Modelling Bitcoin’s digital scarcity through stock-to-flow techniques

Hi and welcome to the Stephan Livera podcast focused on Bitcoin and Austrian economics. Learn the technology and economics of Bitcoin by listening to interviews with Bitcoin's best and brightest. My guest today is a pseudonymous account known on Twitter as Plan B or one hundred trillion. Now He has been doing some really interesting graph, graphing work and charting work, so I gave him a message and he was keen to come on. This is actually his first podcast episode, so a very special one here for you guys. Here is the interview. Plan B. I'm a fan of some of your graphing work that you've been doing on Twitter, you've been really setting it alight lately. So f-first of all, welcome to the show.

Thank you, Stefan, and, I'm glad to be on the show.

Yeah, so look, I've seen, obviously, I know you're a pseudonymous account, but I suppose let's just start with a little bit of background on you, and I think maybe we'll start with what's in a name. Why the Twitter handle at one hundred trillion USD? Is this your theory for the longer term value of Bitcoin?

Yeah, that, that's a good question. Plan B, actually refers to, an alternative plan for quanti- Quantitative easing and negative interest rates. So, quantitative easing is the central bank strategy for, printing money and, and saving banks in the economy. but we don't know, how it ends. It's, it's really uncharted waters. And, yeah, it, it, it might be handy to have a, a, a Plan B, so that, that's where the Plan B stands for. the hundred trillion US dollar is a, a refer, a reference to the, Zimbabwe hundred trillion dollar note, During the, two thousand and eight hyperinflation there, and, and since, quantitative e-easing, printing of money, Yeah, it could lead to hyperinflation. I thought that would be a good, mark, to put up there as a reminder why, why Bitcoin is here.

Nice, very fitting, very fitting. So obviously, I know you're a pseudonymous account, so I don't want you to dox yourself, but maybe just a little bit of background, whatever you're comfortable to share, perhaps just, you know, that you work in finance.

Sure, no problem. Okay, I have a, a background in, in, in, in legal and, and economics, and I work, worked all my life in traditional finance, mainly with a focus on quantitative, investing, quant investing, so analyzing models, and, and investments, and also structured and, structured finance, so asset-backed securities, residential mortgage-backed securities, and, and collateralized debt obligations. So in short, the, the, the financial engineering part of, of an institution. And currently I work for an, Institutional investor as an investment manager, we're, yeah, we have a big balance sheet, multi-billion dollar balance sheet, and I analyze model and, and source, assets, for them. yeah, the, the reason to be anonymous is, is, except, of, apart from, from opaque reasons, maybe also, that I would like to focus on, on data and facts and logic, and it shouldn't matter who I am, for, for that discussion. I think Satoshi gave, a perfect example here.

Fantastic. Yeah, no, totally agreed with that. And so thanks for that. I mean, you've shared that you've got basically a relevant background. To what you're doing in terms of charting and showing some of these different quantitative approaches on how we can think about what, what is the long-term value on Bitcoin and so on. So let's talk a little bit with your general philosophy around, you know, how do you think, what's your guiding Bitcoin investment thesis?

So actually, how, how I got into Bitcoin was, was two thousand and thirteen, four, five years into, quantitative easing and zero interest rates, or at least, low interest rates. So I was, I was searching on the internet, for a QE hedge or arbitrage opportunities, regarding to quantitative easing, and that led me to a website, ZeroHedge, you might know it.

Yes, classic.

Yeah, it's a classic. and, and there was this article about Bitcoin with a reference, of course, to the, white paper. So I read the white paper in two thousand, end of two thousand, thirteen, and I was hooked from the start. It's, it's, it-- I think it's a real piece of art. it's deep, it's fundamental, and yet simple. So, I read all Satoshi's emails and posts after that from the Sec- the Nakamoto Institute, and followed the references that he made in the, in the white paper and in the mails to, Adam Back, Hashcash, and to Nick Szabo's work. I, I think I read it all. so, it, it, it took a while for me to invest though in, in Bitcoin since, well, two thousand and thirteen, when I started reading the white paper, Bitcoin was a hundred dollars, and when I, was finished reading, two months later, it, it was a thousand dollars. So, with the price, going up ten x, I thought I might wait a little. So I ended up waiting until two thousand and fifteen to make the first investment.

Wow, yeah, that's an interesting point because what normally happens, and I suppose this is probably because you have a bit more of a professional finance background, but many, you know, retail individuals who find out something, you know, it's going up, they might think, "Oh, quick, I've got to buy some now," but it sounds like you actually had a bit more of the patience to wait for a good buying opportunity.

Yeah, exactly. Fear of missing out, the FOMO, I'm not immune to those feelings, by the way, but I, I learned to protect myself, that's, that's true. and, and now we're at it, the, the feeling of, the end of 2015, it feels very much like, today After, a, a, a, an all-time high and, and, and after a big bear market, so I'm, I'm very excited about today.

Fantastic. And then, who are some of your influences in the Bitcoin world? I mean, you mentioned obviously Satoshi, Nick Szabo, Adam Back. Any others?

Yeah, yeah, absolutely. so maybe my, my, my, my general view, that I got from Adam Back and, and, and Nick Szabo and, and, and Satoshi also was that it's, it's all- About the digital scarcity thing. it, it, I see Bitcoin as the next logical evolution in money. It's just better money. And, and money is important, not, not because of the financial, part of it, but also because like language, money, is key for human cooperation. so better money leads to better cooperation, more trade, more specialization, better capital allocation, et cetera, et cetera. And in that sense, I think Bitcoin will bring, well, the next renaissance, if you will, So I, I, I came to Bitcoin from the financial investment angle, but what, what drives me is this This, better money thing, and, I w- I wanna see, Bitcoin succeed. th-th-there's one quote that I, used in the article, of Satoshi that I really like, and it's, "Imagine there was a base metal as scarce as gold, but can be transported over a communications channel." So that's where he directly refers to this digital scarcity as being very important, And, the thing is, I, I, I see a lot of technical analysis, at the moment in Bitcoin, and that, that's really fun. But what I'm also very interested in is more fundamental econometric, models. that, that's also where my expertise can be of value, maybe, And, yeah, a lo- a lot of my thinking is also, shaped by, by people like Nash, John Nash, the, Nobel Prize winner, with his, game theory, So he, he, he has a very, clear vision of what money should be. We should, we should look at money like a technology, so it can be improved upon. And, and, and, sadly that didn't, that didn't happen very much, over the last, couple of decades. And also Hayek, of course, the, the, nationalization of money, is something that from an economist, investor perspective, maybe it, it, it's still a bit weird that every country in the world has its own money printed on paper, and coins. So Yeah, the, those classics, and maybe I, I shouldn't forget, Milton Friedman, who basically predicted, the rise of Bitcoin in, in 1999 already. So those are, are big influences, the classics. And of course, Satoshi Nakamoto, his book is, is, is a real classic. If, if, if you're serious about Bitcoin, you should have read, that book. I'm sure you did.

Yeah. So I think, for me, a big influence is the Austrian school. And, I think one concept that Safdieen has really popularized within the Bitcoin world is this whole idea of looking at things through the concept Or through a prism of stock to flow rati-ratio, and I noticed that from your, your charting and your analysis, that you have actually incorporated some of that into your own work. So can you tell us a little bit about how you've done that and why you've done that?

Absolutely. yeah, so, so going from, a digital scarcity to, to stock to flow, maybe there's one step, i-in between, and that's the unforgeable, costliness, which is the definition that Nick Szabo gave for scarcity. so he refers also to the, the costliness of production, like gold. It's, it's very costly to produce gold, and that, that is a very useful, Definition, because it, it feeds directly into the importance of, a fixed supply or, or at least a cap on the money supply, which of course Bitcoin has, but also things like proof of work, and hash rate, which make, Bitcoin production, costly, and also things like decentralization, 'cause if you can influence the money supply or change it, then, yeah, well, you can ask yourself if it's, if it's, if it's scarce. so what Safedine did, and that was actually the first time I read it, was, to make it, to make scarcity quantifiable. And, since I, I'd like to model things, I had to quantify scarcity, and he really explained this stock to value, stock to flow, Ratio, very good. and maybe I'll, I'll explain it a little bit. sure, definitely. Sure. So, so stock is the, the current stockpiles of something, gold could be, Bitcoin, could be anything, the, the current above ground, stockpiles, and flow is the yearly production. Now, if you divide stock by flow, you get the stock to flow ratio. And you could also do it the other way around, so you could divide the yearly production, the flow Flow, by the stock, and then you get the, money supply rate or in Bitcoin they sometimes call that, the inflation rate. So, stock to flow ratio is nothing less than, or nothing more than one divided by the inflation rate. And, if we look at some numbers gold, for example, has a stock of hundred and eighty-five thousand tons and a yearly flow of three thousand tons per year, so the stock to flow is sixty-two, which is really high. and silver has a stock of five hundred and fifty thousand tons and a flow of twenty-five thousand tons, so it has a stock to flow ratio of twenty-two.

what, what Safdie also, makes very clear is that, that other commodities like, copper or zinc or, well, I use the examples of palladium and platinum they all have stock to flow values of, of around zero, less than zero or slightly above zero, but it, it's actually very rare that a, asset or commodity Can go beyond the stock to flow ratio of one, and, and if it does, it, it, it gets this monetary aspect, so it- in fact, only gold and silver have, have, have, stock to flow ratios above one, twenty-two and sixty-two, and they are really monetary, assets, so they have value beca- because of their high stock to flow ratio, their, their scarcity, whereas, all the other commodities also can have value, for example, platinum and, and palladium are used in, catalysts for exhaust gases in the in cars. But, that, that's a value derived from utility, and I think that's, that's, that's when the, the part that, Sevden really, made clear to me, that, that there is a A split between monetary assets with a high stock to flow ratio and commodities which, which have a utility value but a stock to flow ratio of one or less. And, and then if we-- if you look at Bitcoin, where it fits into those two categories, it has a stock of seventeen and a half million, bitcoins at the moment. And a flow of around point seven million bitcoins per year, so it has a stock to flow value of twenty five. That puts it right into the monetary, category, And that's, that's very interesting. And that's also when, when it struck to me that the, during the all-time high in, November, December 2017, the value, the total value of Bitcoin, market was Around or, or similar or, or even slightly above the total silver market. And that's, that's, that was too much of a coincidence for me that the s- stock to flow ratio of Bitcoin and silver is almost identical and the market value. So that's where I got the idea to- Use stock to flow as a input for a model to, to model Bitcoin's, value.

Fantastic. Yeah, I think it's a really great insight and perhaps, like I think it's, it's a novel way of trying to model out, the actual impact of this stock to flow ratio. And as you were saying, these Goods that have a high stock to flow ratio above one, they tend to have some level of monetary premium. And so, do you want to maybe tell us, just talk us through a little bit around what sort of numbers that the chart is showing? or s- sorry, one other thing, before we get-- take one step back. Before we get to that, we should just talk a little bit about how Bitcoin right now, as you mentioned, has that stock to flow ratio around twenty-two, similar to silver. What, what will be the future? stock to flow ratio, say ten, twenty, thirty years out.

Yeah, it's, that's a good point. The, what, what you, notice is that the halvings become very important. So stock to flow ratio increases every day a little bit, but then once every two hundred and ten, thousand blocks, there is a halving, of the number of bitcoins that's, created in a block every ten minutes. So that- That will, that will double the, stock to flow ratio, and the halvings are, well, around every four years. next halving is May twenty twenty, so that will, that will double the stock to flow ratio to fifty, very close to the stock to flow ratio of gold, sixty-two, and, four years later in twenty twenty-four, it will double again to, around or, or a little above a hundred, and then in twenty- 38, it goes to 200, and so on, and so on. So that, that, that really puts us into, uncharted, waters, after next, two thousand twenty, halving, which is very exciting, I think.

Fantastic. And now, maybe just-- Obviously, this is an audio only podcast. I'll advise the listeners, I'll put the link in the show notes to, Plan B, to your article and to your graphs. But maybe just talk to some of the key, points on the graph just to try and help, articulate that for the listeners.

Yeah, shall I do the, the stock to flow chart first?

yeah, sure, let's do stock to flow.

Yeah, the stock to flow chart is the, the chart that, that shows you, stock to flow on the x-axis, and market value on the, on the y-axis. So it's a scatter plot, and it has a hundred and eleven data points in there, of all the monthly, market values and, and stock to flow values of Bitcoin. Of the last, nine years. and what you see, oh, when I first plotted that, made that plot, it was, I saw nothing, 'cause I, I didn't have log scales on, and, and you really should, Should look at these charts in, in, in log scale or, or use log, logarithmic values, because if you don't, you don't see the, the long term trends. So if you, look at log scale to stock to flow and market value You see this perfect straight line. It, it was, when I saw it first, it was really like, "Wow,"

perfect straight line from the, bottom left to the, top right, from low stock to flow and low market value. Creeping up to high stock to flow, current stock to flow of twenty five and, current market value of around, what is it now, eighty, ninety, billions. so what I also did was put a color overlay on that, on the data points, and the color is, indicates the months until the next halving. So right now we're about thirteen months until the next halving in May twenty twenty, and it has the color green, and as the closer we get to the next halving, the, the color turns blue, and then at the halving, after the halving, it turns red. Like, okay, a, a, a, a lot of months until the next halving, and what that does is in the chart, it, it sort of groups all the, all the data points into three distinct areas That, the first area is, is before the first halving, so then there was never halving before. that's a period until, November 2012. and there's a third per- a, a, a second period after the first halving and a third period where we in- where we are in, right now after the second halving. so I think that's basically what you see in that chart.

Yeah. And perhaps talk to some of the, where the price would be at theoretically, let's say now and then after the next halving.

Yeah. So right now the model indicates a value of A little above six thousand, US dollars. And that, I get that question a lot, how, how much did the model, indicate at last, all time high? Now, in, in November, December two thousand and seventeen, at the all time high, it had a model price of thirty seven thousand US dollars. So the real market price was really too high at the, with hindsight. and if we go into the future, next halving, May 2020, the model value jumps to fifty thousand, US dollars per Bitcoin. And of course, the all-time high could be, three to ten x higher than that. at least that's, that's What the price was last two halvings. So it's, it's, it's a rather conservative, value. and that number, by the way, is, is going to increase, of course, next halving, the, so the halving in two thousand and twenty-four, when the stock to flow will be a hundred, Bitcoin will be priced at around, four hundred thousand, dollars each. so yeah, it, it, it goes up really fast.

Right. And I guess the other factor here to think about is that, well, i-in practice, what happens is it's, it, markets can swing or kind of over-- what's the, what's the best way to say? It can kind of go, it can overshoot and then undershoot. Can you discuss that a little bit?

Yeah, absolutely. And, and maybe when we talk later about, about the model itself, you'll see it, it doesn't,

Have a, have an accuracy of hundred of one hundred percent, of course, 'cause it's, it's a model. So all those, FOMO, actions and bull markets and bear, and, and, and fear, it's all not in there. It's, it's, And you see that in the chart as well. So, so the model price is, is very simple based on stock to flow, but the actual market, of course, where, where, where fear and greed are, are playing out, yeah, it, it, it-- So it, it goes, it overshoots and undershoots, and usually what you see, well, usually, I mean, the last two times, is that, The market overshoots three to ten x the model value, but undershoots, fifty percent maximum. So, that, that's one of the reasons why I thought, okay, if we're at, a model value today of a little above six thousand dollars, fifty percent of that, three thousand, should be sort of the minimum, the bottom of, of current bear market But, yeah, that's, that's, that's how I see it.

So essentially what you're saying then is, b-b-uh, using the model, we think the bottom would be around three thousand. I'm not normally a big TA price guy, but, I am curious about, you know, all of this stock to flow and harvesting stuff, and then I suppose what you're suggesting then is that if the model can overshoot, on the next kind of, like, assuming there is a next bull run, i-it would go-- So Blocks per month. Yeah. Yeah. So you mentioned the fifty-five thousand dollar kind of value. So essentially, if it does overshoot, it can go to like over a one hundred and then crash down to sort of whatever half, half of fifty-five, so like twenty-seven thousand, something like that. So theoretically, that's kind of at this point, that's what your model is predicting.

Yeah, exactly. And, and to be clear, the-- so the, the prediction really is the, the fifty thousand for next halving, but we know from- From the errors in the past, that, yeah, the, the scenario you, described, that's, that's a, a very possible scenario, scenario, that's, that's how I see it as well.

Right. Yeah. And I suppose the other big thing, obviously, I have to re-raise this and ask this question, obviously everyone discusses this concept of, oh, is the halving priced in? And I think, speaking-- This does speak to where you stand on other debates, for example, the efficient market hypothesis. So as an austra- And even Safdie himself, I think, has made a similar comment on this, saying, "Look, knowledge isn't given to everyone equally, and so we shouldn't anticipate that the, you know, what, what, what might be called the strong form of the EMH or even perhaps the weak form of the EMH isn't a good way to think about things. But then there are others from, say, the Chicago School and other schools of thought that may believe in that more. So where do you side on that?

Yeah, that's a very interesting point, and it, it's, actually that's, that's one of my first charts, the, the halving chart, with the color overlay, and it shows the Bitcoin price with the months to the next halving, a-and, and you can clearly see from that chart, that the, the halving isn't priced in, or at least wasn't priced in, last two times. So, so my best guess would be it isn't priced in now, next halving, May 2020. But, yeah, the, the efficient market, hypothesis,

it, it's kinda weird, so it, it should be priced in, of course. and, and I, in fact, I'm a big believer of the efficient market, hypothesis, or at least it should be used as a first starting point, for most people that don't have inside information or specialized knowledge or, or a big trading room available. the efficient market price is the best price there is, and they can rely on that, and that's- Especially true if markets are really big and, and, and liquid and efficient, and, and I think that's, that's true for Bitcoin market in a sense. So it's, it's like a eighty billion dollar market, it always surprises me how well the, foreign exchange differences are arbitrated away immediately. So there's, there's Really not much opportunity to, to, to make use of the, foreign exchange diff- differences with, with Bitcoin. And so it must be Yeah, well at least a little, efficient. So, so if it's efficient, it's really weird that, that the pricing isn't, priced in. So that can mean, a couple of things. It can mean that, that, the halving effect isn't there. I believe it is, but, it, it could be that I'm wrong it could also be that, that, a lot of new people, who aren't in the market yet and, and who don't know about the whole thing, Are going to learn about the halving, and in that sense, you have a, an enormous, information asymmetry, at the moment. I, I, I think it's very well possible that is the case here.

Yeah, it's a interesting way to think of it, and, you know, I, obviously being more of, on the Austrian side, I, I, I disagree with the idea of the EMH, and I think it sort of, it takes things a little bit too far, whereas, from an Austrian economics point of view, we might view as Mises said, the market is a process, and people are continually, you know, trying to, you know, serve consumer, you know, if you're an entrepreneur, you're trying to serve consumer demands, or if Correctly speculate, and, it may just be that, you know, right now, Bitcoin is really only very-- it's very poorly understood, whereas kind of assuming if everyone understood Bitcoin, you know, from day dot, from day one, everyone knew the exact supply cur-- or not the exact supply curve, but good enough that they could predict it out over the next, you know, hundred years or whatever, and then that they should take the exact, you know, actions now to- To try and best speculate or profit based on that, whereas perhaps in the foreign exchange example, maybe it's a little bit easier to kind of do that now for the profit straight away, whereas perhaps, if you were to try and apply that with Bitcoin, well, what's the way to profit from that? Well, you've got to buy it now, and does everyone have money available now to buy into that?

Yeah, yeah, and I agree with the Austrian view as well. I think if, if, if nobody tries to, arbitrage those differences away, It would be still here. So the, so somebody has to try, and there will always be, profit opportunities that, that deviate from the efficient markets, and sh- a-and you can't, yeah, you should try to trade it, but, but only if you have a, a niche, a, a special edge over others, in terms of information or knowledge, et cetera. Right. there, there's one big example that, that, that I, I kept in my head since my, university, time, and it That, option model that Black and Scholes have inv-invented. So it's '73, I thought it was. they had this classic paper, they received the Nobel Prize, for it. where they said, okay, there is a, an arbitrage, relation between an option on the on the one hand and a basket of, the underlying asset and a, risk-free asset on the other side, and, well, they're, they're the same price, so if there's a difference between them, you can arbitrage it. So they, they put that out in a paper, it was out in the open. But, well, I think people had to learn it, people had to, digest it and believe it, because, it wasn't used and you didn't see prices move right away. So those, were excellent opportunities for, both gentlemen to, to trade. I think they did it for About ten years without, the, the opportunity going away, so they become, they became millionaires trading their publicly, available model.

Yeah, that's an interesting one. And I'm sure as a finance professional, I'm sure you have, heard or you've probably read Nassim Taleb, right? And I'm sure you've probably have-- Do you have any thoughts on, 'cause obviously Nassim Taleb is quite skeptical of the Black Skulls model and suggests that many traders in the real world don't even- Even use that model, so I wonder what your thoughts are there.

Yeah, he's one of my heroes, yeah, I read all of his books. He's, yeah, he, he's a great quant, but also an investor, so he has skin in the game, even called his, one of his book, of course, skin in the game. so no, he, he's very good. He's, he's like, yeah. A very good statistician, a mathematician, so, I, I understand what he says about the Black and Scholes model, 'cause it's, it's, it assumes normality, which, which isn't present in the, in the, in the current markets. And, and, there's black swans, there is, a different, behavior of market prices, and, and you should model that with different,

formulas and, and models. It, in fact, this is, and, and we probably get later to that, this is why I think it's so very interesting that, the model I found, that, that, that simple linear regression can be rewritten as a power law, with a fractal dimension, that exactly, has all those, those, dimensions, asymmetric dimensions. And, and, and properties that, that Talib describes and, and loves so much.

Yeah, exactly. Because I guess just to my mind, I'm obviously not, as much deeply steeped into, you know, doing statistical analysis, but perhaps Nasim Talib might view that Black Scholes model as, I guess, in Talibian terms, he might say, "These people are thinking it's, you know, standard world when actually we live in extremistan, "and maybe these people who are profiting from that are, you know, the proverbial picking up penn The steamroller. What do you think about that?

Yeah, that's true. b-but you can, you can speculate with, options, so the Black and Scholes, model, and you can hedge with, with options. And I think if you, if you hedge with options, you're, you just buy a contract and, and you pay the price that, that, that's in the market, and you, you're hedged. So that's, that's one way. The other way is, is, is betting on it and, Controls model, and, and, and I think, yeah, the more, the, the, the, the three sigma events or, or, or ten sigma events are much more frequent than, than the normal distribution, a- assumes. So, so yeah, Talib really has a point there, but I also think that it, it works in a lot of cases, and, and this, what, what, what Talib does is, is the next step. So it's, it's- It's a little bit like saying, okay, Einstein's relata- rel-relativ- relativity theory, well, it's nice, but, we have quantum mechanics and that's, that's, that's much better. Yeah, it is, but at the time, Einstein, was also very, very, close to the truth. So, so it's a, I think it's a logical next step and, and certainly, must read for, for Bitcoin quants.

Yeah, really interesting stuff. And I think now the other, the other big obvious question that I'm sure every listener wants to understand here is the question around sample size, right? So obviously we're very early in Bitcoin, it's only been ten years, and we've only seen two halvings. So do you have any, hesitations about the fact that we've- We've only seen two halvings and can we really predict further out based on only a sample, quote unquote, sample size of two?

Yeah, good question. And I, indeed, I get, I get it a lot. maybe one step back, if, if we, if we go to the model, So, coming from this, this, this, chart, the scatter plot that we just, described, I wanted to make a, a, a more formal model to see if there's any significant statistical relationship. And, since there was a straight line visible, I thought, well, okay, let's, let's do a simple linear regression. And, and that confirmed what could already be seen with the naked eye that there was a statistical significant relationship. So F and P values were very, very low Oh, and it had a nice ninety-five percent R squared. So, yeah, that, that gives some, some, some confidence in the model. and, and of course, I also added gold and silver in there, which were totally unrelated markets, but, they turned out to be right on the, on this model line, and, that, yeah, that to me gives some extra, confidence in the model. About the halving and, and, that there's only two halvings. I think that, that, that's a good point, and, and, and that's why I call it a, hypothesis. So w-we're gonna see if it's right in, in, in May 2020 or, or actually after May 2020 halving. so i-it can be wrong. On the other hand, If we look at, a-a-at the halvings, it, if I use like a hundred and eleven data points, so not, not only two data points, and, the stock to flow also rises In between the halvings. So not only at the halvings, then it makes a really ju- a big jump, but it also rises in between the halvings. So for example, if we take the first four years, Be-before there wasn't even a, a halving, and so, so the, the period until November 2012, Bitcoin, stock to flow increased in that period from below one to, three, four-ish, around the, the halving, and if I would have made that model, the linear regression, only in, in the first four years, it would have been exactly the same. So it-- I could have predicted the next halving value and the second halving value with only the first four years of data. and so, yeah, that, that gives me some confidence, in the model. and also if you look at this, this period, also between the first and the second halving, two thousand twelve, two thousand sixteen. It starts in the bottom left and it ends in the top right, and that's true for the first four years, the second four years, and the current period we're in. So, so Yeah, I think it's, it's not only the two halvings and, and that we only have two data points, but I agree that a third and even a fourth halving would, would add, credibility to the model.

Excellent point. So I guess I'll just summarize that then and paraphrase it in my own thoughts. And so essentially, it's not just the two halvings, but it's also the movement in between those halvings, and in that case, we're using month by month data. And I suppose the other concept that you mentioned there is Perhaps we can draw some level of confidence from the ability to backtest the model, or in this case, give the model, in a sense, data only up to, say, the first four years of Bitcoin, and then try to predict what the model would have predicted, the value in the next, you know, halving and, and the, and the time to now. And what you're saying there is that essentially the model could have given us, even if you only, so to speak, fed it, you know, the first A few years of data, it could then have, given us similar values to what we have seen. Is that a fair summary of what you said?

Absolutely, yeah, that's true. And, and, and I agree that backtesting is always very useful and that, while the limited period is, so the only ten years of data for Bitcoin is a bit of a, a nuisance here, but, yeah, it, like you describe, it's, it's perfectly, right.

Excellent. Okay. Well, and then I think the other thing that can come up, I think, I'm not sure, I've forgotten what book I read this from, but I, I think, I was very moved by Burton Malkiel's book, A Random Walk Down Wall, Down Wall Street, and, and I think others such as perhaps, But they have spoken about this idea of potentially what's called curve overfitting, right? So, do you have any thoughts around, are we just sort of-- or even, you know, Nassim Taleb, again, this idea of fooled by randomness, are we sort of seeing a pattern in the data that looks like a pattern but actually isn't a pattern? What do you think about that?

Yeah, good point. It could be. by the way, that's an excellent book, a must-read, the, Malkiel's, Random Walk Down Wall Street, a with lots of stuff about efficient market, hypothesis. yeah, the point curve overfitting, I'm very keen to curve overfitting, 'cause I have a little background in, in artificial intelligence, as well, and, and there was especially big problem, 'cause those, those algorithms can fit everything, also noise, and you only wanna- Model the signal, of course. I d-I do think with, with a linear regression overfitting is, yeah, not, not, not, such a big problem, especially since, In this model, we use only, one input var-variable, stock to flow, and there's only two parameters. So it's, yeah, if, if you go to nonlinear functions with, multivariate analysis and, and multiple input, Inputs, that becomes a bigger problem. however, there, there might be other problems, and, and that's also why I put the article out. So I'd like to discuss the, all the comments and especially the critiques and, and reviews, because I, I'd like to know if I'm wrong, because, Because of the skin in the game. so one, one of the things that, that could be an issue is, is the data itself, the price data, before July 2010. is really iffy. It's, there weren't very much exchanges before the July 2010. So I think it's, it's fair to call All, all, all that data, data archaeology. And, to give an example, there, there's this famous example of, somebody paying ten thousand bitcoins for forty-one dollars of pizza. So that gives you a price a dot. and, and there is also a very early, I think it's my earliest, data point, thirteen hundred and nine bitcoins for one dollar of electricity. yeah. So, so that's not really an exchange price, but a more like a case by case Price that's, that's found by data archaeology. And, and it's important because those data points, those early data points with the very low stock to flow and very low market values, they have, they have an influence on the R squared, on the fitness of the function, of course. I think it will Probably cost you a couple of percentage points, R squared, if you leave them out and start modeling from July two thousand

and ten. right. So your R squared wouldn't be ninety-five percent if you take those, say, those two data points out, it would be lower?

Yeah, l-like ninety-two or something.

okay, okay. And I suppose just in terms of, for those people who aren't as familiar with statistical modeling, what does it mean to have a ninety-five percent R squared?

Yeah, it, it, it, it means It means that the, chance that the, the value is, is, the so the change in value is caused by, by random events or other events than your input variable is very low. So it's, it's, it's really, it, it, it's really the input That, that correlates with the, the output variable and the, the chance of random, other variables, influencing that same output are, very low, close to zero in this case. Ninety-five percent is really, really high.

Yeah. okay. And I think another interesting kind of meme that's been going around in the community, and this is something that went around particularly in twenty seventeen, was this whole, "Oh, institutional money is coming," and that was, you know, that was one of the- I guess ideas rapidly flying around. And, and on the counter side of that, some, you know, detractors might say, "Oh, look, so much of the volume is fake, and maybe Tether is fractional-reserving, and that that is what's driving the volume and the price rise." Do you have any thoughts on that idea that, you know, "Oh, the volume is fake, and Tether is driving it"?

Yeah, that's an interesting question, especially because I'm an institutional investor. yeah, I, I think some institutional investors really get it on, on, on sea level, Like Fidelity, I think that's a very good example. But actually, I don't see much banks and insurance companies that, that, have to deal with, central bank capital, regime like, like Basel or, or Solvency. I don't see them invest in Bitcoin very soon. so if, if, if you look beyond the sea level, at, at banks and insurance companies and institutional investors, say at, at, at dealing room, where the traders are or, or the quants or, or even the young employees, then I see a lot of interest and a lot of buying too. So, Yeah, I, I think the institutional money is coming meme. Yes, I, I hope, I, I hope, we do. And I'm, also personally working towards that. I'd like to be a bridge between Bitcoin and the traditional institutional money. But we have a long way to go. And, yeah. It's, it's, it's, it's funny 'cause I, I also get the question a lot like, "Okay, you're predicting a one to ten trillion dollar, Bitcoin market. That, that's an enormous amount of money. where, where does that come from?" And, and indeed, it, it will, it will not take one trillion or, or a couple of trillion, just a percentage of that, but, but still a lot of money. And my answer to that question is, I think it's the, first, it's the first, the, the, the silver and gold market, where, where money is coming from and, and people selling silver, especially, and, and, and gold more if we approach the halving, and they will, they will rotate to, to Bitcoin a bit. and the second source of, of new money would be countries with negative interest, rates, like Europe and Japan at the moment, and US, soon, I guess.

it must be really hard for people in the US to imagine what it's like in Europe and Japan, to have zero interest on your bal- on, on your saving accounts and, and sometimes negative interest on your mortgage. So I have friends that have a negative interest mortgage rate, so they get money for living in their house. It's, it's really a weird world. And, if you get zero percent On your saving accounts or even have to pay in the future, who knows? it makes you do different things with, with your money and, and you might be looking for a Plan B and, invest some of it in, in Bitcoin.

Exactly. So I think it's around this idea that, Bitcoin may displace other markets and other, well, were pre-mu- previously, things that held some level of what we might call a monetary premium. so I was interested just to, to get some of your thoughts Thoughts in terms of overall finance and investing philosophy. So, an example would be, where do you, where do you sort of sit on the active or passive debate?

Yeah. a bit in line with the, Efficient Market and the, Random Walk Down Wall Street, book you mentioned from, Malkiel. Yeah. I think it's very hard to outperform the market, and generate alpha, so unless you have a real edge, some info that others have, some, some model, some, some, yeah A big dealing room and access to markets that, that others don't have. I would stick to passive. there's overwhelming evidence, that that's best for like eighty percent of the people and also with Bitcoin, you can do, technical analysis and trade a lot for fun, try to time, tops and bottoms,

I personally prefer averaging in, hodling, and, and, as an investment, strategy.

Plan B. You're a man after my own heart. I'm very similar. I'm very much about, passive, just long-term dol- like buy and hold. And I suppose that then brings also the question around allocation, right? So what sort of Bitcoin allocations do you think might be reasonable, depending on what sort of person you are, whether you're just like a retail individual, whether you're- Whether you're a high net worth individual or whether you're a fund, do you have any ideas on that?

Yeah, that's, that's a difficult question. It, it, it depends of course on the specific case and, and, and let me, warn that this isn't financial advice, of course, which, which is true for everything, all the ideas I have. But, yeah, that, that's really difficult to answer. maybe some general guidelines is never invest more in Bitcoin or any other asset than you're willing to lose. Well, there is a, I think it's small probability, but there is a probability that it goes to zero. So I think you should be willing or prepared to lose it all so don't do it with your pension funds or don't do it with money you need for something else. do it with, yeah, some money you have, laying around doing nothing, And also never invest in something that you don't understand. So do your research first and, and do it really well, 'cause there's lots of scammers out there. It's really easy to get caught into some shitcoin and lose all your money. So do it really good, read the white paper, follow the, the white rabbit, trail is very clear, but do your research and, okay, if, if you're then still, want to buy Bitcoin, say Say you're a millionaire and wanna have some fun and take some, some high risk with a small stake, I would say one or one to ten bitcoins, buys you a lot of fun, for the years to come. For institutions, it's a different game, 'cause they have obligations, to their clients and, and, and liabilities and, and regulators. So what I would do is at least research the best performing asset of the last ten year and do it well. So study Bitcoin and, and not blockchain, and understand it deeply. Why is it here? Why is it still here? and those kind of stuff. So

yeah, some very common sense tips there. And I think the other thing, that people face once they have been in Bitcoin for some time is this question of rebalancing, right? So many people come up with a certain allocation. So for argument's sake, they might normally do sixty forty stocks and bonds. But let's say they do that, but say they put maybe one percent Bitcoin, right? Do they just wanna have a small allocation in Bitcoin? But then, let's say there's a big bull market, and now that Bitcoin allocation is a lot more than one percent. So, do you have any thoughts on whether people should rebalance or, on the other hand, if they view it like a once-in-a-lifetime opportunity, would they just say not rebalance that, Bitcoin aspect or component of their portfolio?

Yeah, that, that's a complex question Question. let me say two things about it. I view Bitcoin also as the biggest asymmetrical bet of our time. So, yeah, if you see it that way, if you did your research, and if you have some money around, go for it and have some fun. But, I think I also think even if it's the biggest, biggest, opportunity in a lifetime, that there is nothing wrong with taking some chips off the table, after it goes ten to a hundred x. I mean, you have to live as well, and, and so take a couple percent off, do some nice things, and, and make sure you survive the next bear market, that, that kind of stuff. I sure did in two-- in, in the beginning of 2018. So that was after the all-time high. I didn't sell the top, of course, 'cause that's, that's really hard to do, almost impossible. But if something goes ten to a hundred X, make sure you have some, some- Some fun with it, and, I can tell you I'll, I'll do it again if, if Bitcoin indeed overshoots the, stock to flow model price after next halving, so the fifty thousands it, it overshoots maybe to a hundred or, or maybe two hundred thousand, dollars, I'll take some chips off the table, why not? so, so, so that's, that's one point. The other point is if you, if you look at it from a quant, investor perspective, this is, a very technical thing, i-if there is, asymmetrical, distributions So,

a power distribution, which, which I think is there, then it really makes sense to bet with small, sizes. So not put hundred percent of your money in, but put, for example, one or ten percent of your money in, and then,

your, your return will be, will be very much smoothed over time and still very high, not as high, and also not as low as if you go all in, but it would, it would bring your return very close to the, the highest return possible in that kind of situation, a bit like delta hedging, options.

I, I really like the insight there, and it reminds me of another book I've read by I believe his name is Will, William Bernstein, and I think he, he makes a similar comment there that some people, you know, for example, during the dot com bubble, that they were sitting on fortunes of maybe ten million or fifteen million, and they didn't even think to, you know, as he says, when, once you've already won the game, you should take some chips off the table, right? So some of these people who got really caught up in that hubris of, oh, I've got, you know, ten million worth of dot com stocks in the They thought, oh, look, I'll just keep holding and I'll become a hundred millionaire or a billionaire or whatever, and they didn't think to kind of realize, well, hey, what if I actually took some chips off the table? E-even if you took out one or two million of that, that's still a life-changing amount of money.

Exactly.

So, yeah, look, are there any other kind of comments you have around finance and investing philosophy?

One, one thing, what really interests me, is, is the, the arbitrage Arbitrage opportunity that might be there. So suppose that the quantitative easing, experiment that we're in right now, that it goes south and that it, it doesn't end well, then you should have a Plan B, there should be something after it and, but at least I think there should be some arbitrage possible, So maybe with negative interest, there will be an opportunity or a model like the Black and Scholes model that, that can earn you a risk-free return. I, I, I don't think it's impossible that that thing is out there, and, maybe it sounds like the Holy Grail, but I think that's the next-- in my mind, that's, that's, that's how the next step in Bitcoin's growth, not so much the, The, adoption of, of customers paying for coffee or, or shops, where you can pay with Bitcoin, but, but really a financial arbitrage that is found between the fiat world where you can, borrow money against negative interest rates and the Bitcoin world where you have a super hard asset that will be, well Harder than gold and harder than anything we've seen ever before, there must be-- my feeling tells me there must be an arbitrage opportunity there, and I'm working day and night to, to find that one.

Yeah, interesting thoughts. Hey, yeah, I think people can lose their heads, when they-- when, when it comes as well. So during the bull market, people just go crazy and they don't really-- the random person who doesn't really know about that, you know, Bitcoin and the, the whole cryptocurrency market, they're not paying attention to the, the cooler heads in the room, and they are kind of all looking for the best way to gamble and get a ten x or a hundred x. So that's something to watch out for.

Exactly. And, and, and in that respect, if, I really like the movie, The Big Short, that, you probably saw that one. if you haven't seen it, it's, it's a must see. It, it, it will show you that, during the last, global financial crisis,

it- S-some people saw it coming and, and, and had their Plan B ready and, and I think it's, it's similar to, to the times we live in today.

Yeah, it is a great movie, I do recommend it. so look, Plan B, I think that's pretty much all we've got time for. So if you have any last things you'd like to say just as a closing comment or otherwise, just tell the listeners where they can find you and follow you.

Yeah, sure. you can find me on, on Twitter, Plan Of course, and, and please, tweet me, DM me, with all your comments and questions and critiques. I'm really looking forward to, to discussion, that's why I am on Twitter. And that's also, maybe good to know, I put all the data, all the functions, all the Python scripts, on GitHub, so if people wanna, wanna check for themselves, or test it or, or improve on the model, please do so. I, I- we're also working, with some of my followers at the moment to, to improve the model. So, yeah, please, reach out and, Let's keep the discussion going.

Excellent. Well, look, it, thank you very much for coming on. It has been a really fascinating discussion, I'm sure the listeners will enjoy when I release this one. So thank you again for coming on the show, Plan B. Thank you for having me. So there you have it, some discussion around stock to flow ratio and trying to model that into what that means for the price of the asset. So let me know your thoughts on whether you think we can model this sort of thing or is it more-- Do you fall more on the side of thinking it's Mining, curve, overfitting, etcetera. also just wanted to give a shout out to Michael Fokson, the organizer of the London Bitcoin Devs Meetup. He left me a fantastic review, he left me five stars and wrote, "Highest signal Bitcoin podcast, a brilliant podcast. Stephan is great at bridging the gap between highly technical, experienced guests and general audiences. If you want to learn about Bitcoin tech, this is the podcast for you. Thank you, Michael, that's really kind of you. And guys, I'd really appreciate it if you wanna help me out, any other podcast app, you can give me a review, I'd really appreciate that. Otherwise, you can find the show notes on my website, stephanelivera dot com. This is episode sixty seven. Thanks guys, and I'll speak to you soon. Bye.