The Halvening, Stock to Flow and Your Investment Portfolio

April 28, 2020

I hope this update finds you safe, sane, and doing as well as possible in this strange new world of Covid-19.   As promised, we’re here to keep you up to date on the crypto markets and, in particular, what we see ahead.

As the Fed has sunk an unimaginable $2.3 Trillion into the economy, obviously this is impacting the traditional markets.  Time will tell if this is just a relief rally or if the markets have truly stabilized.  We, along with many experts, believe the traditional markets still have more downside. However, regardless of how they perform, we’re seeing a strong rally in the crypto markets and are anticipating another strong bull run.

As a refresher to our previous updates, we expect this for a few reasons, not the least of which is that crypto is a liquid asset with no counterparty risk and has demonstrated a strong recovery since “Black Thursday.”   This is only part of the story as we have the upcoming Bitcoin Halvening event which, Covid-19 and quantitative easing aside, has established past precedence for a bull run.  In the past, every Bitcoin Halvening has resulted in an order of magnitude jump in value in the crypto markets.

As this event is upon us within a matter of weeks, I wanted to delve further into reasons why prices in Bitcoin and other crypto asset have jumped after previous Halvening Events.  This has to do with the Stock-to-Flow Ratio which measures scarcity value. This is not unique to Bitcoin, it’s a metric that applies across many assets.


The Stock-to-Flow (S2F) Ratio measures scarcity value. Now, just because something is scarce doesn’t mean it will hold its value over time. Platinum is 30 times rarer than gold, but is it 30 times more valuable? No. It’s not even higher than gold right now. This is due to scarcity value, as measured via the Stock-To-Flow (S2F) model which explains the valuation reasoning.

Scarcity Value = Stock / Flow

The value stems from the relationship between how much of a scarce resource is mined and above ground being stored (Stock) compared to how much can be mined in 1 year (Flow). The reason platinum is not more valuable is that it is used in items  like phones and catalytic converters. When it gets used in an industrial process, it’s consumed and therefore removed from the stock. So, its stock-to-flow ratio goes down. Of the precious metals, gold has the best stock-to-flow ratio because there are literally tons of it stored above ground, its use for industrial purposes is insignificant, and you can only mine so much of it out of the ground each year. Over time, it’s something technology has not been able to materially improve (the relative cost per ounce to produce). With gold, it takes a certain amount of human effort, whether literally being a human mining it or stored value of human effort in the form of money that has to be expended to mine it out of the ground.


Bitcoin follows this S2F Model, too. There’s a lot of bitcoin mined, currently about 18 million of the total 21 million, and only so much is released each year. On May 11th of 2020 the amount released to miners, through block rewards every 10 minutes, is going to be cut in half which means Bitcoin’s Flow is going to be cut in half. That has a dramatic effect on price. The Bitcoin Halvening Event happens every 4 years. It’s happened twice before (see graph). Each time it’s happened, the price of Bitcoin eventually went up ~10x. The model has correctly predicted Bitcoin’s price for its entire history. It may take the price a little time to snap to the model, and it may overshoot or undershoot at times, but the price has followed the model. Based on the model, we could see a 15x change in Bitcoin’s price 12-18 months from now.


We’ve been discussing this with our LPs, preparing for this over the past year, and this event is now upon us. From the past 2 times it’s happened, we’ve seen significant price jumps within 1-7 months as per the graph above.

Given the state of the markets, the rise of Bitcoin and the upcoming Halvening event, this could be an excellent time to consider investment in crypto assets.   As such, if you’re considering adding crypto to your portfolio as a true hedge, an outperforming asset class, or an opportunity to have a stake in the future, we would love to speak to you.

Until we do connect, stay safe and sane, and we will continue to keep you informed and Decrypt: Crypto for you.  

About the author James Diorio

James is a Principal and Chief Executive Officer of Tradecraft Capital.