Many gurus (some of which are friends of mine) are using a Bitcoin Pricing Model that has received an incredible amount of attention globally.
Nothing makes me happier than the math guys getting attention – except, of course, when the math is wrong.
The model getting the markets all hot and horny is called the “Stock-to-Flow Cross Asset Model”, or S2FX for short.
The author (who remains anonymous) says that this model can accurately price not just assets like Bitcoin, but also things like gold and silver.
If that sentence above hasn’t gotten alarm bells ringing in your head yet, it should.
Why do I say this?
Because the Stock-to-Flow model isn’t new. Mr. Anonymous’ model, as presented by Bitcoin gurus, is being talked about as if it’s as compelling as Einstein’s Theory of Relativity. Which, by the way, has nothing to do with light, and with that we can shed some light on S2FX.
The truth is, the Stock-to-Flow ratio has already existed for decades, used as an indicator in commodities markets.
But Let’s First Explain What Stock-to-Flow is First…
As the name suggests, the Stock-to-Flow (SF) ratio simply is:
Simply put, the SF ratio is a measure of how much of something there is to go around. Before Bitcoin came along, this ratio had already been used before for commodities like gold and silver, corn and wheat. And long-time Katusa subscribers will find this metric a familiar one…
After all, it’s more or less the same thing as my Days of Supply indicator that I use when I’m analyzing commodities like copper (see Charts to Watch #3 in this previous article, for instance).
So again, the first thing you need to know is that the basic concept of “Stock-to-Flow” isn’t some revolutionary new idea. It’s been around for decades.
However, what the author of the S2FX model does that is new, is create a mathematical model that he states can “[enable] valuation of different assets like silver, gold and BTC with one formula.”
We know that the SF ratio has already been around for decades. But many in the Bitcoin world think this is a breakthrough new model that’s just been developed.
As Trump would say, “Wrong.”
Alright, with that set up – class, let’s get started…
The author of this S2FX model calls it a “cross asset” model. That means it doesn’t just work for Bitcoin, but also gold and silver, and other assets.
The SF ratio had already been applied to gold and silver long before Bitcoin existed, and yet nobody came up with a similar model. So, was this overlooked, or is this a clue that something ain’t quite right with the model?
Another clue should be the fact that the author of S2FX has chosen to stay anonymous. Granted, some will argue that he isn’t anonymous to a select few in the Bitcoin world, but why not go public?
The author of S2FX is not using any inside information, no proprietary information, and nothing offensive or illegal, so this is quite odd. Perhaps our Anonymous Analyst was a fan of the rock band Kiss. And figured that since Kiss got way more attention with makeup on and staying anonymous, the same would be true for his work.
And just in case you were wondering, my favourite Kiss member was Ace Frehley. Ace has the best laugh in Rock’n’Roll.
But back to math, and back to S2FX…
If the S2FX model is as good as suggested, then the potential for massive profits is staggering. So it’s got my attention for sure.
What the Godfather of Card Counting Can Teach You…
When I think of revolutionaries in the world of making money, I think of men like Edward Thorp, pictured below. He is a cool dude, and I highly recommend his book “A Man For All Markets” – and the Foreword by Nassim Nicholas Taleb is great also.
Mr. Thorp is known as the father of card counting. A professor of mathematics who worked at MIT, he came up with various strategies to improve the odds of winning at Blackjack. But Thorp didn’t just talk the talk, he walked the walk. Mr.Thorp is the Elvis of math geeks.
He wrote a book in 1966, Beat the Dealer, outlining the very techniques he put to the test by – you guessed it – visiting casinos and winning money in Las Vegas. So much money, in fact, that he had to wear disguises like wraparound glasses and false beards.
Men like Thorp don’t just come up with theories. They put their money where their mouth is, and they’re not afraid to stand behind their ideas.
That’s the model I try to emulate myself with my publication, Katusa’s Resource Opportunities. I don’t just talk theory, I put it into practice. I got to where I am today by following my own rules – rules I put my name on – as I have a lot of skin in the game on anything I recommend.
One thing I can guarantee is that our Anonymous Analyst, who published the S2FX model, is no Edward Thorp or his ilk. I’ll explain why shortly.
Now, like I said last week, I’m not a Bitcoin hater.
I think it has an important role to play in our future. And all I’m trying to do with this report is bring a higher standard to the industry just like I did with mining.
There’s a lot of misinformation in the world of investing – and that’s true whether you’re looking at Bitcoin, gold, or stocks. That’s why I want to address the S2FX model, to break it down to see if it has any substance behind it.
After all, it could very well be a revolutionary new pricing model overlooked for years by countless experts in their fields.
I may be a skeptic – but never let it be said that I don’t do my due diligence. Like President Ronald Reagan said, ‘Trust, but verify’.
So, with that said, it’s time to do our homework on S2FX.
Breaking Down the S2FX Model
From here on out, we’re going straight to the source. We’re going to show exactly what the author of the S2FX model has written in their paper first in blue boxes, with our explanation immediately following each section.
First, I will describe the concept of phase transitions because it introduces a new way of thinking about BTC and S2F. It explains why S2FX model is important.
Second, I will describe S2FX model, how it works and what the results mean.
Phase transitions are an important perspective in understanding S2FX model. During phase transitions, things get totally different properties. Transitions are often discontinuous. Three examples of phase transitions are:
- US Dollar
The classic example of phase transitions is water. Water exists in four different phases (states): solid, liquid, gas, ionized. It is all water, but water has totally different properties in each phase.
Phase transitions are also present in finance. For example the US Dollar has transitioned from gold coin (One dollar = 371.25 grains of pure silver = 24 grains of gold), to paper backed by gold (“In gold coin payable to the bearer on demand”), to paper backed by nothing (“This note is legal tender for all debts, public and private”). Although we keep calling it Dollar, the Dollar has totally different properties in these three phases.