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Thoughts on Bitcoin S2F Model
The S2F model of BTC proposed by PlanB was proposed with respect to USD as a unit of measurement. However, the USD money supply is always changing as money is being created via credit expansion and destroyed via debt defaults.
- How does it still make sense?
I assume the model wouldn’t make sense w.r.t. Argentinian peso or Turkish Lira. - Did it just happen that
credit expansion offset money destruction via defaults in USD, and/or because USD is the least inflated currency worldwide?
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I know that PlanB has re-created the model with respect to gold, and that makes more sense to me since gold has a more stable supply growth (1-3 %).
- What was R2 of (S2F
w.r.t. Gold) vs (S2F w.r.t. USD)? I
couldn’t find the answer vs gold. For USD it is 0.92 or 9.96 depending on
whether you use actual S2F or original S2F schedule. - Is there a way to take out
the gold supply growth variations out of the equation? In other words, can
we assume that the gold supply growth is constant (say 2%), adjust the
price, and recreate the model? The answer is possibly no, because it is hard to predict the effect of varying supply growth on the price of gold. Any thoughts on that?
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- How does it still make sense?
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6 Replies
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Normalizing to the price of gold is a good idea. Unfortunately, the price of gold is being manipulated by US and other central banks. If they allowed the gold price to rise as fast as _real_ inflation, people would freak out — and their little scam would fail.
If we could find an asset that is truly constant-value and has a price that “floats” against the dollar, then we could measure the _real_ inflation rate. Sadly, I cannot think of any such thing. Platinum’s price is obviously being manipulated just like gold (just look at the historic price curves). Two metals that might have escaped manipulation so far are Palladium and Rhodium.
Palladium resists corrosion like Platinum, but there is a lot more of it around. The mining rate could be adjusted to balance the price, so stock to flow predicts that it isn’t a good basis for a standard.
Surprisingly, Rhodium is the “truly” most precious metal in the world, even though most people say, incorrectly, that position is held by gold. Rhodium (Rh) is also in the class of Platinum-like metals. Rh is extremely resistant to corrosion just like Gold, and makes the option of a Rh-standard seem interesting.
The Rhodium flow is extremely low b/c it is very hard to mine. Basically, you have to mine Platinum and then throw away 90% of the ore (the Platinum part) and extract Rhodium from the rest. The downside of Rh is that it has very important industrial metal for catalytic converters, so the Rh is used up (i.e. destroyed) by industry faster than it can be mined. So there is no Rh stock, and it is a poor candidate for a monetary standard.
If anyone can suggest a commodity that has a stable real value that is not manipulated by the central bank, and has a high stock to flow, then I’d be happy to hear about it.
I don’t have sufficient motivation to look up the references I used to write this message.
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Thanks Gerald for the reply. That’s true. The price of gold is manipulated by central banks who own 15-20% of gold supply.
From quick research, I believe the consumption of Rhodium is very high compared to its production. That makes it more like oil in that sense. Even if it’s scarce, the fact that its stock gets destroyed/consumed all the time makes it bad candidate to be treated as money.
I think that the S2F model will fail after one or two more halvings. It’s probably just a coincidence, but who knows? I don’t mind being wrong on this one. If it continues to be true after two halvings, that would be astonishing.
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Maybe the “predictability” of the USD inflation rate improves the model’s accuracy. I think you can make a pretty good s2f model using the argentinian peso for your data points but since the inflation rate is more unpredictable it will not be as accurate.
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That’s a good point. The predictability of the USD money supply inflation is probably the answer as you mentioned. That begs the question would the model continue to be valid after the massive USD money supply inflation created by the stimulus packages? If anything the model should fail in the upward direction causing a crack-up boom in the price of bitcoin.
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What I don’t understand is S2F versus S2FX. PlanB’s S2FX regression line eliminates time on the X-axis and adds real estate as a data point, and in the process the expected price of BTC in this cycle goes from $55,000 in S2F to $288,000 in S2FX. This is too big a difference. What is it due to? I suspect the regression line steepens more than really reflects reality, and therefore, the expected price of BTC is too high, because in S2FX BTC is not discounted adequately to reflect how new and risky it is. Certainly it’s reasonable to expect to see gold and real estate, both asset classes that have existed for all of recorded history, on the S2FX regression line. But it strikes me that while BTC may someday be on that regression line, it will take years for it to get there. On a risk-adjusted basis, BTC should be valued cheaper. Therefore, shouldn’t BTC be valued more along the S2F line than the S2FX line, and shouldn’t BTC’s expected value in 2021 be closer to $55,000 under S2F than $288,000 under S2FX? I know that $55,000 may be the mean while $288,000 is the top; but, still, is the added value from S2FX justified? If so, can any readers please tell me what I’m missing?
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I think you are right. I believe the difference arises from relying too heavily on supply estimates of gold and silver
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