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Who is PlanB?

PlanB is the pseudo name of an institutional investor and quant from Amsterdam (The Netherlands, Europe). He is famous for his stock-to-flow (S2F) model, where he forecasts the value of Bitcoin (BTC) relative to its scarcity. The financial consultant currently manages an investment company with a portfolio worth billions.

The official identity is yet to be made public. He goes by the same moniker on Twitter. Surprisingly his profile has the photo of a black cap emblazoned PlanB. However, the “B” assumes the Bitcoin official logo. Oddly, he once introduced himself as a man in his “late forties.”

From his interviews, he considers his former full time job of providing capital for the traditional markets as “Plan A” while his pastime- BTC research- as Plan B! Let’s dig deeper into his contributions to cryptocurrency.

Career Path

Little is known about PlanB in terms of his early life and career. He only disclosed that he studied Law. The law school nor the years of admission and graduation remain unknown.

Moreover, he did Economics, where he specialized in Quantitative Finance. In video interviews, he chooses to remain anonymous by hiding his face.

PlanB’s Stock-to-Flow Model

The institutional investor was the first to find similarities between Bitcoin and other precious commodities like gold and silver that store value over lengthy periods. Their characteristic – unforgeable scarcity – makes them retain their value. Increasing the supply in the short run is not possible.

For instance, it may take years to find gold. Further, the mining process consumes so much time and financial resources. Like gold, Bitcoin is also scarce. Additionally, the coin supply is limited. It takes massive amounts of resources (electricity and computing resources) to mine new coins. Therefore, the market capitalization grows slowly.

Initially, the stock-to-flow ratios were used to establish the current stock levels compared with the commodities’ production rate. However, for commodities that stored value like gold and silver, a high ratio would show that their consumption is not for industrial uses in most cases. Instead, the most significant supply is kept as a monetary hedge hence a high ratio. Thus, the interpretation of a high stock-to-flow ratio for a given commodity is that it is scarce.

Formulation of the S2F Model

PlanB used the mathematical concept to calculate the stock-to-flow ratio of scarce commodities to model the value of BTC with scarcity. However, to achieve a projection of the numerical value of Bitcoin, the analyst had to find out a way of quantifying scarcity.

Fortunately, he achieved that using the S2F formula.

Let us first dig into the meaning of S2F and find out how it can quantify scarcity. In the formula, the abbreviation SF will still mean S2F.

SF ratio = stock/flow

Stock is a measure of the existing reserves of a particular commodity. Flow is the annual rate of production.

Let’s use the stock and flow values of gold and silver in the first quarter of 2019.

Commodity Stock (tn) Flow (tn) SF Market value
Gold 185,000 3,000 62 $8.5 trillion
Silver 55,000 25,000 22 $308 billion

Using the SF formula, gold has the highest SF of 62 (185,000/3000), whereas silver has 22. That means it takes an estimate of 62 years to produce the stockpile of gold available at that time and 22 years for silver.

The higher the SF means that it is more scarce, making them monetary commodities.

PlanB used the same concept to calculate the total supply of Bitcoin and the estimated rate of supply (mining).

The BTC stock in the first quarter of 2019 was 17.5 million coins, and the rate of mining was 0.7 million in a year. That gives us an SF of 25. With such a high SF, it qualifies to be a monetary commodity. No wonder it had a market capitalization of almost $70 billion at that time.

The Dutch investor thus concluded that scarcity measures from the S2F formula are accurate determinants of value. Market values rise when SF rises. What followed the formulation of the hypothesis was Bitcoin’s historical data collection. The actual figures would back up his claims and help him come up with a statistical model.

Data Collection

PlanB collected actual monthly figures from the Bitcoin blockchain for approximately nine years (December 2009 to February 2019). His objective was to compare the monthly SF figure with the value.

He got the total number of blocks by using an unique programming language to query the blockchain. With an established block subsidy (new coins entering the circulation) of around 210,000 units in approximately four years, the analyst could estimate the monthly tally.

At that point, he had all he needed to compute Bitcoin’s SF. However, he had to correlate the data with the values of the coin at that time. The value data available started from July 2010, and he had to interpolate the data from three sources.

To prove that the concept applies to the digital currency’s value, he used the SF and market statistics of gold and silver from the table above as a benchmark when drawing a scatter plot.

In the graph, he placed the market value on the y-axis and the SR ratio on the x-axis.

Interpretation of the graph

PlanB fitted a linear regression to the values. Impressively a link between SF and an asset value is visually discernible.

He firmly believes that the probability that the correlation is by chance is close to zero. Though gold and silver belong to a very different investment category, their SF values match the BTC model, making it believable.

In the last quarter of 2017, the SF figure for BTC was 22, and its market capitalization was around 230 billion USD. Interestingly it was comparable to that of silver (308 billion USD).

The investor’s projected market capitalization for BTC after May 2020 halving is 1 trillion USD, which converts to a price of 55,000 USD for a single unit of BTC.

The model is absolutely on point, because the price at the time of writing (almost a year later) is 58,000 USD. Moreover, the market capitalization is beyond 1 trillion USD.

Criticism on the Stock-to-Flow Forecast

PlanB’s model projects that the price of BTC would shoot to $288,000 before the year 2024. That is before the blockchain conducts its next halving. However, several top-notch crypto analysts and investors have had conflicting opinions about the statistical projection in the past few months.

Alex Kruger, an expert in economics and cryptocurrency, trashed the model claiming that it’s built from the most basic errors. He faulted S2R for making an erroneous assumption by maintaining that there’s indeed a long-running relationship between the price of Bitcoin and its scarcity. According to Kruger, the programmatic rise of a price index where everyone knows its numerical value at a certain point in time in the future looked nonsensical.

Cory Klippsten, the CEO of Swan Bitcoin, distanced himself from the S2R model hype. He claimed that bullishness is only vital for the right reasons; otherwise, you may lose your influence if your belief turns out a fallacy. Although he admits he had confidence in the model, he admits losing faith in its predictive power towards the end of 2019 after a close examination. He calls it “invalid.”

The Chameleon Model

Critics insinuate that the stock-to-flow valuation model for BTC is a “chameleon model” for its blatant errors.

The term was coined by Professor Paul Pfleiderer from the Stanford Graduate School of Business to refer to financial models with vague theoretical assumptions. He provides an example of a model that forecasts an asset’s price. However, its theoretical assumptions leave no room for uncertainties of its returns.

The professor claims that analysts should avoid such kinds of models for deviating from the truths presented to us by reality. Paul claims chameleons are never easy to notice and challenge because they seem to make sense. It’s only upon a more profound examination that their vague assumptions conflict with reality.

A critic faults the assumption that a monetary commodity’s market capitalization is extracted directly from new commodity units’ supply rate. The theory has no empirical backing other than the isolated data points for silver and gold, whose market cap is meant to match Bitcoin’s.

In a further attempt to soil the model’s theory, the skeptic tries to extend the forecast to 2025. The estimate shows that one Bitcoin will bear an unbelievable price tag of $235 billion. Moreover, the analyst is scoffed at for the inexperienced use of linear regression (for such a prediction) that has a high likelihood of generating false projections.

PlanB’s Defense on his S2F Mathematical Tool

Though PlanB expresses deep faith in his model, he still leaves room for error. He exemplified the idea of a statistical forecast by claiming that it’s just a clarification of reality. He went ahead to make it clear that all models are erroneous, but some are helpful.

Adam Back, the CEO of Blockstream, a blockchain technology corporation, also threw in his weight against the criticism leveled against the investor. He explained that a model is just a speculative forecast where the noted trend may continue. He compared the S2R model with Moore’s Law.

He asserted that investors should not blindly count on forecasts as precise estimates. Kruger further expressed his fears that the S2R analysis could be used as a tool to attract more Bitcoin investors with the promise of a stable value.

The $100,000 Price Target

So far, the S2F model has exhibited a level of accuracy that sparks curiosity. PlanB tweeted that Bitcoin was revving its engine and that he forecasts a dash in value towards the 100,000 USD Mark. Towards the end of 2020, the investor likened the current cycle to the one in 2016, a “slow upward grind.” He predicted that the process might repeat itself.

The Investor’s Prediction For 2021: S2F Versus S2FX

With the initial S2F model, the analyst forecasted the price of Bitcoin to hit $100,000 by December 2021. But that would be the case if the growth in price mimics the 2017 trajectory.

However, if the 2021 bull run follows the prediction of the newer S2FX model, then Bitcoin will clock a value of $288,000 between 2021-2024. One of the reasons why PlanB introduced the S2FX model is that he feels there’s a possibility of the bull run assuming the price path of 2013.

The S2F model was the first one, delivered in March 2019. However, PlanB later revised it to a new version he called (S2FX) that creates a provision for macro factors and segments the transformational journey of Bitcoin as an asset.

According to the analyst, the new model makes it possible to extrapolate the value of diverse assets like gold, silver, and Bitcoin with the same method. He explains how he made the newer forecast through a regression analysis of S2F values the two assets.

On January 7, 2021, PlanB expressed confidence in his models’ projections through a tweet. He said that by December 2021, we would find out where the Bitcoin price finds its equilibrium. He expressed the possibility of achieving either the $100,000 or the $288,000 price target.

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