Pseudonymous peddler of Bitcoin’s “stock-to-flow” price model PlanB pledged to invalidate his projection if BTC would not reach $100,000 by December 2021.
More than three weeks into the month, Bitcoin trades for less than $50,000, having never come close to six figures throughout November.
PlanB, who now commands a 1.6 million-strong Twitter following, popularized stock-to-flow as something of a stand-in for scarcity.
Even though Bitcoin will remain inflationary until its final coinbase reward (expected in 2140), the model comforted investors who believed that BTC could be evaluated akin to gold.
“Stock” (above-ground, mined metal) is regularly measured against “flow” (newly unearthed metal) by professional bullion investors.
- Stock-to-flow involves a simple ratio between Bitcoin’s circulating supply and the amount of BTC generated through mining.
- It became popular as it predicted large price rallies for Bitcoin — such as $100,000 by now — which attracted crowds of bullish investors.
- The model’s name borrowed a common calculation for valuing precious metals like gold.
In his 2019 introduction, PlanB argued the predictability of Bitcoin’s circulating supply relative to its mining production explained its explosive success and makes it possible to predict future prices with reasonable accuracy.
Indeed, PlanB has repeatedly argued he could use scarcity-based calculations to predict Bitcoin’s price.
Bitcoin stock-to-flow’s kryptonite: autocorrelation
“A statistically significant relationship between stock-to-flow and market value exists. The likelihood that the relationship between stock-to-flow and market value is caused by chance is close to zero,” wrote PlanB in March 2019.
According to PlanB, stock-to-flow predicts demand for Bitcoin over time. It does not.
PlanB created a chart using an “Ordinary Least Squares” price regression against the gold industry’s stock-to-flow ratio.
However, he failed to account for autocorrelation (also known as serial correlation), a concept that invalidates the predictive power of his model.
Autocorrelation describes the statistical phenomenon of previous price points influencing subsequent points in a series.
It mathematically calculates the degree of similarity between events in one time series and a lagged version of the same time series over successive time intervals.
Technical analysts like PlanB commonly fail to understand autocorrelation. Indeed, PlanB has for years refused to understand the flaw in his model; fundamental events can also influence the price of any asset.
Scarcity matters (but not all the time)
China sometimes impacts Bitcoin’s price by enforcing unfriendly policies toward crypto.
So, it’s no surprise that most technical analysts’ models (like stock-to-flow) break down when unexpected events occur.
The following events all helped BTC reach all-time highs this year:
- El Salvador’s adoption of Bitcoin,
- the SEC’s first approval of an ETF,
- and record-breaking fiscal stimulus.
PlanB attempted to account for this by sorting events from Bitcoin’s life into “phases.” This relied on random assumptions and arbitrary clustering to show a regression line.
He conveniently shrugged off Elon Musk’s tweets about Bitcoin’s energy use and China’s crackdown on mining, both of which caused the price to plummet.
Stock-to-flow’s flaws led several observers to call on PlanB to scrap the model and try again with something more predictive, which doesn’t rely so much on how scarcity related to price in the past.
Indeed, with 1.6 million exact phrase results on Google, the most common disclaimer on financial products is: “past performance is not indicative of future results.”
Based on US Securities and Exchange Commission Rule 156, it is an enshrined axiom of finance that everyone doubts at some point in their career, to their own peril.
This was a major flaw in PlanB’s logic.
PlanB has admitted that Bitcoin would need a “small miracle” to reach $100,000 this month.
But even if it doesn’t, PlanB did promise in June to proclaim stock-to-flow invalidated should Bitcoin be where it is today.
Chameleon or rainbow, pick your poison
PlanB’s Stock-to-Flow can be described as a “chameleon model.” Stanford professor Paul Pliefderer coined the term to detail models built on disputable, shaky logic but still attract significant attention and respect.
Pliefderer wrote in his 2018 book Chameleons: The Misuse of Theoretical Models in Finance and Economics (via Strix Leviathan, our emphasis):
“Imagine an asset pricing model based on the assumption that there is no uncertainty about any asset’s returns. No serious person would suggest that the predictions of the model should be subjected to rigorous empirical testing before rejecting it.”
“The [chameleon] model can be rejected simply on the basis that a critical assumption is contradicted by what we already know to be true.”
In any case, if the chameleon stock-to-flow isn’t your vibe, why not predict Bitcoin prices with rainbows?
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