Germany’s BayernLB bank issues a paper on Bitcoin

by Blocks99

4 months ago

Under the title “Is Bitcoin outshining gold?” the report applies the stock-and-flow approach, used to determine the hardness of an asset, to Bitcoin and compares it to gold.

In commodity-market analysis, the stock-to-flow approach is a method of quantifying an asset’s hardness. Hard commodities are generally extracted or mined, like oil or metals, and traditionally exhibit lower volatility than soft commodities such as crops. The paper identifies an unusually strong correlation between the market value of bitcoin and the ratio of existing stockpiles of the cryptocurrency (stock) to new supply (flow).

Although the authors warn against overconfident forecasting based on a statistical model, they regard the stock-to-flow ratio as a good heuristic for understanding Bitcoin. Next year’s Bitcoin halving (50% reduction in supply growth) will reveal how well the model fits the cryptocurrency.

The report also states that bitcoin is designed as an ultra-hard currency, predicting that by next year it will exhibit hardness similar to gold. It goes on to say that when halving takes place again in 2024, Bitcoin’s hardness will again increase to a much higher degree. While gold owes its high stock-to-flow ratio to its relative scarcity and the difficulty of mining it over the millennia, the authors argue, the supply of the purely digital currency can be engineered to increase its stock-to-flow ratio dynamically.

(Source: BayernLB)