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Understanding Bitcoin’s Stock-to-Flow Ratio


Satoshi&Co Daily Crypto Newsletter

May 14 · Issue #176 · View online

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Commodities are a unique asset class that are not cash yielding (the only return is through price appreciation) and whose value is primarily driven by their real-world consumption demand. Every asset that is consumable and somewhat constrained in supply can be termed as a commodity. Popular examples include livestock, food grains, crude oil, metals etc. The price of a commodity, in most cases, is a function of its real-life utility and its supply demand changes. However, there is a special class of commodities such as gold, silver, whose market value is multiples higher than what can be attributed to their real-world consumption. This special class of commodities are held for investment and price appreciation rather than for consumption.
Stock-to-flow Ratio:
Stock-to-flow Ratio for a commodity is defined as it’s years of inventory relative to annual supply.  While the economic utility of a consumable good is created when it is destroyed or used up, the utility of investment assets lies in their possession and later resale. Industrial commodities therefore have low stock-to-flow ratios, this is to say, inventories usually only cover consumption demand for a few months. If there were no inventories at all, supply would have to correspond exactly to production and demand exactly to consumption. However, if there are inventories, consumption can temporarily exceed production. Since inventories of consumable commodities are as a rule very low, prices will rise quickly in anticipation of a future supply shortage and bring consumption into balance with production. As opposed to this, the price stability that comes with having a huge pile of inventory gives platinum, gold and silver a new monetary aspect. The demand driven by the store-of-value use case for gold, for instance, far outstrips that from actual industrial use cases.
Similar to gold, Bitcoin also exhibits a very high stock-to-flow ratio due to its low issuance relative to its current supply. One of the reasons why Bitcoin is often referred to as “Digital Gold” is because of its high stock-to-flow ration which is comparable to Gold’s. Moreover, Bitcoin’s stock-to-flow ratio will only increase with time, and soon surpass Gold’s, as the block rewards are reduced by half at the end of every halving cycle, resulting in diminishing future issuance. After the upcoming halving event, 84% of all bitcoin would have been mined.
Source - ZPX, Satoshi&Co research
Source - ZPX, Satoshi&Co research
Meanwhile in Crypto Wonderland....
“Bakkt To Launch in June”
Revealed Monday, Bakkt, the Intercontinental Exchange’s independent crypto initiative, will be launching its physically-backed futures contract in June. According to a Medium update from its chief executive, Kelly Loeffler, the product will take two forms: 1) a daily settlement future; 2) monthly futures. This confirms rumors that the platform was looking to launch a vehicle for a same-day market. Bakkt expects the soft launch of this product by July, explaining that it intends to iron out any kinks in the coming weeks.
“Samsung to Roll Out Blockchain Features On More Galaxy Models”
South Korean electronics giant Samsung is planning to bring cryptocurrency and blockchain features to more phones across its Galaxy range. Citing a press release from Samsung, Business Korea reported Tuesday that the firm would make its digital wallet app available even on lower-cost models and will further expand the crypto features to more jurisdictions. The Samsung Blockchain Wallet is currently only available on Samsung’s recently launched flagship phone range, the Galaxy S10. The S10 additionally comes with blockchain features such as digital signing and decentralized apps (dapps), which the report appears to suggest may also be added across the Galaxy range.
“HTC Exodus 1 Integrates Kyber Network”
Consumer electronics giant High Tech Computer (HTC) is rolling out in-wallet cryptocurrency trading for users of its Exodus 1 smartphone. HTC, which this week announced a low-cost version of its blockchain smartphone would appear around Q3 2019, now allows Zion Vault users to swap between various cryptocurrencies. The feature comes as a result of a partnership with Kyber Network, a dedicated platform for cross-token trading solutions. Swaps involve a selection of Ethereum (ETH)-based ERC-20 tokens, including basic attention token (BAT), kyber network (KNC) and dai (DAI), and removes the need to send tokens to intermediaries such as exchanges.
“Fans Can Wager Crypto on Top Fortnite Streams”
Fans of the biggest Fortnite and Apex Legends streamers on Twitch can now place real bets on how well they play. Esports platform Unikrn is debuting a new product that lets fans wager crypto on Twitch and other gaming sites, in a bid to give users more content for gambling. The problem with running an esports book is that there isn’t always something to bet on, according to Unikrn CEO Rahul Sood. Right now, users can bet on live esports tournaments at the top tier. They can also bet against themselves on Unikrn. But people don’t always want to bet on themselves, and while there’s a lot of esports tournaments in the world, there are not yet enough for fans to bet on a top-tier game no matter the time.
Tweet of the Day
Balaji S. Srinivasan
What does due process look like for social networks? I believe in the medium term, the next generation of social networks will be built from the ground up to use crypto for governance.
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