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Vitalik disagrees with stock-to-flow model: Price increase is not directly related to block reward halving

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Vitalik disagrees with stock-to-flow model: Price increase is not directly related to block reward halving

Ethereum co-founder Vitalik Buterin pointed out on Twitter yesterday that the claim "Bitcoin's block reward halving will affect the price" is unfalsifiable. He also stated that he does not agree with the theoretical basis of the Stock-to-Flow model for Bitcoin developed by PlanB.

Vitalik Disagrees with the Basis of S2F Theory

The Stock-to-Flow (S2F) model for Bitcoin valuation was proposed by an anonymous analyst known as PlanB and was first introduced in March 2019. PlanB defines Bitcoin as a digital asset based on peer-to-peer (P2P) networks, cryptographic algorithms, and proof of work, with scarcity. The Stock-to-Flow model is a valuation model that quantifies scarcity to estimate future prices; generally, the higher the Stock-to-Flow ratio, the higher the asset's valuation.

However, relying solely on scarcity to predict Bitcoin prices has raised doubts about the model's effectiveness. Ethereum founder Vitalik Buterin recently reiterated on Twitter his disagreement with the validity of this valuation model. Earlier reports indicated that as early as March of this year, Vitalik had stated that he believed the valuation model to be one of the 95% of "garbage" posts on the internet.

Since the model is primarily based on scarcity, and each Bitcoin block reward halving affects Bitcoin's scarcity, Vitalik agrees that Bitcoin prices tend to rise before each halving event. However, he does not agree with the theoretical basis of the Stock-to-Flow model. His reasoning is that the theory of "halving leading to price increase" is not falsifiable; in other words, while prices tend to rise before and after halving events, there is no evidence to prove that the price increase is directly caused by the halving. Finally, Vitalik pointed out that the peak of $20,000 occurred at the end of the second year post-halving in 2016, followed by a decline, demonstrating that there is no direct correlation between the two.

Bitcoin Demand Influences Price More Than Supply

Another blind spot of the Stock-to-Flow model is that it focuses only on changes in the supply side, assuming that demand is constant or steadily increasing. We all know that the total supply of Bitcoin is constant, and everyone is aware that Bitcoin is designed to be deflationary, so unexpected changes in the supply side are unlikely. However, Bitcoin's demand is not fixed, so the impact of demand on Bitcoin's price may be greater than that of supply. Yet, the design logic of the Stock-to-Flow model only focuses on supply, which has become one of the criticized blind spots.

Interestingly, shortly after, PlanB himself responded positively to Vitalik's criticism under his tweet:

"I respectfully disagree. Halving creates scarcity in BTC, and the value of scarce assets (such as BTC, gold, silver, etc.) seems to be higher than non-scarce assets. Peaks are not that important (peaks are caused by greed and Fomo), what matters is the average price level."