Stock-to-Flow: An Important Monetary Concept

Today we cover the important concept of Stock-to-flow for a monetary asset.

It's important to understand how this works so you can think reasonably about the price to value of a monetary good, whether that's gold, silver or Bitcoin.

Stock is the total supply of an asset at present time.

Flow is the increase of the asset over time. (inflation)

The ratio of stock to flow is a ratio to show how long it will take the supply of an asset to double.

In the case of gold, it currently takes about 60 years to double the supply.

For silver, it takes about 10.

And the prices for each metal represent this.

Because gold’s high stock to flow means it is considered scarcer, and thus more valuable, than silver.

When it comes to money, you want the scarcest and lowest inflation rate possible. You don’t want others to be able to produce more of it since that devalues your holdings. The best form of money is as resistant as possible to manipulation and increasing supply.

Bitcoin beats all other money due to its known supply and consistent production rate, which will mint the last Bitcoin sometime around 2140.

Then there’s the halving, which cuts the block reward (release of Bitcoins) every 4 years. Here’s the current halvening history of Bitcoin:

Bitcoin inception 2008: 50 BTC per block reward
November 28, 2012: 25 BTC per block reward
July 9, 2016: 12.5 BTC per block reward
May 11, 2020: 6.25 BTC per block
Upcoming: Spring of 2024: 3.125 per block
and so on.
2140: Last BTC will be mined.

Measuring Scarcity: At this point, it is necessary to describe a common measurement of scarcity that can be used as a relative point of comparison – the stock to flow ratio. The delineation of a stock and flow variable dates to the work of Fisher and Irving in 1896 and is conceptually applied across the fields of finance, accounting, and economics.9 Stock is the accumulated amount of some asset at a point in time, and flow is the increase in that asset over a period (typically a year). The stock/flow ratio is a metric to show the amount of time in which it will take for the current stock to double in amount. The higher the ratio, the longer it takes for the asset’s stock to double and the scarcer the asset. This is particularly helpful when assessing the relative degree of scarcity in commodities. Today the stock to flow ratios of gold and silver are roughly 60 and 10 years, respectively. The scarcity of the precious metals, gold in particular, is the primary reason that societies converged upon them. Gold’s high scarcity relative to silver made it the ultimate standard of value.

-The 7th Property

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