- Just a month after announcing the expansion of its custodial services to include cryptocurrencies, BNY Mellon explores the future valuation of the Bitcoin price.
- If the stock-to-flow ratio is correct, the Bitcoin price will reach at least $100,000 by the end of 2021.
- BNY Mellon believes that there are flaws in the S2F ratio and that Bitcoin’s valuation would most likely be more accurate based on a combination of different models.
12 years after the inception of Bitcoin, institutions are now seeing the intrinsic value of the leading cryptocurrency. The world’s largest custodian bank with over $37 trillion in assets under custody has recently evaluated ways of valuing Bitcoin, highlighting the stock-to-flow model.
Stock-to-flow model is worth understanding despite its flaws
BNY Mellon has recently explored different methods of valuing Bitcoin, as the custodian bank announced plans last month to expand its offerings to Bitcoin and other cryptocurrencies. In a March investment report, “Blending Art & Science: Bitcoin Valuations,” BNY Mellon analyzed several potential models for calculating how much the pioneer cryptocurrency could be worth in the future.
While Bitcoin is frequently compared to gold — another asset that has been used as a store of value to hedge against inflation — the banking giant explored a few valuation methods for the yellow metal before looking at possible valuation models for Bitcoin.
After suggesting that there are numerous models for deriving the valuation of Bitcoin, BNY Mellon suggested that the stock-to-flow ratio (S2F) is one of the more interesting valuation concepts, despite its flaws.
The stock-to-flow ratio refers to the total current supply of an asset — the stock — divided by the amount of the asset that can currently be mined in a year — the flow. Using the S2F ratio on commodities like gold gives the precious metal a ratio of over 50, meaning that it would take over 50 years of gold production to reach the current stock of gold.
Bitcoin currently has an S2F ratio in the 20s, but with the next halving event for the cryptocurrency, the digital asset’s S2F ratio will eventually increase and reach gold’s market capitalization. However, BNY Mellon highlighted one of the model’s biggest flaws, as many critics of the S2F model have emphasized — that supply does not define price. While gold has an S2F ratio near 60, gold’s price fluctuated massively in its history. The report stated:
They argue that the majority of gold’s movement can be explained by the purchasing power of the US dollar, and buying/selling of gold is based on inflation or currency debasement expectations. To all of these points, we agree.
However, if the valuation model for Bitcoin is correct, the digital asset’s price would reach at least $100,000 to $288,000 by the end of 2021.
Researchers at BNY Mellon concluded that they have not yet decided on just one model for valuing Bitcoin. Still, its valuation would most likely be a combination of several models which constantly evolve as it gains mainstream acceptance.
Fidelity predicts Bitcoin price at $1 million
The S2F model on Bitcoin was first introduced by crypto analyst PlanB in March 2019, highlighting the digital currency’s scarcity and hence deriving its future value. Citing that the amount of Bitcoin mined and produced continues to decline over time until its total supply of 21 million is produced, the S2F ratio will go up, along with the BTC price.
PlanB suggested that as Bitcoin went through its third halving in May 2020, mining rewards being cut in half would cause the crypto’s price to rise to $55,000, which was a trend seen in gold and silver prices when the same S2F ratios were hit.
In August 2020, Fidelity Digital Assets also analyzed the S2F valuation model, exploring the reasons to attract interest in the leading digital currency as an investment. According to the asset manager, Bitcoin is the second most resilient asset after gold.
In its next upward cycle, Bitcoin could reach a price of $1 million by 2025, according to the model. Raoul Pal, CEO of Real Vision, predicts Bitcoin at the same price, and added that the most attractive way for institutions to gain exposure to the leading cryptocurrency would be through Bitcoin exchange-traded funds.
Note: All information on this page is subject to change. The use of this website constitutes acceptance of our user agreement. Please read our privacy policy and legal disclaimer. Opinions expressed at FXstreet.com are those of the individual authors and do not necessarily represent the opinion of FXstreet.com or its management. Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.
Recommended Content
Editors’ Picks
Is Altcoin Season here as Bitcoin reaches a new all-time high?
Bitcoin reaches a new all-time high of $98,384 on Thursday, with altcoins following the suit. Reports highlight that the recent surge in altcoins was fueled by the victory of crypto-friendly candidate Donal Trump in the US presidential election.
Shanghai court confirms legal recognition of crypto ownership
A Shanghai court has confirmed that owning digital assets, including Bitcoin, is legal under Chinese law. Judge Sun Jie of the Shanghai Songjiang People’s Court shared this opinion through the WeChat account of the Shanghai High People’s Court.
BTC hits an all-time high above $97,850, inches away from the $100K mark
Bitcoin hit a new all-time high of $97,852 on Thursday, and the technical outlook suggests a possible continuation of the rally to $100,000. BTC futures have surged past the $100,000 price mark on Deribit, and Lookonchain data shows whales are accumulating.
Shiba Inu holders withdraw 1.67 trillion SHIB tokens from exchange
Shiba Inu trades slightly higher, around $0.000024, on Thursday after declining more than 5% the previous week. SHIB’s on-chain metrics project a bullish outlook as holders accumulate recent dips, and dormant wallets are on the move, all pointing to a recovery in the cards.
Bitcoin: New high of $100K or correction to $78K?
Bitcoin surged to a new all-time high of $93,265 in the first half of the week, followed by a slight decline in the latter half. Reports highlight that Bitcoin’s current level is still not overvalued and could target levels above $100,000 in the coming weeks.
Best Forex Brokers with Low Spreads
VERIFIED Low spreads are crucial for reducing trading costs. Explore top Forex brokers offering competitive spreads and high leverage. Compare options for EUR/USD, GBP/USD, USD/JPY, and Gold.