In his recent interview with Anthony Pompliano, the pseudo-anonymous PlanB talked about why the stock-to-flow model which is used to quantify scarcity works.
An institutional investor, PlanB shared that this model works because the scarcer something is, the more valuable it should be. And another reason it works very well could be the Bitcoin network effects.
“There is a network effect of developers that more and more developers start working on Bitcoin and more and more merchants start buying and selling stuff with Bitcoin and and the number of investors keeps increasing and then there are all sorts of network effects in markets.”
He talks about how in the beginning there haven’t been any on-ramps and off-ramps but now there are exchanges in every country. We also have derivatives, futures, and options markets.
“So, it could be that the stock to flow is quantifying the underlying network effects in Bitcoin,” said PlanB who has an economics degree in quantitative finance and a law degree in financial markets law.
The start of Bitcoin, which has been during the global financial crisis, central banks have started to print trillions of dollars, euros, and yen and this money is used for buying bonds that help States and also for buying mortgages.
“So, it could be that a little bit of that money is somehow finding its way into Bitcoin and that Bitcoin measures the increase in money supply, if you will, of all those fiat currencies.”
Yet another potential reason why does S2F works are HODLers which means that there are people that really believe in Bitcoin no matter what, so they stick to it and keep the bitcoin through crashes.
These real holders are like loyal shareholders of a company that don't immediately sell the stocks and split up the company but let them build. And the same is true for Bitcoin,
“the act of holding is very important and might also be something that is quantified by S2F.”
Cointegration is getting stronger
The Dutchman who is in his mid-40s also shared that he first discovered Bitcoin in 2013 when he read the whitepaper and got hooked. However, he didn't buy any BTC until 2015 which was a private investment and not as an institutional investor.
Bitcoin is an asset with a Sharpie ratio bigger than one meaning that a return percentage is bigger than the risk percentage which not many or any have.
PlanB further talked about the cointegration of BTC price and S2F which he said is “getting stronger over time.”
However, the steelman argument against S2F is the efficient market hypothesis that says there's no free lunch and the fact that you use information that's out there in the public and a formula that is publicly known and that could not be a profitable thing because it's out in the open.
As for how bitcoin will do in an economic slowdown, the digital asset hasn't experienced one but it was created at the height of the global financial crisis. He said,
“We haven't had a crisis to test it on but I think that it might be a bit similar to the internet. The internet was built as a communications protocol that kept working under enormous machine nuclear wars.”
“Bitcoin is a bit like that, it's very decentralized; there are hundreds and thousands of nodes at ten thousand relaying nodes around the world. So, even if there's a really big crisis or a nuclear war, Bitcoin will relay transactions. It will keep working even if all the nodes on earth are gone because there are also nodes in space.”
“I think Bitcoin is made for a situation like this.”
You can watch the full interview here:
An institutional investor, PlanB shared that this […]