Plan B's Bitcoin Price Prediction: Myth or Not?

George Box’s well-known saying, “All models are wrong, some are useful” can also be applied to the infamous Stock-to-Flow model (S2F), which has garnered significant attention over the years.

The model was popularized by an anonymous analyst named Plan B in 2019, but does it still have any statistically significant predictive power? Let's find out!

The Stock-to-Flow Model

Definition and Key Components

The Stock-to-Flow ratio is a measure of the scarcity of an asset. It is calculated as:

Current supply of bitcoin / yearly production of bitcoin

• Stock: The total supply of bitcoin currently in existence.
• Flow: The yearly production of new bitcoin.

The current supply of bitcoin is 19.71 million, and the total number of bitcoin issued annually during this epoch is 164,250.

19,710,000/164,250 = Stock to Flow of 120

But what does the above 120 represent? It is the number of years it would take for the bitcoin supply to be recreated at the current rate of new issuance. In other words, a higher S2F ratio indicates greater scarcity of the asset.

Historical Context

Before being used by Plan B, the Stock-to-Flow ratio was used in commodity markets such as gold and silver, each of which had Stock-to-Flow ratios of 22 and 70 respectively.

Previously, gold had the highest Stock-to-Flow ratio of any asset. With the recent halving of the bitcoin supply, bitcoin’s Stock-to-Flow ratio has surpassed gold’s.

What is unique about bitcoin is that the supply is capped at 21 million. With silver and gold, more can be found and mined as long as it is financially feasible. Bitcoin’s Stock-to-Flow will continue to nearly double every four years. This will make a comparison to any other asset using the Stock-to-Flow ratio laughable.

Who is Plan B, and Why is His Model Popular?

Background of Plan B

Plan B is an anonymous institutional investor with a strong background in traditional finance. He is known for his detailed analyses and contributions to Bitcoin market trends.

His insights have caused many to have a bullish outlook on bitcoin’s short-term price action. His models are widely discussed, and they have caused others to combat the model vigorously.

Popularity of the S2F Model

The Plan B’s Bitcoin S2F model gained popularity due to many reason, including:

• Simplicity: Easy-to-understand calculations.
• Historical Success: Accurate bitcoin price predictions in previous cycles.
• Influence: Persuasive arguments backed by compelling charts.

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Source: Bitbo

Why Plan B’s Model Is Wrong

Criticism and Flawed Assumptions

Despite its popularity, the Plan B’s S2F model has been criticized for several reasons:

• Oversimplification: It primarily focuses on scarcity, ignoring other market complexities.
• Historical Data Reliance: Assumes past trends will repeat without accounting for potential future changes (e.g., regulation, technology).

Evidence Against S2FInstances where bitcoin’s price deviated from S2F predictions highlight its limitations. The chart below shows prices in each of the months cited. March 2019 is when Plan B published his first article about the model. The chart starts in March 2019, followed by six-month increments. Notably, these six-month increments miss the extreme highs and lows of the last cycle.

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The discrepancies of this model show that it is challenging to predict bitcoin’s price, even if the model seems to be directionally correct across cycles.

The Pitfalls of Relying Solely on Technical Models

Technical Limitations

Models like S2F can fall short due to volatility and predictive bias. High price volatility makes it difficult for any model to predict movements precisely. Predictive bias means models can fit historical data while failing under new conditions.

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Broader Market Considerations

Bitcoin price predictions must also consider regulatory changes, such as policies that impact liquidity and market access. They must also be paired with macroeconomic trends like inflation rates and technological innovations that impact use cases and overall Bitcoin adoption.

Complementary Tools to Plan B’s S2F Model

Again, all models are flawed. This does not keep individuals from seeking a directional understanding of bitcoin’s price movement in the short to mid-term. Some of these tools include the below:

1. On-chain Analysis

• Active Addresses: Track the number of unique addresses interacting with the Bitcoin network daily. A rising trend suggests growing user engagement and potential demand.
• Transaction Volume: Analyze the total value of Bitcoin transacted daily. Higher volumes can indicate increased market activity and liquidity.
• Network Hash Rate: Monitor the total computational power securing the network. A higher hash rate signifies a more secure network and can be seen as a positive indicator of long-term price potential.

2. Sentiment Analysis

• Social Media Trends: Gauge market sentiment by analyzing discussions and trends on platforms like Twitter, Reddit, and specialized crypto forums. Positive sentiment often precedes price increases.
• News and Media Coverage: Track mainstream media coverage and expert opinions on Bitcoin. Positive news can drive adoption and influence price movements.
• Fear and Greed Index: This index aggregates various sentiment indicators to provide a snapshot of market emotion. Extreme fear or greed can signal potential turning points.

3. Technical Analysis

• Chart Patterns: Identify common patterns like head and shoulders, double tops/bottoms, and triangles, which can offer clues about potential price reversals or continuations.
• Moving Averages: Use moving averages (e.g. 50-day, 200-day) to identify trends and potential support/resistance levels.
• Relative Strength Index (RSI): This momentum oscillator helps identify overbought or oversold conditions, potentially signaling a price reversal.
• Fibonacci Retracement: Apply Fibonacci retracement levels to potential support and resistance areas based on prior price swings.

The Psychology of Hodling: Fostering Habits

Understanding investor psychology is crucial:

• Behavioral Biases: FOMO (Fear of Missing Out) and FUD (Fear, Uncertainty, and Doubt) often drive irrational decisions.
• Market Sentiment Analysis: Understanding the outlook of those in the broader market provides perspective beyond one’s limited view.
• Long-term Trend Awareness: While bitcoin can be highly volatile to the downside, over the long term, bitcoin’s price has trended upward at a remarkable pace.

The Power of Hodling

Historical data shows that “hodling” can outperform frequent trading. The term “hodling” was originally a misspelling of “holding” on a now-legendary post on the BitcoinTalk forum. It has now been popularized as an acronym meaning “hold on for dear life.” This mirrors the adrenaline rush of never selling bitcoin, regardless of price. This approach can outperform frequent trading due to Bitcoin’s significant and unpredictable runs to the upside and the lack of capital gains taxes that short-term trading creates.

Hodling is simple, but it is not easy. Similarly, Bitcoin is a relatively simple idea – hard money for long-term savings. However, it can be challenging to defer gratification in the short term. For those who do, whether the price appreciation follows the S2F model over the long term or not, the benefit should be significant.

Conclusion

Plan B’s bitcoin prediction through his Stock-to-Flow model offers a fascinating lens into bitcoin’s scarcity-based valuation. However, relying solely on any single technical model overlooks broader market dynamics and psychological facets crucial for long-term investment success. By integrating additional tools and adopting resilient investment habits like hodling, investors can achieve a more balanced and informed approach to maintaining steady hands during bitcoin’s inevitable price volatility.

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