Why The Bitcoin Stock-to-Flow Model Is Not Useful

In March 2019, an anonymous idiosyncratic by the pseudonym “PlanB” astonished investors erstwhile helium published “Modeling Bitcoin Value with Scarcity,” and introduced his present celebrated Stock-to-Flow (S2F) model. The exemplary predicted exponential maturation of the bitcoin marketplace value, with what purported to beryllium dependable technological methods. A twelvemonth later, helium introduced the Stock-to-Flow Cross Asset (S2FX) model, which includes gold, silver, diamond and existent property data. As we volition spot below, PlanB’s models are scientifically invalid and don’t person the assurance level helium claims they do.

According to his website, PlanB is “a erstwhile organization capitalist with 25 years of acquisition successful fiscal markets. He has a ineligible and quantitative concern inheritance and has ever been fascinated by modeling hazard and return.” Note that helium doesn’t assertion to person expertise successful modeling hazard and return. This volition go important, shortly, arsenic we volition rapidly spot that the S2F/S2FX models could not person been formulated by anyone with heavy cognition of statistic modeling.

According to PlanB's March 2019 article:

"The linear regression function: ln(market value) = 3.3 * ln(SF)+14.6

.. tin beryllium written arsenic a powerfulness instrumentality function: marketplace worth = exp(14.6) * SF ^ 3.3

The anticipation of a powerfulness instrumentality with 95% R2 implicit 8 orders of magnitude, adds assurance that the main operator of bitcoin worth is correctly captured with SF.”

As awesome arsenic that whitethorn sound, PlanB has made a remedial mistake here. Notice however the relation says “market value” equals a relation of Stock-to-Flow? This is simply a tautology and truthful a statistically invalid model, for the elemental crushed that “market value” decomposes to “Stock * Price” portion “Stock / Flow” is connected the different broadside of the equation.

In layman’s presumption PlanB is fundamentally asserting that “Stock is simply a relation of Stock.” A tautology is simply a trivial connection that is existent nether immoderate circumstances. It’s similar saying a banana is simply a benignant of banana. Of people Stock is simply a relation of Stock. This is wherefore the information fits, but is scientifically worthless. Tautologies are existent but bash not archer america thing useful. Rather, they are existent due to the fact that of the meanings of the terms.

This means the exemplary is autocorrelated (i.e. invalid). When you set for that, the R-Squared (R2) worth is zero. Thus, scientifically speaking, Stock-to-Flow is nonsensical and cannot beryllium utilized to exemplary price.

“It shows precocious correlation [because] it uses the aforesaid word successful each axis (stock), and erstwhile you instrumentality the log of 2 presumption with the aforesaid adaptable you ADD it. When 1 (stock) is overmuch much volatile, it dominates. The exemplary is autocorrelated. Does not request S2F astatine all. Just terms vs time.”—Cory Klippsten

Furthermore, the architecture of his models shows a deficiency of knowing of statistical modeling, nevermind that the exemplary doesn’t adjacent incorporated demand. To marque the models valid helium would person to detrend the clip series. Their innovations, the small inconsistencies, should incorporate accusation astir the different broadside of the equation. Without detrending, 1 gets spurious results. Just regressing 2 sloped lines against each different creates a semblance of correlation that conscionable isn’t there.

PlanB’s Stock-to-Flow Cross Asset (S2FX) exemplary suffers from the aforesaid basal mistake and has further issues. PlanB claims the S2FX exemplary leaves retired time for bitcoin, but this is mendacious arsenic his Bitcoin phases are a relation of time. The clusters adjacent halving periods and 1 tin already gully retired the adjacent phases connected the X-axis. The others assets are cherry picked and adjacent the values for those assets are cherry picked.

For a much elaborate breakdown of PlanB’s atrocious math, work btconometrics’s Bitcoin and Stock to Flow critique wherever helium shows the fallacious statistic down PlanB’s models and illustrates the fallacy of bamboozling statistics. This is argumentum verbosium — different known arsenic impervious by verbosity oregon proof by intimidation.

“In this nonfiction I volition amusement you wherefore banal to travel is thing but a formation of fancy — a fairytale oregon a phantasy bolstered by affectional enactment from irrational actors, a deficiency of broad-scale mathematical cognition and impervious by verbosity.” (btconometrics)

PlanB has rebuffed valid disapproval saying the exemplary can beryllium restated with terms utilizing wholly antithetic parameters that debar the tautology. However, these alternate parameters are conscionable arbitrary numbers that helium changes from clip to time. To recognize wherefore this is simply a problem, we tin comparison it to the celebrated Bitcoin Rainbow Chart. The Rainbow Chart was created by Über Holger and it has a highly disposable disclaimer connected it which says:

“The colour bands travel a logarithmic regression (introduced by Bitcointalk User trolololo successful 2014), but are different wholly arbitrary and without immoderate technological basis. We ne'er alteration them though. In different words: It volition lone beryllium close until 1 time it isn’t anymore.”

Holger is wholly honorable and transparent astir the Rainbow Chart. It is not intended to beryllium thing much than a chaotic guess. It’s not pretending to beryllium scientific.

Contrast this to PlanB, who has gone retired of his mode to falsely assertion a technological ground for his models successful his writings and connected dozens of podcast shows. On these shows helium claims to invited disapproval but his Twitter relationship tells a antithetic communicative — anyone who points retired a flaw, imaginable problem, has a valid question oregon adjacent “Likes” a valid enquiry into the validity of his assertions is blocked.

PlanB says helium blocks radical for “noise control” but assures his followers that helium welcomes valid statement and criticism. However, his actions connected Twitter archer a antithetic story. Individuals who knock PlanB’s models successful bully religion are blocked by PlanB. Inquiring why S2FX phases are aligned with halvings, and truthful look arsenic if to beryllium a clip series, quickly results successful a block. PlanB blocks those who authorities opposing opinions. He blocks radical who "Like" tweets with genuine criticisms. Followers person been blocked for privately messaging him a superior question. He has adjacent blocked radical who alteration their Twitter name, successful jest, to PlanC.

This is not the behaviour that 1 would expect from an idiosyncratic with genuine expertise successful quantitative concern oregon who has respect for the technological method. If PlanB wants to honestly assertion that his models person a technological R2 worth successful the precocious 90s, past helium cannot beryllium blocking and censoring valid disapproval that shows otherwise.

What It Means To Be A “Useful” Model

PlanB often repeats George Box’s assertion that, “All models are wrong, but immoderate are useful.” He misuses the quote. Box was referring to technological models that connection testable hypotheses, not tautologies. In an nonfiction connected the taxable for Nature, Alexander J. Stewart explains:

“But the intent of a exemplary is ever to clarify our knowing of what we are studying. That sounds straightforward, but it’s not, due to the fact that clarity of knowing tin lone beryllium assessed successful hindsight. A exemplary indispensable assistance america formulate testable hypotheses successful a mode that moves a tract forward, possibly by pointing america to a caller thought that finds empirical support, by allowing america to propulsion retired an aged idea, oregon by making a much precise quantitative prediction. […] Bad models aren’t wrong, they’re tautological”

PlanB’s ardent followers often retort, “But, Einstein and Newton made mistakes! His exemplary volition enactment until it doesn’t.” This misses the constituent and it is insulting to scientists similar Einstein and Newton. Yes,it's existent that Newton and Einstein were fallible, but arsenic followers of the technological method, they welcomed disapproval and admitted their mistakes. PlanB avoids both.

Einstein and Newton’s revolutionary models were groundbreaking hypotheses that clarified our knowing of the universe. Neither are celebrated for postulating tautologies. Newton said forces enactment connected matter. Einstein said substance is vigor and vigor is matter. PlanB made the nonsensical assertion that banal is simply a relation of stock. That’s not a utile proposal oregon model. Bitcoiners who assertion to combat against snake lipid salesmanship and shitcoinery should beryllium demanding better.

Tell Me The Good News

Now that we cognize that the S2F/S2FX models are conscionable lines connected a illustration with nary technological basis, we tin acceptable those models speech and determination connected and absorption our vigor connected amended hypotheses that tin beryllium tested and perchance alteration the mode we deliberation astir bitcoin. We don’t person to shackle our expectations to PlanB’s arbitrary terms schedule.

Those who fell for PlanB’s argumentum verbosium tin determination connected and summation existent condemnation successful Bitcoin by learning astir its properties, its web effects and what sets it isolated from each different projects. Bitcoin has a agleam aboriginal and the sooner we determination distant from atrocious models, the sooner we tin travel person to knowing it.

This is simply a impermanent station by Level39. Opinions expressed are wholly their ain and bash not needfully bespeak those of BTC Inc oregon Bitcoin Magazine.