Applying Stock-to-Flow (S2F) Model to Kaspa
(While I am analysing KAS mining, I am inspired to see how to apply S2F to KAS price prediction. Therefore I generated this article with ChatGPT. )
Part 1: Introduction to the Stock-to-Flow (S2F) Model
What is the Stock-to-Flow Model?
The Stock-to-Flow (S2F) model is a framework used to evaluate the scarcity of an asset and its potential price, particularly in the context of commodities like gold, silver, and, more recently, cryptocurrencies like Bitcoin. The model predicts that the scarcity of an asset, quantified by its Stock-to-Flow ratio, is a key driver of its value.
At its core:
Stock refers to the total existing supply of the asset.
Flow refers to the annual production or issuance of new supply.
The ratio, calculated as:
indicates how many years it would take, at the current production rate, to produce the total current supply of the asset.
For example:
Gold, with a high S2F ratio of approximately 60, is highly scarce because its existing supply is large relative to its annual production.
Bitcoin, after several halvings, now has a comparable S2F ratio, aligning it with commodities like gold and positioning it as a "digital gold."
History of the Stock-to-Flow Model
The S2F model was originally used to evaluate commodities such as gold and silver. Its application to Bitcoin and other cryptocurrencies gained prominence in 2019 when PlanB, a pseudonymous analyst, published the seminal article "Modeling Bitcoin's Value with Scarcity." PlanB argued that Bitcoin’s predictable and declining issuance schedule makes it comparable to precious metals, and its price can be modeled using its S2F ratio.
Key milestones in S2F’s development:
Traditional Commodities: Gold and silver have historically been valued based on their scarcity. High S2F ratios have made them reliable stores of value.
Application to Bitcoin: Bitcoin’s fixed supply of 21 million coins and halving mechanism make it a perfect candidate for S2F modeling. PlanB’s model demonstrated a strong correlation between Bitcoin’s S2F and its market value.
Broader Adoption: The S2F model has since been used to analyze other assets, including cryptocurrencies like Ethereum and now Kaspa (KAS), which have unique emission schedules.
The Essence of the Stock-to-Flow Model
The S2F model’s underlying principle is scarcity economics—assets that are harder to produce or mine tend to retain and grow their value over time. It posits that:
Scarcity Drives Value: As S2F increases (less flow relative to stock), the asset becomes more scarce, and its price is expected to rise.
Predictability Matters: Assets like Bitcoin or Kaspa, with transparent and predictable supply schedules, allow for accurate S2F calculations, making the model particularly effective.
Quantifying Scarcity: By comparing S2F across assets, investors can identify those with the potential for price growth due to increasing scarcity.
For example:
Gold’s S2F of ~60 indicates that it would take 60 years to produce its current supply at the current mining rate. This high ratio contributes to its status as a store of value.
Bitcoin’s S2F ratio has increased over time due to its halvings, with PlanB’s model showing strong price appreciation correlated to S2F growth.
Why the S2F Model Matters for Cryptocurrencies
Despite its limitations, the S2F model has been instrumental in shaping how the crypto community evaluates scarcity and its impact on value. Its application to Bitcoin and other scarce digital assets like Kaspa highlights:
Transparency: Cryptocurrencies with predictable supply schedules align perfectly with S2F analysis, enabling investors to model future price trends.
Scarcity Economics: The S2F model underscores the importance of limited supply in driving value, resonating with Bitcoin’s "hard money" ethos and Kaspa’s aggressive emission reduction schedule.
Macro Relevance: The model bridges traditional and digital finance by applying age-old principles of scarcity valuation to the innovative realm of blockchain.
This foundation provides the theoretical and historical context for applying the Stock-to-Flow model to Kaspa (KAS), which we will explore in the next section. In particular, Kaspa’s unique emission schedule and rapid reduction in flow make it an intriguing candidate for S2F-based price prediction.
Part 2: Applying the Stock-to-Flow (S2F) Model to Predict Kaspa’s Price
Kaspa (KAS) is uniquely positioned within the cryptocurrency landscape due to its rapid emission reduction schedule, which introduces scarcity faster than many other cryptocurrencies. Its predictable and transparent supply mechanism makes it a strong candidate for applying the Stock-to-Flow (S2F) model.
1. Why Use S2F for Kaspa?
Kaspa’s emission schedule is based on monthly reward reductions that approximate an annual halving (5.6% monthly decrease). This characteristic aligns with the S2F model’s focus on scarcity, making Kaspa a natural fit for price forecasting using S2F.
Key properties of Kaspa relevant to the S2F model:
Total Supply: Kaspa’s maximum supply is capped at approximately 28.7 billion KAS.
Emission Schedule: As of 2025, the block reward is expected to be 69.3 KAS/block, with block times of 1 second, resulting in approximately 2.2 billion KAS/year as the annual flow.
Circulating Supply: By 2025, the circulating supply is projected to be 25.49 billion KAS.
Rapid Scarcity Growth: The steep reduction in flow accelerates the increase in Kaspa’s S2F ratio, differentiating it from slower-scarcity assets like Bitcoin.
2. Calculating Kaspa’s S2F Ratio
To apply the S2F model, we calculate the S2F ratio at various points in Kaspa’s emission timeline:
2025 Projection:
Stock (Circulating Supply): 25.49 billion KAS.
Flow (Annual Emission): 2.2 billion KAS.
S2F Ratio:
Post-2026 Projection:
Assuming further reduction in block rewards (~35 KAS/block) and annual flow halving:
Stock: 27.7 billion KAS.
Flow: 1.1 billion KAS.
S2F Ratio:
Kaspa’s S2F is increasing rapidly due to its aggressive emission reduction, making it scarcer relative to its stock.
3. Adapting the S2F Price Model
The relationship between price and S2F in the model is expressed as:
Where:
a is the baseline multiplier, reflecting market adoption, utility, and sentiment.
b is the sensitivity of price to scarcity, determined empirically.
For Bitcoin:
Historical data suggests a ≈ 0.4 and b ≈ 3.3, reflecting strong market sensitivity to scarcity.
For Kaspa:
Kaspa is still maturing, with lower market adoption and fewer use cases than Bitcoin. Hence:
a values are set lower to reflect its current stage.
b values are also lower, given Kaspa’s evolving role as a transactional network rather than a pure store of value.
4. Key Considerations for Kaspa
While the S2F model provides a strong foundation, several factors unique to Kaspa influence its price prediction:
Utility and Ecosystem Development:
Kaspa’s adoption in payments, DeFi, or as a Layer 1 protocol will impact demand and amplify the effect of its scarcity.
Market Sentiment:
Kaspa’s “fair launch” and aggressive emission reduction are appealing to decentralization-focused investors, but broad adoption will depend on its narrative gaining traction.
Scarcity Impact Timing:
Scarcity’s effect on price may lag due to low initial awareness or speculative trading cycles.
5. Scenarios for Price Prediction
We will use the following two scenarios in the next section to predict Kaspa’s price based on:
Good Case: High adoption, strong utility, and market enthusiasm for scarcity.
Base Case: Moderate adoption, steady ecosystem growth, and market acceptance of S2F-based valuation.
Each scenario will involve specific assumptions for the a and b parameters in the S2F model and will estimate Kaspa’s price for 2025 and beyond. Stay tuned for the full analysis and projections!
Part 3: Predicting Kaspa’s Price Using S2F: Scenario Analysis
Using the Stock-to-Flow (S2F) model, we can estimate Kaspa's price under two scenarios: Good Case and Base Case. Each scenario reflects different levels of adoption, market demand, and sensitivity to scarcity.
1. Parameters for the Scenarios
The S2F model is applied using the formula:
Where:
a: Baseline price multiplier, reflecting adoption, utility, and sentiment.
b: Sensitivity of price to scarcity (S2F).
We will calculate the price for 2025 using the following assumptions for each scenario:
2025 S2F Calculation:
Stock (Circulating Supply): 25.49 billion KAS.
Flow (Annual Emission): 2.2 billion KAS.
S2F Ratio:
2. Price Predictions for 2025
a) Good Case
Per 1 KAS: ~$2.21 USD.
b) Base Case
Per 1 KAS: ~$0.27 USD.
3. Scenario Implications
Good Case ($2.21 USD per KAS):
Assumes strong adoption driven by ecosystem growth, including DeFi, payments, and transaction layers.
Market sentiment values Kaspa's aggressive scarcity akin to Bitcoin's trajectory.
Base Case ($0.27 USD per KAS):
Assumes moderate adoption, with the market slowly appreciating Kaspa’s scarcity.
Some DeFi and payment use cases drive steady growth, but speculation remains limited.
4. Future Outlook
While the Stock-to-Flow model provides a framework for scarcity-driven price predictions, real-world factors like ecosystem development, market sentiment, and adoption play significant roles. Kaspa's rapid emission reduction creates a unique dynamic that could amplify its S2F impact, especially as its ecosystem matures.
These predictions, though speculative, highlight the range of possibilities for Kaspa’s price depending on adoption levels and market dynamics. As Kaspa continues to grow, its actual performance will depend on the strength of its utility and narrative within the crypto space.
I am actively advocating market education on Bitcoin, cryptocurrencies, and web3, with the hope of empowering more people to seize this chance and benefit from these technologies, ultimately achieving genuine financial freedom. Feel free to share this article with your friends and kindly recommend this column to them.