On the Apparent Convergence of Bitcoin’s USD Market Value Toward

the Stock-To-Flow Valuation Model and the Necessary Divergence Into

the Narrow Halving Window

AJC
BTC: 1D1so2SuThGnGBt2WfExF4GhQ8jss8f4LK

October 31st, 2019

ABSTRACT. The concepts of stock-to-flow and hard money are introduced. A primer on Bitcoin is
provided. Apparent convergence is demonstrated with detailed mathematical explanation.
Implications of convergence are explored. Necessary divergence is discovered. A new term is
defined. Discussion provides clarity. Concluding remarks include a warning.

1. INTRODUCTION

The concept of the stock-to-flow (S/F) ratio has been used as a metric of various commodities’ scarcity,
especially in regards to commodity money such as gold and silver. Put simply, the S/F is the ratio of the
readily available quantity of a thing to the annual rate of the production of that thing. Discussions about
this ratio have multiplied among the cryptocurrency community due to recent publications by Saifedean
Ammous (1) and the pseudonymous person known as ―Plan B‖ (https://medium.com/@100trillionUSD)
(2). In short,
―The relative difficulty of producing new monetary units determines the hardness of money:
money whose supply is hard to increase is known as hard money, while easy money is money
whose supply is amenable to large increases.‖ (1)
This difficulty of producing new monetary units provides protection from devaluation by large increases
of those units, i.e. inflation of the monetary supply. Therefore, the S/F ratio is a not merely a measure of
scarcity but is also used as a measure of the hardness of a monetary good and, therefore, its suitability as a
store of value. A mathematical model was proposed by ―Plan B‖ in March of 2019 which shows a power
law relationship between the market capitalization of Bitcoin and its S/F ratio (2). It was also
demonstrated that other common stores of value—namely gold, diamonds, silver, palladium, and
platinum—follow a similar power law relationship.
It has often been questioned whether or not Bitcoin will ultimately succeed as a universally utilized unit
of account and medium of exchange. This research is meant to shed some light on that topic.

1
 2. A BRIEF PRIMER ON BITCOIN

The pseudonymous person, or persons, known as Satoshi Nakamoto published the bitcoin white paper (3)
exactly 11 years prior to the date of this writing (i.e. October 31 st, 2008). It described a peer-to-peer
electronic cash system that does not require its participants to trust in a third party and whose supply of
monetary units is controlled. The software is open-source, which means it is freely available to anybody
who wishes to acquire it. The system is primarily enabled by the combination of four key innovations: a
decentralized network, a public transaction ledger, consensus rules for transaction validation and currency
issuance, and finally a mechanism, known as the Proof-of-Work (PoW) algorithm, for attaining
decentralized consensus on the state of the ledger (4).
The public transaction ledger is called the ―blockchain,‖ and the units of currency that are issued to the
network are called bitcoins. Transactions are appended to the existing ledger in groups, called blocks,
which include a cryptographic ―fingerprint‖ of the block that immediately precedes it. This cryptography
allows for the blocks to be linked to one another to form a chain, hence the name ―blockchain.‖ When a
new block is disseminated to the members of the network, consensus rules allow the individual members
to validate the block and reach consensus on the state of the entire blockchain. Due to the combination of
cryptography, decentralized distribution, and consensus rules, the blockchain transactions are extremely
well protected from fraudulent action.
Through the PoW algorithm, users of this peer-to-peer system can assist in the issuance of new bitcoins
by employing the computational power of hardware such as a central processing unit (CPU), graphics
processing unit (GPU), or application-specific integrated circuit (ASIC) hardware. Such hardware is used
to perform computations (work) to find the answer (proof) to a mathematical puzzle that correctly links
the newest block of transactions to the previous block. As a reward for solving this puzzle and providing
PoW, brand new bitcoins are awarded to the solver of the puzzle. These newly awarded bitcoins are
sometimes referred to as a ―block subsidy‖ because they are awarded for each new block that is added to
the blockchain. Using hardware to create PoW and thus earn block subsidies is a process called ―mining.‖
Part of the distributed and decentralized consensus rules is a schedule for the issuance of block subsidies.
These specific rules stipulate that the subsidy be less than or equal to a defined limit which is reduced by
half every 210,000 blocks. The limit on the subsidy that was awarded to the solver of the first block—
called the ―genesis block‖—was 50 bitcoins. The time from the genesis block to the first halving of the
block subsidy, and also the times from each halving to the next halving, are sometimes referred to as
block subsidy eras. For example, during the first subsidy era, 50 bitcoins were added to the existing stock
of bitcoins for each of the first 210,000 blocks numbered 0 through 209,999. There were no bitcoins
before the time at which block 0 was mined. 32 subsidy halvings are scheduled to occur, and no bitcoins
will be produced after the 33rd subsidy era.
One parameter that is embedded in each block of the Bitcoin blockchain is the difficulty. The difficulty
controls the rate of production of bitcoins such that the amount of computation required by the mining
community to produce PoW is such that the average rate at which new blocks are appended to the
blockchain is 1 block per 10 minutes. The difficulty automatically re-adjusts every two weeks to
accommodate for changes to the total computational power that is employed for mining. Due to the nature
of the computations that are performed to produce PoW, the arrival of new blocks to the blockchain is
approximately a Poisson process (3) (5).

2
 3. CONVERGENCE

The S/F model proposed by ―Plan B‖ was created using monthly S/F data from December 2009 to
February 2019 (2). This resulted in 111 data points which, when plotted against Bitcoin’s market value
according to the general equation,
(1)

where is the total market value of all bitcoins, shows a linear relationship with slope
and y-intercept . A similar plot, shown in Figure 1, can be created using daily data.

Figure 1 – Plot of daily data. Linear regression is shown.

Note that the coefficients and are similar to those calculated by ―Plan B‖ but
slightly different. This is likely due to the larger quantity of data, and different start and end dates
(starting date of the data used to create this report is August 17th, 2010). The sources of this data are the
.zip files located on the Bitcoin page of the website www.datahub.io (6) as well as .csv data exported
from the charts page of blockchain.com (7). This linear regression will be referred to as the S/F model.

Each of the data points in Figure 1 can be expressed as a multiple of the S/F model. Let ̃ be the total
market value implied by the model, i.e.

̃ ( ) (2)
where,

3
 (3)

is the annualized average rate of change of for the data point corresponding to day . Then, we define
the model multiple as,
̃ (4)

Due to the fact that the otherwise variable

and exponentially growing S/F model of
market value is now constant in the
expression of the market value as a mere
multiple, this new basis of expression can be
referred to later as ―m-space.‖ A plot of the
model multiple over time is shown in Figure
2, along with annotations, graphics, and
fitted curves that were included when this
figure was posted by the author to the
r/bitcoin subreddit. As expected, the data is
vertically centered on a model multiple of
1.0 due to the fact that this data is merely a
multiple around a linear regression; the
central horizontal line corresponding with a
value of 1.0 on the y-axis is identical to the
diagonal regression line in Figure 1. The
points are now ordered, left-to-right,
chronologically rather than by S/F ratio. A
distinct pattern of oscillation is immediately
apparent, with decreasing amplitude over
time. This oscillation is highlighted in the
bottom part of the figure by a series of
shaded peak-rectangle graphics. The left and
right ends of these graphics coincide with
the dates of the block subsidy halvings (with
the exception of the left-most graphic) in
Figure 2 – (Top) plot of Bitcoin total market value expressed as
order to emphasize that the base of each
multiple of S/F model implied value, and (bottom) included ―peak‖ begins with the date of each subsidy
annotations, graphics, and fitted curves. halving. The peak of each graphic
approximately coincides with the all-time-
high market values within each block subsidy era.
The reduction in amplitude of the oscillations about the S/F model can be modeled by bounding curves,
as shown in the bottom plot of Figure 2. The points to which the curves are fit correspond with the
extremes of the model multiple within each subsidy era. This data is tabulated below. Three points were
used to fit each curve. The decay curves were fit to the natural log of each point according to the general
equations,

(5)

4
and

(6)

where is the upper bounding curve, is the lower bounding curve, and are constants, and
rd
is the time in years elapsed since the date of the genesis block, January 3 2009. It is reiterated that
these exponential decay curves are fit to the natural logarithm of the extremes of the model multiple data
within each subsidy era, i.e. the right-most column of the tabulated data. Therefore, the curves shown in
the bottom plot of Figure 2 that appear to be bounding the model multiple data are double exponential
curves of the form . It may be
Date
called into question why a double exponential 6/11/2011 59.00 4.08
curve would be used. However, comparing the Upper 12/6/2013 18.21 2.90
values of the data points in the table shows that the 12/17/2017 9.35 2.24
natural log of the data points is clearly more 10/2/2010 0.013 -4.35
symmetrical about 0 than are the raw data points Lower 12/20/2012 0.032 -3.45
about 1. Indeed, when these curves are fit to the 11/4/2016 0.074 -2.60
data, the coefficients are quite similar and the double exponential curves are very symmetric about a
model multiple of 1. While it is not shown in this report, the bounding curves that would result from
fitting a single exponential curve to the data are comparably asymmetric about a model multiple of 1 and
are also a worse fit to the data. The coefficients that result from the double exponential fit are
, , and .
Taking this concept of convergence a step further, these bounding double exponential curves can be
plotted and visualized as imaginary boundaries to the market value of bitcoin itself. Due to the step-wise
nature of the controlled supply of bitcoins, and therefore of the S/F model itself, it follows that these
resultant imaginary boundaries to the market value would be characterized not only by convergence, but
would also proceed over time as a series of steps. The lower imaginary boundary would appear as a series
of upward advancing steps, approaching the implied price of the S/F model, and the upper imaginary
boundary would appear as a series of up-side down steps also approaching the implied price of the S/F
model and increasingly interlocked with the lower steps. Due to the interlocking nature of the converging
imaginary boundaries on the market value of Bitcoin, some reasoning can be employed to further test for
convergence, and in so doing demonstrate that these imaginary boundaries might actually be more
concrete than imaginary. And, due to the combining properties of convergence and interlocking,
predictions of the future price of bitcoin on dates of subsidy halvings can be made with increasing
precision. With time, a comparison of these predictions with the recorded market price will confirm or
deny the concreteness of these boundaries.
Because the model multiple is defined merely as a factor that is multiplied to the market value implied by
the S/F model, the upper and lower boundaries are also merely the product of the market value implied by
the S/F model and or . That is, the upper and lower boundaries to the market value of bitcoin are,
from equations 4 and 2,

̃ ( ) (7)
and

̃ ( ) (8)

5
where the constants have been rounded only in the text of this report for simplicity and legibility.
Trivially, prices can then be computed from total market value by dividing by cumulative bitcoins
produced. These boundaries, along with the historical price data, are shown in Figure 3.

Figure 3 – A logarithmic plot of the historical price of a bitcoin, and boundaries to that price suggested by the convergence
toward the S/F model.

One will immediately notice the step-wise nature of the converging boundaries as was previously
described. One will also notice that a portion of the boundary lines is noisy and the remainder is straight.
The noise of the boundary is caused by the fact that the arrival of blocks to the Bitcoin network is
approximately a Poisson process, and therefore there is some randomness in the ratio that is
calculated from the historical record of cumulative bitcoins. And, naturally, the remainder is straight
because there is no historical record of cumulative bitcoins for those dates, so the average rate of 1 block
mined per 10 minutes was used. As an aside, one might also deduce from the relative displacement of the
bounding lines to each other and the degree of historical noise in each boundary, that the price of bitcoin
will one day be entirely dependent on the rate of production of new bitcoins and thus far too volatile to be
considered a unit of account and medium of exchange. This will be addressed in the discussion presented
later in this report.

6
 4. DIVERGENCE

As written earlier, a line of reasoning can be used to further test for convergence, and in so doing
demonstrate that these imaginary boundaries might actually be more concrete than imaginary. Attention
should be given to a unique point on the plot in Figure 3, specifically the date of the 4th subsidy halving at
the y-axis level of about $250,000. If it is a true proposition that the market value of bitcoin is converging
toward the S/F model, and if it also true that the amplitude of the market multiple diminishes between the
bounding prices calculated from equations 7 and 8, then it therefore follows that the price of a bitcoin on
the date of the 4th halving will be some price that is between the upper bounding price of the day prior to
the halving and the lower bounding price of the day of or after the halving. A new term is now defined for
convenience: the narrow subsidy halving window (or narrow halving window, ―NHW,‖ for brevity) is the
range of prices between the lower price boundary immediately after the subsidy halving and the upper
price boundary immediately before the subsidy halving. It becomes apparent, then, that a requirement for
the continued convergence of the market value of Bitcoin toward the S/F model is that the market value
periodically and temporarily diverges from the S/F model and instead converges toward the NHW in the
months leading up to the date of subsidy halving.
For all previous subsidy halvings this NHW has been, despite its name, quite wide. Therefore, the
difference between the trajectory of the market value away from the S/F model and the trajectory toward
the NHW is quite indistinguishable.
The NHW corresponding to the subsidy
halving scheduled to occur on
approximately May 14, 2020, however,
is comparably narrower and would
require a significant divergence of the
market value from the S/F model to
allow for continued convergence. This
can be visualized in Figure 4, which
shows the same convergence of the
total market value of bitcoins toward
the S/F model. The NHWs become
increasingly narrow and are
characterized by minimum window
prices that begin below a 1.0 model
multiple and increase toward, and
Figure 4 – The same plot of Bitcoin total market value expressed as a multiple eventually cross, the upper boundary.
of S/F model implied value. NHWs are indicated by thick vertical lines. The
general future trajectory of Bitcoin total market value is indicated by dashed Paradoxically, the NHW minimum
lines. prices are greater than the NHW
maximum prices for all halving events
after the fourth. The definition of the narrow halving window is not strict, however, so the term could
reasonably be limited to the first four halving events. Critically, it is noted that the current trajectory of
Bitcoin’s market value since its lows in January to March of 2019 has generally been one that appears to
be directed toward the center of the upcoming NHW.
It is suspected that additional computations can be made to demonstrate this periodic divergence toward
the NHW within the existing set of data. One such computation that has been performed by the author is a

7
transformation to the ―m-space‖ such that the market value of Bitcoin is expressed as a multiple of a
modified S/F model, i.e.

(9)
̃

where is the modified model multiple and is some function of time that is equal to 1 at the
start of each subsidy era and monotonically increases during the subsidy era such that it is equal to the
midpoint of the NHW at the end of the era. In this way, it would be expected that the Bitcoin market
value expressed in terms of the modified model multiple would converge toward, rather than diverge
from, a value of 1 at the end of each subsidy era, especially at the ends of all subsidy eras after the 2 nd.
Unfortunately, the spread of the model multiple data and the duration of time from now until the end of
this subsidy era are too great to allow for the author’s demonstration of divergence toward the NHW that
is significantly more conclusive than what is readily apparent in the figures that have already been
presented. Unless more sophisticated analysis can be applied to make this demonstration, it is suggested
that patience be exercised until the final destination of Bitcoin’s market value at the end of this subsidy
era—whether inside the NHW or outside—becomes reasonably evident.

5. DISCUSSION

It is quite plain to the author that this is a very strange and hardly believable way of analyzing the value of
Bitcoin in the markets. One need only take a second glance at Figure 3 to become overwhelmed with
confidence that this analysis is utter hokum. However, given the grandiose predictions of the S/F model in
regards to the value of bitcoins in the distant future, and given the meteoric rise of Bitcoin’s value since
its inception, a careful and critical prognosis—as is presented in this section—may be prudent.
What is particularly strange about this model is that it predicts that the market price of bitcoins will eventually be
determined entirely by the rate of production of new bitcoins, and therefore be subject to sharp, daily increases and
decreases, particularly on the days of subsidy halving on which the price is predicted to increase
immensely. A new basis of financial understanding is suggested—and, indeed, has already been
suggested—to provide a more sensible understanding of this phenomenon.
Examination of Figure 3 will reveal that this model predicts the price of one bitcoin will be approximately
$1 million USD during the 5th subsidy era and approximately $10 million during the subsequent era.
Given the hard limit of approximately 21 million total Bitcoins ever to be produced, this suggests that the
total market value of all bitcoins will be about $20 trillion USD and $200 trillion USD during the 5th and
6th eras, respectively. It has been estimated that the total value of global fiat money supply is some value
between $10 trillion USD and $100 trillion USD. Therefore, if the S/F model is correct, it should be
expected that Bitcoin will become more highly valued by the markets at some point in time during the 5 th
or 6th subsidy eras. It seems natural, then, that the most popular basis of valuation will no longer be one in
which the value of bitcoins is understood to be increasing with respect to fiat currencies, but rather one in
which the value of fiat currencies is decreasing with respect to bitcoins. That is, the markets will rapidly
begin pricing (either privately and internally, or publicly and externally) goods and services in terms of
their cost in bitcoins because bitcoins will have become the most valuable and sought after commodity.

8
It is doubtful that this could happen without a general understanding by market participants of the unique
characteristics of Bitcoin. Therefore, it may be generally well known at that time that there will only be
approximately 21 million bitcoins available for the global population to use for market transactions, and
thus a sense of urgency to accumulate bitcoins in exchange for any remaining fiat currency will be set in
motion. It is during this time that a global transition in perspective will occur—from one in which, 1) fiat
currencies are considered to be a stable store of value, 2) financial securities are overpriced on a fiat
currency basis, and 3) the real estate and fixed assets market is considered to be a seller’s market—to one
in which, 1’) fiat currencies are considered to be a volatile and worthless asset, 2’) financial securities are
underpriced in a bitcoin currency basis, 3’) the real estate and fixed assets market is considered to be a
(bitcoin) buyer’s market. As this transition in perspective occurs, beginning with the 3rd subsidy halving
and continually gaining popularity during the next one to three subsidy eras, the general recognition of the
worthlessness of fiat currency will cause a general panic in developed nations as citizens begin rapidly
withdrawing funds from their accounts in
order to acquire bitcoins. It is in this new
financial order that bitcoins will be
purchased as rapidly as they are produced.
It is in this way that the market exchange rate of
fiat currencies will eventually be determined entirely by the
rate of production of new bitcoins, as the demand for
bitcoins will exceed and eventually
overwhelm the controlled supply of newly
produced bitcoins. This transition can be
visualized in Figure 5, where the future
exchange rate of BTC to USD is shown to
remain within the converging bounds of the
S/F model, but gradually begins to
approach and eventually converge with the
lower bound—which was the upper bound Figure 5 – Plot of historical BTC/USD exchange rate, with bounding
in previous figures. It is in this way that the lines converging to the S/F model. A projection of the future exchange
rate is shown.
value of bitcoins will diverge from the S/F
model in order to converge with it.
And now the main argument of this report is beginning to come full circle. As it was quoted in the
introduction,
―The relative difficulty of producing new monetary units determines the hardness of
money: money whose supply is hard to increase is known as hard money, while easy
money is money whose supply is amenable to large increases.‖ (1)
If it is in the case that Bitcoin’s value is derived solely from its hardness as a monetary good, and if it is
the case that hardness is measured by the S/F ratio, then the valuation of Bitcoin by the markets through
price discovery must continue to converge toward some model that depends explicitly on the S/F ratio.
Given that this valuation model is already apparent, it is clear now that the discovery by the free markets
of the true value of bitcoin is equivalent to the convergence toward the S/F model because the value of
bitcoin is its hardness as determined by the S/F ratio. Finally, the signal that is available to market
participants that the value of Bitcoin is truly converging to the S/F model is precisely the divergence of its
value into the narrow halving window in the months leading up to the subsidy halving. It is in this way
that Satoshi Nakamoto, purposefully or otherwise, has provided a sign of the new financial order.

9
 6. CONCLUSION

An understanding of the apparent convergence and necessary divergence is now complete, and with this
new upside-down and inverted point view of the financial system the alternative title to this report can
now be read at the bottom of the references page. In concluding this report it appears necessary to provide
some words of warning to those who would dismiss this analysis. The current reality is that most people
do not own bitcoins. Therefore, if the market value of Bitcoin continues to divergently converge toward
the S/F model, then there will soon be a time when the majority of the global population will be put into
the position of making a hard choice: commit all of their fiat-denominated assets to an investment in
Bitcoin, or see their relative socio-economic standing diminish as the ratio of the number of bitcoins they
can purchase to the total of 21 million falls below the ratio of the fiat value of their fiat-denominated
assets to the total global fiat money supply. Given the current state of Americans’ finances, a state in
which many people find it difficult to spare $400 for an emergency, it is unfortunate that this fate might
befall so many people as they remain ignorant of the global transition to the hardest sound money that
humanity has ever witnessed. Therefore, an effort ought to be made to educate friends and family about
the principles of sound money as well as the trends that we can see in the data. Optimistically, I think
most people, when provided with unbiased data and sound reasoning, can make an informed decision to
protect their livelihood.

AJC

10
 REFERENCES
1. Ammous, Saifedean. The Bitcoin Standard: The Decentralized Alternative to Central Banking.
Hoboken : John Wiley & Sons, Inc., 2018. 9781119473862.
2. B, Plan. Modeling Bitcoin's Value with Scarcity. Medium.com. [Online] March 22, 2019. [Cited:
October 31, 2019.] https://medium.com/@100trillionUSD/modeling-bitcoins-value-with-scarcity-
91fa0fc03e25.
3. Nakamoto, Satoshi. Bitcoin: A Peer-to-Peer Electronic Cash System. bitcoin.org. [Online] October
31, 2008. [Cited: October 31, 2019.] https://bitcoin.org/bitcoin.pdf.
4. Antonopoulos, Andreas M. Mastering Bitcoin: Programming the Open Blockchain. Sebastopol :
O'Reilly Media, Inc., 2017. 9781491954386.
5. Bowden, R., et al., et al. Block arrivals in the Bitcoin blockchain. arxiv.org. [Online] January 23,
2018. [Cited: November 2, 2019.] https://arxiv.org/pdf/1801.07447.pdf. arXiv:1801.07447v1 [cs.CR].
6. Bitcoin. Datahub.io. [Online] 2018. https://datahub.io/cryptocurrency/bitcoin#resource-bitcoin_zip.
7. Blockchain Charts. blockchain.com. [Online] 2019. https://www.blockchain.com/charts.