The Stock to Flow Model: Mark Valek’s Exclusive Interview with “Plan B”

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The Stock to Flow Model Mark Valek’s Exclusive Interview with Plan B

“I read the whitepaper regarding Bitcoin, was hooked and went down the rabbit hole.”

Plan B

Key Takeaways

  • When asked if the Bitcoin Halving is Already Priced In, Plan B Says “No.”
  • Plan B says that Bitcoin has done a 10x increase during the last halvings, and his model forecasts this trend to continue.
  • The largest critique of Plan B’s Stock to Flow Ratio Model is that it does not consider demand. Plan B answers this critique by saying that many famous financial pricing models including Capital Asset  Pricing Model and the Black & Scholes Model do not consider demand.

Plan B is blogging under a pseudonym. Who exactly is behind this baseball cap remains unknown. We also asked him some personal questions in this interview. His Twitter handle is: @100trillionUSD.

Plan B

Plan B, When Will You Show Yourself?

As explained in the previous chapter, we arranged an interview with the father of the “Stock-to-Flow Model”. Plan B says that Bitcoin is here to stay. He also expects the price explosion of Bitcoin to be foreseen by his model. Why he is so sure about this? How does he deal with critics? Will he ever take off his cap and show his face?

Mark: Plan B, almost a year ago the publication of your model really shook up the entire crypto community. How do you deal with all this attention you and your model have received? What have you experienced this past year?

  • Plan B: It has been a very interesting year since the publication of the article March 22nd 2019. The paper was well received and I gained valuable feedback from econometricians and math/stats people all over the world. I love the interaction with the community and the open source vision of sharing knowledge. I really enjoyed doing the podcasts. With 60k followers and a full-time job, I do have to make choices. It is almost impossible to read all the comments, DM’s (Direct Messages), Telegram messages, WhatsApp messages, emails, and I hope everybody understands. I want to keep focused on analysis, investing, and writing more articles.

Mark: Can you tell us, what you do for a living and why do you use a pseudonym?

  • Plan B: I am both an analyst & investor at an investment office of a large institutional investor in the Netherlands. As a team we invest $50+ Billion AUM. My main focus is on mortgages, loans, and structured finance. I do not want my employer to have any negative consequences from my Bitcoin “hobby”. Also, I consider it good operational security to remain anonymous.

Mark: Where did your interest in Bitcoin come from?

  • Plan B: If you have seen the movie The Big Short (2015), that was my life from 2007-2008: CDO’s (Collateralized Debt Obligations), ABS (Asset Backed Securities), and RMBS (Residential Mortgage Backed Securities) etc. The craziness of negative interest rates and QE (Quantitative Easing) forced me to rethink everything I knew about finance. So, I was actively looking for QE hedges in 2013 and found an article about Bitcoin on the website Zerohedge. I read the whitepaper, was hooked and went down the rabbit hole.

Mark: Why did you start to model the value of Bitcoin?

  • Plan B: I started modeling because I wanted to know what drives Bitcoin’s price. I noticed that there was a lot of technical analysis, but not much statistics / econometrics modeling. So, I tried to make a more fundamental model, based on Bitcoin value: it’s scarcity.

Mark: In our “In Gold We Trust Reports” we have been writing about the S2F ratio of Gold and Silver for many years. It’s great, that through your model, this concept of scarcity has been introduced to an even greater community. In terms of terminology, however, we prefer to talk about constancy, rather than scarcity when talking about SF (Stock to Flow). A higher SF ratio indicates a more constant quantity rather than a scarcer quantity of the good (as a higher scarcity indicates that the quantity actually goes down). Even though this is just a minor differentiation in terminology, we think that this could be helpful for a more intuitive understanding of the S2F concept. What are your thoughts in this respect?

  • Plan B: Unforgeable scarcity (Nick Szabo) is a well know concept in the Bitcoin community, so I see SF as a nice quantification of that concept. Frankly I think some people in the “commodity community” don’t have a very good definition of scarcity. For example, I talked to a lot of commodities investors that think platinum is scarcer than gold because there is less platinum in the world than gold. I prefer the definition of scarcity that relates production (flow) to stock. You could also interpret this as inability of producers to influence stock (and thus price): with oil producers have much influence, and with gold less. Maybe your definition of “constancy” is the same? This is something we should discuss further.

“The Drunk & His Dog” Analogy

The drunken sailor goes out with his dog on a leash, wanders around in a random fashion and the dog has to stay with him, but sometimes he is on the right, sometimes on the left, but he cannot go any further as he is on a leash.

You don’t know where the drunken sailor and the dog are going, but you do know they stay together.    

Mark: Could you please explain to us the analogy regarding “the drunk and his dog” again and tell us the meaning for our readership?

  • Plan B: The drunk and his dog story is a popular story to explain cointegration. Correlation is about how two series move together. Cointegration is about two series staying together. So, the drunk walks a random unpredictable path, and his dog too, but the distance between the drunk and the dog is predictable, it is never larger than the leash. So, without knowing where the drunk or dog are going, we can predict they stay together. With stock-to-flow and Bitcoin it is special case of course, because we know where one of the two is going: SF. Cointegration is used to test if correlation is spurious or real: no cointegration = spurious. SF and BTC are cointegrated, so they are likely (no guarantee) not spurious.

Why Current Prices of BTC Do Not Reflect the Predictions of the SF-Model

Mark: Are people too dumb to get it?
Plan B: No, it is enough if some people get it. Like with insider information, if only 10-100 get it, they will move the price. Dumb money is formally “noise” according to the EMH (Efficient Market Hypothesis), it is irrelevant.
Mark: Is it bad model?
Plan B:  I think the cointegration is real, so the model is good. So far, I have not seen anything better.
Mark: Are the ones that “get it” already invested?
Plan B:  Most will be invested, but I think that many who “get it”, also see the big risks such as government bans, a software bug, “the next Bitcoin”, death spiral, etc. These risks prevent them from going all in. Actually, this is true for myself as well: I am invested, but not 100%; if I knew 100% certain Bitcoin would go to $100k USD in 2021, I would go all in and even lend money.
Mark: Are the markets inefficient?
Plan B: No, the markets are efficient. Also, the $150 Billion Bitcoin market is efficient, as I have shown in the FX (Foreign Exchange) example in my article. Easy arbitrage between BTC/USD, BTC/EUR, and BTC/JPY markets is not possible.
Mark: Do people know about the model?
Plan B:  Enough people know about it. I have 60k followers on Twitter and many of them are investment bankers, quants, miners, venture capitalists, hedge-fund CEO’s, and CIO’s, etc. The SF model was featured in MSNBC and in Forbes.    

Mark: Your model has occasionally been criticized – that it only explains the Bitcoin price in reference to Bitcoin supply. If this is even possible, how do you incorporate demand?

  • Plan B:  People that use the demand argument probably don’t have a statistics or investing background. The argument is theoretically right (price is a function of supply and demand) but there are a lot of famous pricing models that do not use demand (or supply) as input and still give good predictions. Some examples of this are the CAPM (Capital Asset Pricing Model) and Black & Scholes model, as both price with only risk / volatility (standard deviation, etc). The demand argument is really based on ignorance.

Mark: Let’s now throw a new thought into the equation: The model tries to explain the price of Bitcoin in USD. We know, that measuring value in fiat money over time is difficult, as fiat currencies are designed to be permanently inflated. In our mind, the model implicitly does not take into account fiat money inflation. If say, – at least for the sake of a thought experiment – the USD would hyperinflate within the next years, we would expect the model to vastly underestimate the USD value of Bitcoins. What are your thoughts regarding the dollar-inflation in regard to SF model?

  • Plan B: It is true that the SF model doesn’t correct for inflation. If we would do that, we probably see not much difference anyway because from 2009-2019 inflation was low. And indeed, in my opinion the SF model predicts USD hyperinflation because Bitcoin USD does this 10x every 4 years. Many people have problems with this thought, but for me it is not an improbable scenario, given negative interest rates and what central banks are doing with QE: they are going full Zimbabwe in my opinion.

Mark: What is the deal with the artist you commissioned? (The artist is going to make an artwork out of the charts).

  • Plan B: The artist Petek was intrigued by the charts and she asked permission to paint it. It will be a unique painting with some special elements that are yet to be revealed. It is exciting to see that a lot of other people are inspired as well and are commissioning a similar SF painting. Her idea is that she will make a series of paintings using different colors and materials based on SF. I think Bitcoin is not only about programming and money but also about a movement and a revolution. Art and science are two sides of the same thing, they belong together.

Mark: What other projects are you currently working on?

  • Plan B: I am cooperating with other Bitcoiners on research and writing more articles. I am working together with some investment funds, also traditional institutes, finding ways to include an exotic investment like Bitcoin in the existing asset mix. Also, I am doing chain-analytics, crunching the 300GB blockchain to find more patterns that can give insights and be used for proprietary trading, that is really uncharted territory.

Mark: (When) can we expect an outing of Plan B?

  • Plan B: I think the chances of me going dark are higher than an outing. I have no desire to become a public figure. Especially when the model works, which I hope and expect of course. People that want to meet me know where to find me, through my network, and everybody can verify it is me by my cryptographic signature (like on the articles).

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