Vitalik Buterin critiques stock-to-flow model as giving ‘false sense of certainty’

Ethereum co-founder Vitalik Buterin came out against overly simplified financial models for crypto markets on Tuesday, citing the stock-to-flow model as a “harmful” example. 

Buterin tweeted that the stock-to-flow model was not looking good and he couldn’t help but criticize simplistic financial models.

“I think financial models that give people a false sense of certainty and predestination that number-will-go-up are harmful and deserve all the mockery they get,” he said. 

Stock-to-flow is a model some bitcoin (BTC) traders use to forecast the price of the cryptocurrency, that was used for natural resources like gold. As these are scarce resources the amount that can be produced reduces over time, which causes the stock-to-flow ratio to increase.

Essentially the ratio measures the amount of bitcoin available in the market divided by the amount mined annually. This is then used to create a line (the red line below) on a price chart showing estimated prices in the future. 

Source: Look into bitcoin

Based on the above chart the stock-to-flow model has, for the most part, been correct. However, as was pointed out by sassal.eth, and echoed by Buterin, the model has recently begun to decouple from the actual price of bitcoin.

The model predicted bitcoin’s price to be $67,175 as of June 18, however, bitcoin traded below $19,000 that day and was trading at $20,845 at the time of writing, according to Coinbase data via TradingView.

© 2022 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.