The Mathematical Formula Behind Bitcoin Bullishness: Crypto CEO – Business Insider

The Mathematical Formula Behind Bitcoin Bullishness: Crypto CEO – Business Insider

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  • Jack Mallers is the 28-year-old CEO of crypto payments app Strike.
  • Mallers told Insider that bitcoin is the best cryptocurrency to invest in right now.
  • Mallers said bitcoin’s stock-to-flow ratio sets bitcoin apart from all other crypto investments.

When Satoshi Nakamoto created bitcoin, he capped the total amount of the cryptocurrency that would ever exist at 21 million. 

Due to this inherent scarcity, investors ranging from Mike Novogratz to Bill Miller believe that bitcoin is the digital version of gold. It makes sense that, with a finite supply of bitcoin available to investors, the cryptocurrency only becomes that much more valuable the closer we get to the last bitcoin ever mined. 

Jack Mallers also believes that bitcoin is a form of digital gold, and in a recent interview with Insider he cited the specific mathematical model that predicts bitcoin will one day be the “hardest” asset, and why he thinks that makes the cryptocurrency an incredible investment opportunity.

Who is Jack Mallers?

Jack Mallers is a 28-year-old Illinois native who created the payment platform Strike, which uses the lightning network, a layer 2 bitcoin scaling solution, to improve the original blockchain’s speed, scale, and efficiency

Strike has found tremendous success in the five years since its founding. El Salvador, which made bitcoin an official currency last year, uses Strike’s app to allow vendors to send and accept bitcoin. Twitter’s tipjar — which allows for Twitter’s over-200 million users to use bitcoin as a payment — utilizes Strike’s plug-in to send bitcoin “tips.”

As Strike has grown, so too has Mallers’ authority in the cryptocurrency industry. In fact, Twitter and Block founder Jack Dorsey has cited him as an “incredible inspiration.”

Despite the bear market , Mallers maintains an absolute belief in bitcoin, and has previously stated that he believes the price of bitcoin could hit six figures as soon as this year

Mallers roots his optimism in the power of the stock-to-flow model. This model illustrates bitcoin’s scarcity compared to other assets, and proves that bitcoin’s price increases have been directly related to its rising scarcity — and that future price appreciation lies ahead. 

What is stock-to-flow?

Stock-to-flow measures how much of an asset exists in the world, and compares it to how many units of the asset are created each year. 

The model was pioneered by Plan B, a pseudonymous Twitter user with over 1.5 million followers, as well as a background in law and finance. On a recent episode of SALT Crypto with Skybridge Capital’s Anthony Scaramucci — who has described the model as being the “most prescient” for bitcoin valuation — PlanB explained stock-to-flow. 

“The stock-to-flow model basically says that if an asset is scarcer, then it should be more valuable,” PlanB said. “How do you quantify scarcity? There’s a known measure, the stock-to-flow measure, the number of years for a reserve for a certain asset to replenish the reserve that exists. The scarcer an asset, the higher the stock-to-flow ratio, the higher the value of that market should be.”

The stock-to-flow equation is simple: stock (or the total amount of asset available) divided by flow (how much of an asset is produced annually). The resulting ratio determines how scarce or abundant the asset is, and the higher the ratio, the more scarce (and therefore valuable) the asset is. Mallers would describe an asset’s stock-to-flow ratio as “hardness,” noting that “the harder a resource is, the more valuable it becomes.”

Stock-to-flow shows how bitcoin’s value rises over time

Below are the stock-to-flow calculations of gold and bitcoin — which have high stock-to-flow ratios — and zinc , which has a relatively lower stock-to-flow, and thus holds less value. 

The world’s supply (stock) of gold is 244,000 metric tons, and 3,560 metric tons are produced annually (flow). So its stock-to-flow ratio is roughly 68.5:

244,000 total supply (in tons)  / 3,560 total creation = 68.5 stock-to-flow ratio 

The world’s supply (stock) of bitcoin is 18,920,000, and 328,500 new bitcoins are produced annually (flow). So its stock-to-flow ratio is about 57.5:

18,920,000/328,500 = 57.5 stock-to-flow ratio

The world supply (stock) of zinc is 250 million metric tons, and 13.8 million metric tons are produced annually (flow). So its stock-to-flow ratio is roughly 18.1:

250/13.8 = 18.1 stock-to-flow ratio

What compounds bitcoin’s stock-to-flow ratio are its halving events. A “halving” refers to when a bitcoin miner’s reward for creating a new block on the bitcoin blockchain — paid in bitcoin — is reduced by half. Bitcoin halving occurs once every four years. 

For example, in 2020 the reward a bitcoin miner got for mining a block of bitcoin was cut in half from 12.5 btc to 6.25 btc per new block. The next halving event is in 2024, when the reward will be reduced to 3.125 btc.

Those who believe in the stock-to-flow model point to the fact that not long after each halving event, bitcoin’s price surges to a new all time high. After the 2016 halving, for instance, bitcoin’s price went from trading between $500 and $1,000 to $20,000. After the halving in 2020, the price climbed from $9,000 to about $30,000.

The next halving event is set to occur in 2024, at which point the global production of bitcoin is set to decrease 50%, thus making bitcoin a much “harder” asset according to the stock-to-flow model. 

When the halving occurs in 2024, the stock-to-flow of bitcoin would be 

(present stock) 18,920,000 + (2 x 328,500) (two years of production) = 19,577,000

328,500 / 2 = 164,250 (one half production after the halving)

19,577,000 / 164,250 = 119.19

This means in two years, bitcoin will become more than twice as “hard” as it is now, and its stock-to-flow ratio will easily surpass that of gold. 

Those who believe the stock-to-flow model has a positive financial relationship with halving events would argue that the 2024 bitcoin halving could drive the cryptocurrency to a new all-time high. 

Bitcoin’s downturn doesn’t mean the model is wrong

While the stock-to-flow model gained prominence during the last bull run, it has since received a lot of criticism in the recent bear market.

Critics say that according to the model, bitcoin should be closer to the market cap of gold, as their stock-to-flows are similar. However, while gold’s market cap sits at $11.7 trillion, bitcoin’s is just ​​$596 million, and the highest it ever reached was $1.27 trillion at its peak in 2021. 

Moreover, given the current crypto winter, many are losing faith in the stock-to-flow model. According to PlanB’s predictions last year, bitcoin should have touched $100,000 per coin in December 2021. Not only did it never hit that, it ended December down 17% and finished 2021 around $47,700.

Since then, bitcoin has fallen even further as stock market doldrums in 2022 sent cryptocurrency prices plummeting. Bitcoin’s price is currently hovering around $30,000, and there’s little sign that it will recover any time soon.  

Marcel Burger, the CIO of AMDAX Asset Management, told Insider about his issues with the model. “The stock-to-flow model was introduced as a model to forecast the future price of bitcoin,” Burger said. ‘As the model is built upon linear regression, but it doesn’t meet the required assumptions in order to do so, this model can’t produce reliable results.” 

While Burger said stock-to-flow is a failed econometric model, he did say there are some merits to it. 

“It is fair to assume that assets that get more scarce over time tend to increase in price. As long as demand remains equal, but supply decreases, I would expect prices to increase,” Burger said. 

In his discussion with PlanB, Anthony Scaramucci expressed his continued belief in the model despite criticism that it isn’t keeping up with bitcoin’s recent price movements. “There’s an expression that Warren Buffet has that I would rather be roughly right than precisely wrong,” Scaramucci said. “When you step back and look at it is doing more or less what you said.”

PlanB agreed, making it clear that his intention with the model was never to map out bitcoin’s price movements day-by-day, but rather to provide a guide for bitcoin’s potential price over the long-term.

“It’s a very principle-based, very intuitive-based thing that scarce things are more valuable. It uses that same scarcity to value bitcoin,” PlanB told Scaramucci. “It would not be very usable for trading, but it would be a very rough compass for investors.” 

For Mallers it’s the underlying idea of creating a store of value with high “hardness” that matters the most. He’s less interested in bitcoin’s daily moves, and far more focused on its long-term potential. And it’s bitcoin’s “hardness,” as illustrated by the stock-to-flow model, that makes him a bitcoin believer.

“Bitcoin has accomplished a hardness never before seen in our species history, it has set a record for hardness in stock to flow,” Mallers said.

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