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BNY Mellon criticizes prediction models for Bitcoin

Photo of: Nathan VDH
by Nathan VDH

Investment service BNY Mellon looks at models for predicting the price of Bitcoin, including the popular stock-to-flow ratio (S2F). Are they relevant?

Who wouldn’t like to be able to predict the price of Bitcoin with relative certainty? Its fluctuations, denounced as erratic by its detractors, complicate the work of forecasters. And yet, there is a great demand for such forecasts among investors.

Several financial models are currently used for this exercise. But are they really relevant? Experts from the investment bank BNY Mellon have written a report on the subject.

The first of these is the net cost model. It is based on the analysis of the physical cost of Bitcoin mining. “However, does this cost set the price of bitcoin? Arguably not,” financial analysts respond, however.

In the crypto world, another model is preferred, the stock-to-flow (S2F). In fact, it is preferred by BNY Mellon’s report, despite its weaknesses. It is in fact presented as “one of the most interesting valuation concepts and deserves to be understood despite its flaws. “

S2F is not the monopoly of Bitcoin. It is used more globally to predict the value of commodities, including gold. Its principle is simple. Commodities like gold have the highest stock-flow ratios, over 50.

In other words, it would take more than 50 years of gold production to obtain the current gold stock. It is indeed no coincidence that gold and BTC are so often compared. Their value depends in particular on their scarcity and therefore on the supply, which is limited in the case of the crypto-asset.

In the case of Bitcoin, this S2F ratio is in the 20s. “Current S2F linear models extrapolate a price based on the increase in the S2F ratio of bitcoin (from halving) to eventually reach the capitalization of the gold market,” the bank further states.

But it also recalls that the S2F has its detractors. And their argument is this: supply does not define the price. And this is true for gold. Its price has fluctuated massively in its history, even as its S2F was around 60.

Indeed, other parameters come into play. Thus, “the majority of gold’s movements can be explained by the purchasing power of the U.S. dollar, and that the buying/selling of gold is based on expectations of inflation or depreciation of the currency. “

“In many forms, the S2F model is elegant (and potentially flawed) in its simplicity. It provides that relativity to link bitcoin to a much more established gold market/framework,” so judges BNY Mellon.

That leaves the 3rd model, or stock-to-flow cross asset model (S2FX). According to this model, the halving in May should have resulted in a price for Bitcoin of $50,000. But it was only $10,000 at the time.

In short, these different models have obvious flaws. A surprising conclusion? Not at all. And the experts remind us that evaluation is ultimately more of an art than a science. This is confirmed by the currency market. Several models coexist there, each with its “own strengths and weaknesses”.

“In the end, the valuation of bitcoin will probably be a combination of several models and will be in constant evolution, especially as it gains public acceptance,” the report states.