The Halving and the Stock-to-Flow Model: Bitcoin’s Built-in Scarcity

Unlike traditional fiat currencies, which can be printed in unlimited quantities by central banks, Bitcoin has a unique and unchangeable monetary policy that is written into its code. At the heart of this policy are two interconnected concepts: a fixed supply of 21 million coins and a periodic event known as “the halving.”

These two features combine to create a system of provable digital scarcity, a property that is the foundation of Bitcoin’s value proposition. The most popular model for quantifying this scarcity and its relationship to price is the “Stock-to-Flow” (S2F) model, a framework borrowed from the world of precious metals that has become a cornerstone of Bitcoin valuation theory.

The mechanics of the bitcoin halving

New Bitcoins are created as a reward for the “miners” who process transactions and secure the network. This reward, known as the “block subsidy,” is cut in half approximately every four years (or every 210,000 blocks). This event is the halving.

When Bitcoin was created in 2009, the block subsidy was 50 BTC. In 2012, it was halved to 25 BTC. In 2016, it was halved to 12.5 BTC. In 2020, it was halved to 6.25 BTC, and the most recent halving in 2024 reduced it to 3.125 BTC. This process will continue until the last Bitcoin is mined sometime around the year 2140. The halving has a direct impact on the supply side of Bitcoin’s economic equation. Each halving event represents a “supply shock,” dramatically reducing the rate at which new Bitcoins are created and increasing the scarcity of the asset.

The stock-to-flow (S2F) model explained

The Stock-to-Flow model is a way to measure the scarcity of an asset. It is calculated by dividing the total existing supply of an asset (the “stock”) by its annual production rate (the “flow”). A higher S2F ratio indicates greater scarcity.

For example, gold has a very high S2F ratio because its existing above-ground stock is massive compared to the small amount that is mined each year. The S2F model for Bitcoin applies this same logic to the digital world. The “stock” is the current circulating supply of Bitcoin, and the “flow” is the number of new Bitcoins being mined each year. Because the halving cuts the flow in half every four years, Bitcoin’s S2F ratio doubles with each halving event, making it programmatically more scarce over time.

The S2F model and its correlation with price

What made the S2F model famous is its remarkably high correlation with the price of Bitcoin. When Bitcoin’s price is plotted on a logarithmic scale against its S2F ratio over time, the price has historically followed the model’s predicted value with a high degree of accuracy. The model suggests that there is a direct, power-law relationship between scarcity (as measured by S2F) and value.

Historically, the periods following each halving event have been characterized by massive bull runs in the price of Bitcoin, as the supply shock of the halving kicks in and the market reprices the asset to reflect its new, higher level of scarcity. While the model is controversial and its predictive power is a subject of intense debate, its historical accuracy has made it a key tool for many long-term Bitcoin investors.

Criticisms and considerations

The S2F model is not without its critics. The primary criticism is that it is a supply-side model that completely ignores the demand side of the equation. An asset can be scarce, but if there is no demand for it, it will have no value.

Critics argue that the high correlation between the S2F model and price is simply a coincidence and that the price of Bitcoin is driven by a host of other factors, from macroeconomic conditions to regulatory news. They also argue that as the market matures and becomes more efficient, this simple supply-side model is likely to break down.

Despite these criticisms, the S2F model remains a powerful narrative and a useful framework for understanding Bitcoin’s unique economic properties. It is a key part of the toolkit for any trader looking to go beyond simple price charts and understand the deeper economic forces at play, a discipline that is central to any study of Technical Analysis and its relationship with market fundamentals.

For those looking to trade based on this long-term thesis, a reliable and secure platform like the YWO trading platform is essential for holding the asset over the multi-year cycles that the model describes.