, as it takes longer to produce more of it.
For example, gold has a high stock-to-flow ratio of about 62, meaning that it would take 62 years of current production to match the existing stock of gold. Silver has a lower stock-to-flow ratio of about 22, meaning that it would take 22 years of current production to match the existing stock of silver. Both gold and silver are considered scarce assets, as their production is limited by the availability of natural resources and the cost of mining.
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Bitcoin, however, has an even higher stock-to-flow ratio than gold and silver. As of August 2023, there are about 19.5 million bitcoins in existence, and the annual production is about 328,500 bitcoins (based on the current block reward of 6.25 bitcoins per block and an average block time of 10 minutes). This gives Bitcoin a stock-to-flow ratio of about 59, meaning that it would take 59 years of current production to match the existing stock of bitcoins.
But unlike gold and silver, Bitcoin’s stock-to-flow ratio is not constant. It changes every four years, when the block reward is halved. This means that the annual production of bitcoins decreases by 50% every four years, making Bitcoin scarcer over time. The next halving is expected to occur in May 2024, when the block reward will drop to 3.125 bitcoins per block. This will increase Bitcoin’s stock-to-flow ratio to about 120, making it twice as scarce as gold.
The stock-to-flow model, which was popularized by a pseudonymous analyst known as Plan, predicts that the value of an asset is proportional to its stock-to-flow ratio. According to this model, as Bitcoin becomes scarcer, its value will increase exponentially. Plan B has projected that Bitcoin’s value will reach $1 million by 2025, based on the historical relationship between Bitcoin’s price and its stock-to-flow ratio.
Of course, the stock-to-flow model is not a perfect predictor of Bitcoin’s value, as there are many other factors that influence the supply and demand of Bitcoin, such as regulation, innovation, adoption, competition, etc. However, the model does capture one of the key features of Bitcoin that sets it apart from other assets: its digital scarcity.
Bitcoin is the first asset in history that has a verifiable, immutable, and programmable supply. No one can create more bitcoins than the protocol allows, no one can alter the history of transactions, and no one can change the rules without consensus. This makes Bitcoin a unique form of money that is resistant to inflation, censorship, and corruption.
Bitcoin’s scarcity is one of the main reasons why many investors consider it a store of value, a hedge against fiat currency devaluation, and a potential global reserve currency. As more people recognize the value proposition of Bitcoin, its demand will likely increase, driving its price higher in the long term.
Bitcoin’s scarcity is one of its most important features that distinguishes it from other assets. By comparing Bitcoin’s stock-to-flow ratio to gold and silver, we can see that Bitcoin is not only scarce but also becoming scarcer over time. This implies that Bitcoin’s value will likely increase as well, according to the stock-to-flow model. While this model is not a guarantee, it does provide a useful framework for understanding how scarcity affects value.