Bitcoin flow analysis

The popular stock-to-flow bitcoin valuation model has the air of academic and its mathematical basis is beyond the scope of this analysis.
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Most flows on the blockchain are assets in transit between services, moving via unknown entities. Assets flow between exchanges as traders balance assets across venues, each of which offers different prices, liquidity and products. Flows to crypto-to-fiat exchanges suggest people are interested in cashing out to fiat, while flows to crypto-to-crypto and derivatives-only exchanges suggest people are interested in the broader set of trading opportunities typically available on these exchanges.

See how this data shows bitcoin getting older and colder in Q2 while Tether started to act as a store of value. Age is the time an asset is held by an entity. The longer an asset is held, the more likely it is that holders are using the asset as a store of value or are inactive. Liquidity is the degree to which an entity sends on assets it receives. Illiquid entities act as sinks, reducing the number of assets available to buy. An increase in illiquid assets may therefore potentially increase prices. The unrealized USD gain or loss of assets held by entities, relative to their value when the entity received them.

Why the Stock-to-Flow Bitcoin Valuation Model Is Wrong

The greater the unrealized gain the more likely an entity is to send assets to an exchange to sell, thereby realizing the gain, unless the entity is inactive. Dive deeper into mining pools and their role in the market with our recent report. Mining pools typically receive newly mined assets, then distribute these to miners who are members of the pool. Miners may then send assets to other destinations, such as exchanges, where assets may be sold to cover the costs of mining.

Bitcoin and the Stock to Flow Model | Binance Academy

The current circulating supply of Bitcoin is approximately 18 million bitcoins, while the new supply is approximately 0. After the next halving in May , the ratio will increase to the low 50s. Stock-to-Flow Model for Bitcoin. Source: LookIntoBitcoin. Sneak a peek at the latest Bitcoin BTC prices today.

What Is Bitcoin Mining?

Models are only as strong as their assumptions. For one thing, Stock to Flow relies on the assumption that scarcity, as measured by the model, should drive value. This is confirmed by historical data from Coinmetrics. Source: Coinmetrics. The valuation of an asset requires taking into account its volatility. If the volatility is predictable to some extent, the valuation model may be more reliable. However, Bitcoin is notorious for its large price moves. While volatility might be decreasing on the macro level, Bitcoin has been priced in a free market from its inception.

This means that the price is mostly self-regulated on the open market by users, traders, and speculators.

BTC inflows to exchanges

Combine that with relatively low liquidity , and Bitcoin is likely to be more exposed to sudden spikes of volatility than other assets. So the model may not be able to account for this either. Other external factors, such as economic Black Swan events , could also undermine this model. A Black Swan event, by definition, has an element of surprise.

The Stock to Flow model measures the relationship between the currently available stock of a resource and its production rate. New York, NY: Springer. Heusser, J. Bitcoin trade arrival as self-exciting process. Accessed 10 Feb Hileman, G. Global cryptocurrency benchmarking study. Cambridge Centre for Alternative Finance.

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Pagnottoni, P. Price discovery on Bitcoin markets. Pasquale, F. Cardozo Law Review , 36 , Plerou, V. Quantifying stock-price response to demand fluctuations. Physical Review E , 66 2 , Russo, C. One of the biggest crypto exchanges goes dark and users are getting nervous. Accessed 14 Feb Shah, D. Bayesian regression and Bitcoin. In 52nd annual Allerton conference on communication, control, and computing Allerton pp.

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