Bitcoin Scarcity Model Hints at Massive Undervaluation

3 weeks ago

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Quick take

Bitcoin’s stock-to-flow (S/F) ratio, a model based on the principle that scarcity fuels value, appears to be regaining its predictive strength.

Historically, the price of Bitcoin has moved in tandem with the S/F ratio, making it a potentially useful tool for predicting future valuations.

However, the model deviated from predictions around April 2021, during the market’s bull run. Interestingly, with five months until the halving, Bitcoin’s trajectory appears to have realigned with the S/F ratio. Although it is still $65,000 short of the model’s prediction, the trend points in a positive direction.

Chart showing Bitcoin’s stock-to-flow ratio from 2010 to 2023 (Source: Glassnode)

The S/F deviation, measuring the divergence between the current Bitcoin price and the S/F pattern, suggests that Bitcoin is still significantly undervalued. This is based on the model’s assumption that a deviation greater than or equal to 1 indicates that Bitcoin is overvalued and vice versa. Notably, the only time Bitcoin was deemed more undervalued according to this model was during the 2022 FTX collapse.