Bitcoin’s Stock-to-Flow Limitation
Although taking the rarity of Bitcoin as a key predictor of the price is a strong point of this model, but having only one variable in price prediction is also a weakness. This is because other variables that affect the price are not included in the calculations such as investor sentiment, cyber attacks, replacement of other technologies, relevant law changes, and other unpredictable events. All of these variables can affect investors’ trading decisions and affect Bitcoin’s price volatility more than the model can predict.
Bitcoin's Stock-to-Flow Model is a Bitcoin price prediction model that uses the relationship between Bitcoin’s rarity or Stock-to-Flow ratio with its past prices to predict future prices under the assumption that the more scarce the resources are, the higher the price will be.
However, resource scarcity is not the only variable that affects an asset, like Bitcoin’s, price. There are still numerous other factors that Bitcoin's Stock-to-Flow model does not take into account for its predictions. Investors who are interested in using this model to make investment decisions should use other tools along with it to obtain the most comprehensive information, whilst also conducting a suitable risk management strategy as well.