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A brief history of Bitcoin Stock-to-Flow models

The possibility of the S2F model’s results possibly being spurious was also addressed in a July 2019 review article by a Dutch econometrician called Marcel Burger. In the article, Burger replicated the S2F model and tested whether the model met the needed statistical requirements needed to use those techniques. Burger found flaws related to the model’s underlying assumptions, and suggested that the model should be improved upon.

The rise of cointegration

In an August 11th 2019 publication, Nick Emblow (phraudsta), an Australian statistician, picked up where Burger left off. Emblow’s work improved upon the original S2F model by applying a different statistical technique (a Vector Error Correction Model) to overcome the statistical limitations that were identified by Burger. More importantly, Emblow found that Bitcoin’s S2F ratio and price are ‘cointegrated’, which means that the identified long-term relationship between the two is actually not spurious.

To explain what cointegration entails, Emblow used an analogy about a drunk walking his dog. Imagine them strolling around, both occasionally going in different directions but remaining in close proximity due to the leash that connects them. Here, the drunk and his dog are ‘cointegrated’; they are connected and will both end up in the same place — wherever that may be.

The opposite would be true if a drunk is on his way home, and a stray dog crosses his path. Both stroll around together for a bit, but this relationship proves to be meaningless if a car drives by and scares the dog away.

In his conclusion, Emblow suggests that this analogy needs to be changed to apply to the Bitcoin S2F model. Since the S2F ratio variable is actually rather constant, unlike the drunk or his dog, it would be more appropriate to consider Bitcoin’s price to be the drunk and S2F ratio to be the road home.

Shortly after, in September 2019, Marcel Burger replicated Emblow’s findings. Later that month,...

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