 If you know anything about Bitcoin, then you've probably seen this chart before. That's because the stock-to-flow model developed by Plan B is one of the most popular theories on Bitcoin's long-term price action. According to the model, Bitcoin's limited supply will drive its price to over $100,000 in one year from now. However, a recent report by crypto asset data firm ByteTree says the stock-to-flow model is fundamentally flawed. It would be really nice if that model was true. And yes, it's very, very good that there's a finite supply of Bitcoin. That makes Bitcoin incredible, but it doesn't create value. If the stock-to-flow model is not a reliable indicator, then what are the real factors driving Bitcoin's price action? And according to these factors, how much Bitcoin could be worth in one year from now? To answer these questions, we reached out to Charlie Morris, CIO and co-founder at ByteTree. I'm Giovanni, your host, and this is another exclusive Cointelegraph interview. In a latest report published by ByteTree, you debunked the stock-to-flow model as a reliable model to calculate the appreciation of Bitcoin. So what is your argument against the stock-to-flow model? Well, I suppose that you sum it up, but it's too good to be true. I mean, it would be really nice if that model was true. And I think the stock-to-flow is very much a technical argument. You're saying you're squeezing the market there for your force to price higher. But I revert to the gold market. I know a lot of people in the gold market, the serious people in the gold market. And yes, people talk about mine supply as a factor, but it's fairly considered to be a very minor factor, not a major factor. No one thinks that if you shut down gold mining, that the price of gold will go to infinity. It's just not the way it works. When you've got a vast amount of gold out there, it's that that you're valuing and a small amount of new supply, that's an irrelevance. And I would also point to, back in 2009, 10, 11, the Bitcoin inflation rate was really, really high. In other words, the stock-to-flow was negligible. And at that time, I would say it's the other way around, I would say the miners massively influenced price when they dominated the network. But in the future, they will be insignificant to the network. And obviously, they'll do hard work behind the scenes to keep it going. But economically, there will be far less significant in the future because the number of coins that they have in inventory and produced become less and less. So they won't have the impact. And it's completely wrong to think that the only place you can buy Bitcoin is from a miner. I mean, to the contrary, it's a massive liquid network. You can buy it from all sorts of actors in the space for all sorts of different reasons. So they do not have a monopoly on new supply. And to assume that the STOF model kind of assumes that that's the case, that you're squeezing the whole thing and we're running out of Bitcoin, it's just not the case. I suppose the final point is, yes, I like Thai supply. Yes, it's very, very good that there's a finite supply of Bitcoin. There'll never be more than 21 million Bitcoins. That's great. That provides confidence and stability. That makes Bitcoin credible, but it doesn't create value. Value comes from the actors in the space. More people using Bitcoin, more adoption, a busier network, vibrant technologies, all of these things create value. The supply side just creates stability, not value. So basically, you are saying that here, the most important thing is demand. So if there is not increasing demand, then this whole system of the stock to flow model wouldn't work because in order to increase value, Bitcoin needs to have increased demand, right? Absolutely. The supply is known, so it's not in the equation. If supply was variable and it came and went, like some of the token designs we're seeing today, then it would be very, very important. But because it's basically known and low and going to zero supply, it's all up to demand. Demand is what sets the price, not supply. In the report, you said that Bitcoin and gold are opposite. That goes against the common perception of Bitcoin as digital gold. So how are gold and Bitcoin opposite? The real point I'm trying to make is that if they're complementary assets, them being different is a good thing, not a bad thing. If you own Bitcoin and gold, then you have a better outcome than one or the other in terms of risk-adjusted returns. And please allow me to explain that because essentially, they're very similar on the supply side. We just talked about that. We're both 2% inflation assets at the moment, and obviously, both of those will fall, probably Bitcoin will fall faster than gold in terms of the supply side. But more importantly, the macro behavior of the two assets, gold likes an inflationary world and tends to outperform risky assets in general. And by risky assets, I just kind of mean the S&P 500 or something like that. Gold tends to outperform the S&P when the economy is doing badly or when bond yields are falling, where there's some kind of distress out there. Bitcoin tends to outperform with economies doing well, but also prefers inflation to be rising more stable. So both assets, in my opinion, are inflation sensitive. And indeed, the narrative within the space would agree with that. If that weren't true, then no one would see this as an asset that would protect you from some kind of collapse of the economic system. And it just transpires that over any period of time, any meaningful period of time, if you have a rebalancing strategy between gold and Bitcoin, you don't necessarily have a higher return depends on the period you check, but you pretty much always have a higher risk adjusted return. That is better bank your buck, a strategy that helps you to sleep at night. So you cover more scenarios. So in the report, you said that Bitcoin behaves like a growth stock, which means that it's expected to grow at a much faster rate than the market average. So what does make you believe so? Yeah, so the current round of growth stocks are of course tech stocks. I was referring to that. And if you only get specific, it behaves quite similarly to social media stocks. Now, Bitcoin has massively outperformed. That's not making a mistake there. When I talk about correlation, I don't mean performance. Bitcoin has done better than anything. But the up years and the down years, as I said, 2013 and 2017, the two best years of Bitcoin were two of the best years for social media stocks. And similarly, 14 and 18 were two of the worst years. And you can't escape that correlation. And the other performance in between has a reasonable fit. But if you think, where does Bitcoin come from? Well, it comes from the internet. And what is it? Well, it's a FinTech. So if it's a financial technology that comes from the internet, then it's not a great shock that it correlates with lots of FinTech and social media stocks. After all, we are building a network here. So, you know, I don't think I should surprise anyone that historically it's behaved very much like a tech stock. You also pointed out that the governments expanding their balance sheets, so pumping more and more cash into the economy, is positively correlated to the Bitcoin appreciation. So according to this argument, this year, we should see like an increase, an exponential increase in the Bitcoin price. Why haven't we seen that yet? Well, you know, what's wrong with the price appreciation of Bitcoin this year? I mean, not much has done better. I think the fangs have done a little bit better, but pretty much anything else. You can point to an individual stock like Zoom or some Tesla that's done really well, fine. But in talking of asset class level, not much has beaten Bitcoin. It's really been at the front. The money that's been printed by central banks around the world, not just in the US, has fed, you know, most asset prices. I mean, it hasn't fed everything. Things like things that are problematic in COVID and the leisure industry and energy, these things haven't done so well. But essentially, most asset prices have been flattered because there's more liquidity in the system. And I think, you know, most people who have experienced in asset markets would realize that prices are unsustainably high and can't really be justified by the current state of the economy or indeed the future outlook for growth. You know, a lot of things have got to go right for asset prices to maintain their current levels. Bitcoin is an interesting one because in our opinion, it's slightly above where it ought to be in terms of fair value, but not much above. But it's got the ability to grow much more so than the fangs, for example. And so I think that if you're an investor in a space like that, you know, it's not a bad call to reduce some of the index of profits and areas that have done really well and see this force carry on in Bitcoin. You also said that people should go along on Bitcoin when miners are selling it. So that sounds a bit counter-intuitive. Why would people go along on Bitcoin when miners are selling it? Shouldn't be the other way around? So it is counter-intuitive, but there's a lot of logic to it. When the miners are selling their Bitcoins, it transpires that that means the market bid is firm. So they like what they see in the market, they like the price and so they sell, they reduce their inventory. So when you're mining, you naturally build up inventories and then to turn that into cash, you sell, sell into the market. Now, you know, I think a lot of people would assume that the miners really want Bitcoin, but actually what they want is profit. In the same way, an oil or an oil company or a copper miner or a gold miner, they don't care about the commodities they're mining, they just want to make profit, they want to margin. And the Bitcoin miners, I would think that most of them would be incentivized by profit rather than hoarding Bitcoin for the future. Maybe the earlier adopters was a very different game, but I think nowadays when it's very commercial costs are high, that's really the way that the industry has gone. And so when they're increasing their inventory, it's because they have to, it's because they don't like the market they see. In the same way, when the copper price is down, a copper producer might start stockpiling because the market's not there for them to sell into. They're not necessarily taking a view on, I hope the price rises later. But you've got to assume that the miners know what they're doing, they've invested a lot of money, they're competent, they're good traders. And when they see a healthy market, they sell their stock. And when they see a weak market, they hold back. So that's why it works in reverse. Talking about mining, you said that the mining economy will soon face some serious challenges. What are these challenges according to you? Over the long term, fees become more important and the block reward becomes less important. And so fees have to support the entire network one day in the future. And in fact, it's not that far away, but before that crossover point happens, depends how things pan out a bit, but then how much the network grows. But it just means that the fees will be by far the dominant force in miners' reward. And we've got to look after the miners. I mean, at the moment I think they get $20 billion a year, but they need to be well-fed because they're doing a lot of work for it. They're holding the whole network together, which is an important job. And so if they're not incentivized, then it's harder for the network to operate and the hash rate will start to fall. And historically, you wouldn't necessarily think that was a good thing. But I think the network will always operate whatever happens because if it's not profitable, it will just become easier. And so all you're losing really is some security. And I think that you'll always be able to transact Bitcoin whatever happens in the future because there's just so many ways to do it. And if the network is dead, then you only need one person with a PC to mine it with one node and it keeps going, doesn't it? So I'm not suggesting that we're going to get to that point. But the system that Satoshi designed is very, very versatile and resilient for a range of scenarios, whether the Bitcoin is hugely successful or whether it's not. But I think the point he's making really is just that fees will have to be very high one day in the future to support the network, which is why we need more things like Lightning Network and SignChains and other solutions within the space. That's clear. So you also drew a parallelism between the price of Bitcoin and the activity on the Bitcoin network. You said that the more activity on the Bitcoin network, the more valuable it's going to be Bitcoin. Can you explain what you mean like drawing this correlation? The idea that you buy Bitcoin, everyone buys Bitcoin and then it's worth a lot of money. It's just not true. You've got to have a dynamic network. I bring this back to Facebook. Facebook, if no one used Facebook, if no one posted any pictures or funny jokes, then it would be worthless. The reason it's so valuable is because it's very busy and they get advertising revenue. But even without the advertising revenue, the network in itself is busy. I mean, WhatsApp had no revenue, but it was still a very valuable business model. Because when you've got the world's attention, then that value is attached to that. Bitcoin has got the world's attention or a growing part of the world's attention. I just see all the value in that. Now, as transactions also struggle to grow because we're bottom there, because as soon as you approach $3 million a week, then the fees start to accelerate. There is some kind of limitation there that the bottom line is that the amount of money that can change hands over the network is not capped. I mean, that can just keep on growing. Indeed, the average transaction size over the years has always been growing, certainly over any medium-term measure. And the correlation of the amount of money that transfers on the network, the transaction value or the network demand or call it what you will, that and the price of Bitcoin are highly correlated. And what's happened? If everyone on the planet would just huddle Bitcoin without transferring it, without creating some sort of activity, then probably there wouldn't be any appreciation of it. Am I understanding correctly your thought? I think that's absolutely correct. I mean, you put it very well. But perhaps there's one mistake in your argument. Perhaps one person could exit at the top and sell one Bitcoin for a trillion dollars, and that would be great. But everyone else would have nothing. Yeah, anything that's liquid during times of stress is valuable. And that's why a lot of macro investors hold US Treasury bonds because in a crisis, but we're quite used to the idea that dollar goes up and all the liquidity is in Treasury bonds. And I think to have something that has liquidity when things are going wrong really is a powerful idea. And Bitcoin is very much in that cap. So if everyone bought Bitcoin and didn't use it, there would be no liquidity. So there'd be no value. Another way to get to the same argument. Analysts at Pantera Capital used the stock to flow model to make a prediction for one year from now. So in August 2021, they predicted Bitcoin will reach $115,000 according to the stock to flow model. So assuming that you don't agree with this kind of prediction, would you be able to make an assessment on the price of Bitcoin from one year from now based on the metrics that you described in your report? You know, I don't know where network demand is going to be in a year's time, but I can assume that it's going to be better than it is now because the natural state of affairs is growth. And the trend growth rate is about 86% and has been for the last few years per year, which is not bad at all, is it? And so that would give me a lower target. So I think the worst price I'm going to give you for October 2021 is around $7,000. So that would be things all go horribly wrong, and the network starts contracting a bit and maybe some governments get in the way and cause trouble when we have some kind of recession. So it's about $7,000. I think a central target would be closer to about $20,000-$25,000. I think that would be my cool view of where we are in a year's time. And the other bound target, if we go back to bubble, would be about $96,000. But so I'm sorry, I can't keep up with the Pantera model of what was it, $116,000. But I assume if something goes up too quickly, then it probably comes down again. So you know, I'd be much happier with $25,000 a year and stay on that 86% growth rate for as long as possible. Cool. All right, that was it, Charlie. Thanks a lot for being with us. Thank you, Giovanni. And one day, maybe we don't have to do this on camera. Maybe one day we can actually shake hands and not wear a face mask. That was Charlie Morris, co-founder and chief investment officer at Byte3. I'm Giovanni, your host. If you enjoyed the interview, as always, smash the like button and see you next time.