Why does the stock-to-flow predictive model fail?

Let’s be honest There is no such thing as a perfect model. We know very well that we cannot invalidate a model by presenting occasional errors in its predictions. After all, we know these are just statistical estimates. That is, the probabilities are not absolute. Of course, for ideological reasons, we cannot spoil each other. The stock-to-flow model is a sacred cow for many to harness scarcity as the primary source of value for Bitcoin. The model corresponds to a way of thinking. It doesn’t describe reality. What it does is affirm prejudices from libertarian ideology. Why does the stock-to-stock model fail?

Of course we are already entering dangerous territory here. I mean identity politics. Questioning the scientific validity of a model that is so linked to the crypto-libertarian identity is a very risky adventure. You run the risk of violating the law. And of course being a victim of crypto roles. Now the intent here is not to offend anyone. What is happening in the world Is it a crime to think? Not all of us who disagree are part of the great conspiracy. The danger today is precisely that we all live in a homogeneous tribe. So anything that does not correspond to the truth of the tribe is a threat. Governments are the enemy. Banks are the enemy. Academics are the enemy. The real deal is what our favorite influencer is saying. Here is the detail. Many influencers are full of bullshit.

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Why does the stock-to-flow predictive model fail?
Why does the stock-to-flow predictive model fail?

Models are built with data. If the data does not match the model, the model must be changed. How do we know there is a bias in the stock-to-flow model? Well, the model often fails. But few blame the model. The market is to blame. That is, the model does not fail. People fail. Which is strange because a model has to describe what people do. It doesn’t prescribe. In other words, the model has become a dogma when data has to be ignored in order to survive. Which might be fine for some. But an investor has to have his feet on the ground. Otherwise you could lose money.

When a predictive model fails, the solution is not dogmatic acceptance. It would make sense to make adjustments with the new information. In other words, the idea is to perfect the model over time. Why does it fail? Where did we go wrong? Correct and refine further. The problem with getting too ideological is that we become victims of Confirmation Syndrome. That means we only see what we want to see.

What is the stock-to-flow model? It is based on the relationship between stocks and flows to determine price. Essentially the limited supply of Bitcoin. The meaning of halving, etc. Here I am of course simplifying the whole thing for the sake of brevity. The reader can provide further details himself. However, this model is obviously based on the scarcity of Bitcoin. It reminds us of the old diamond-water dilemma. Why is water cheaper than diamonds? Neoclassical economics tells us that it is not demand that determines the value of a good, but its marginal utility.

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Today’s conservatives recite the ancient script of the neoclassical economists of the past with great passion. But economics is essentially an empirical science. What is important is not dogma, but experience. In other words, the economists of the past are not gurus to be followed with your eyes closed. Theories have to be tested. I would say that the model in question is not wrong per se. Your problem is that it is incomplete. Existence is important. And the flow is important. But also the demand. In other words, something can be scarce, but when there is a lack of demand, there is no value.

What is bitcoin It’s code that essentially serves as an interchange course. It presents itself as a digital, civic and global asset. Its scarcity is important. But that’s not all. That said, it’s not its only attribute. One would assume that a model takes into account its other attributes. If it were that simple, everyone could create a different cryptocurrency with greater scarcity and beat Bitcoin. But such a project would fail, because Bitcoin is much more than its scarcity. Bitcoin is a social construct. The bitcoin code is to bitcoin what paper is to the dollar. It is its substratum, but not its essence.

Like it or not, Bitcoin is a couple. In other words, it is a medium of exchange. And a medium of exchange only exists in coexistence with other elements. An example. What good is a chest full of gold on a desert island? A Robinson Crusoe wouldn’t tell us anything. Why? Because a medium of exchange is essentially a social pact. Which means it takes people to make it work. This is missing in the stock-to-flow model. It diminishes the human factor. Quantify your inventory. And quantify the flow. But, What about the network effect? The liquidity of the dollar? Investor humor? The geopolitical reality? The Legal Status of Miners in China?

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The Bitcoin universe has more variables than existence and flow. If we reduce everything to two variables, we get incomplete results. The stock-to-flow model is a popular model for two reasons. First, it penetrates the minds of many conservatives because it invokes the old libertarian dogmas. The political / identity component. Always so popular these days. Second, because of its simplicity. Its simplicity creates a magical halo. And in such a complex and enigmatic world, simplicity calms the senses. The sentence: Bitcoin will be worth millions because it is scarce. Seductive indeed.

Anyone who dares to deny Bitcoin’s sacred scarcity is a fool who doesn’t understand Bitcoin. In other words, he does not belong to our tribe because he does not recite the same official dogmas. Now Bitcoin is richer and more complex than a simple scarce commodity. Its price is determined by the law of supply and demand. If we quantify supply based on what a predetermined algorithm tells us and completely ignore anything related to demand, we will surely have a failed model. It can become very popular because it says what some want to hear. But failed in its results because it does not include all the variables in the equation.

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