Happy Friday everyone!

Bitcoin began the week with a pullback before rallying on news that the Federal Reserve, the US central bank, had hinted at interest rate cuts in 2024 and beyond.

Lower interest rates encourage demand for assets such as property, stocks, and crypto. 🚀 

If this move ends the tightening cycle of the past two years and is mirrored by central banks around the world, it's another catalyst for Bitcoin. The outlook for next year is already bullish, based on the likely launch of Bitcoin ETFs in the US and the next halving event in April.

The fact that Bitcoin is up more than 150% YTD and has major catalysts lined up is attracting more and more media attention. And it seems that some of the implications of the next halving are only beginning to be understood.

One of the implications is that Bitcoin will be more scarce than gold.

It's a big one. For many investors, gold holds a special place in their worldview because of its scarcity.

So let's look at why Bitcoin will be more scarce. 🔬 

Let's start with this clip from CNBC. The gentleman speaking is Brian Kelly, who is the founder of digital currency investment firm BKCM and the author of 'The Bitcoin Big Bang: How Alternative Currencies are About to Change the World'. He's been investing in Bitcoin since 2012.

Yup, you've heard it right. He says:

And then he refers to the stock-to-flow ratio. 🤯 

I hear you, so let's take a closer look.

What's the stock-to-flow ratio?

The stock-to-flow model is commonly used to price commodities such as gold, silver, and platinum. As the name suggests, the model evaluates the relationship between the current supply (stock) and the current production rate (flow). So you take the stock and divide it by the flow. The number you get is the number of years it will take to reach the current level of supply at the current production rate.

Rule of thumb: The higher the stock-to-flow ratio, the more scarce an asset is. This generally translates into how valuable an asset is. ☝️ 

Bitcoin's current stock-to-flow ratio

Let's run the numbers for Bitcoin.

The current supply is 19.57 million, while the annual flow is 328,500.

That’s a stock-to-flow ratio of 59.6.

To recap, this means that it would take about 60 years to produce the current supply of Bitcoin at the current production rate.

Now, let's compare that to gold. 🥁 

Gold's stock-to-flow ratio

According to the World Gold Council, the best current estimates suggest that approximately 208,874 tonnes of gold have been mined throughout history.

The World Gold Council also reports that gold producers uncover an average of 3000 tonnes of gold each year.

That's a stock-to-flow ratio of 69.6.

As you can see, gold currently has a higher stock-to-flow ratio than Bitcoin.

But that will change next year. 🔥 

How the halving affects Bitcoin's stock-to-flow ratio

In April the next halving will take place. If you missed the issue in which I explained it, you can read about it here. What you need to remember is this: The halving is the single most important event in crypto.

Bitcoin is created by miners (aka computers) solving mathematical problems. Each time a miner successfully validates a block of transactions on the blockchain, they are rewarded with Bitcoin. That's how Bitcoin is put into circulation. Miners then sell their Bitcoin on the market.

Now, every four years, the reward is halved. It went from 50 BTC in 2009, 25 BTC in 2012, 12.5 BTC in 2016 to 6.25 BTC in 2020.

In April 2024, the block reward will be reduced to 3.125 BTC.

So the key thing to remember here is that stock and flow have an inverse relationship. While the stock increases over time, the flow halves every four years. This means that Bitcoin becomes more scarce over time. Until 2140, when the limit of 21 million Bitcoin will be reached.

Bitcoin's stock-to-flow ratio after the next halving

In April 2024, around 19.68 million Bitcoin will be mined. But the annual flow will be halved. It will be 164,250. And so the Bitcoin stock-to-flow ratio will double.

It will be 119.8.

(And it will double again 4 years later, and double again 4 years after that, and so on until 2140).

In other words, Bitcoin will be the first asset in history to be more scarce than gold.

Isn't it amazing? That's the beauty of a hard cap on supply and an inflation rate that halves every four years.

Before you get too excited, a final caveat about the limitations of the stock-to-flow model. ⚠️ 

Although it is used to price commodities, it only looks at the supply side of things. However, the two most fundamental factors in determining the price of any asset are supply and demand. Demand can be affected by general market sentiment, the economy as a whole, laws and regulations, catastrophic black swan events, and all sorts of other things. 🤷 

So don't try to draw a straight line from the stock-to-flow ratio to the future value of Bitcoin. 🙅 

That's it for today, everyone. Have a great weekend! 😎 

Before you go, please help me get better! 🙏 

Please drop me an email or dm me on Twitter or Instagram with any feedback or topics you'd like to see covered in this newsletter!

Thank you! 🤜 🤛