Debating the S2F Model with Eric Wall and Pierre Rochard

Pierre Rochard (Kraken), Eric Wall (Cinnober)

[00:00:00] Christian: Hello everyone. Thanks for making it this far in the live stream. I am super excited to bring one of the premier sessions we have planned for you guys. I am sitting here with a great Pierre Rochard and the fantastic Eric Wall. how are you two doing.

Pierre Rochard: Doing very well.

Eric Wall: Thanks for having us.

Christian: So Eric and Pierre have agreed to come here to argue for and against the stock to flow model.

at Pierre is taking the position of for. Eric is taking the position of against we're going to start off with an opening statement from Pierre, then Eric, and then move to a back and forth debate. So without further ado, let's just get right into it. Pierre, why don't you introduce yourself and your position?

Pierre Rochard: Yeah, sure. Pierre Rochard. I am the lead Bitcoin strategist at Kraken. One of the world's largest Bitcoin exchanges and, my position on this [00:01:00] topic, just zooming out. I think that what I would defend is, is the stock to flow concept. and then there are a myriad number of models. So I would also.

Defend people using these stock to flow, variable in models. and I would defend, the use of almost any variable and models for that matter. and I, I find that the bias against using stock to flow to be interesting. now conceptually stock to flow is a measure of scarcity. And, even already here, there's a debate about whether, Bitcoin has a stock to flow ratio in the sense that, arguably all of the Bitcoin already exist, and that there's only ever going to be 21 million Bitcoin.

And that the, because the distribution process, is, is known ahead of time. that there isn't really a flow. There's just, there's some kind of just dilute of process there. And we already know that [00:02:00] Bitcoin has like an infinite stock to flow ratio in the sense that, that there's a fixed cap on it.

So we can, we can argue about that. I think that, that misses the fact that, there are actual, money flows, right. In the sense of resources coming in and out of the system. And, the creation of new Bitcoin is. is important because you're actually creating underlying, units and making them available for distribution on the market.

And so, I don't, I don't buy the, the, you can almost analogize it to in mainstream, monetary economics, this concept of rational expectations, which is that, if everyone has the same expectations about any phenomenon, it could be inflation, whatever. then, it's just not relevant when those expectations get fulfilled.

and I disagree with that school of thought. I think [00:03:00] that, even if you're fully expecting an event to happen, it actually happening is indeed new information. even if your confidence was a hundred percent going into it. and I think that we see that in human behavior, around Bitcoin's issuance as well.

so I, I don't buy kind of the, the, the efficiency or rationality argument, against using stock to flow just because. It's a function that's predefined based on, you know, the passage of time or, you know, the creation of blocks in the Bitcoin system. so yeah, I'll just leave it at that, and we can take it from there.

Christian: Fantastic. Thank you for that, Pierre. Okay, Eric, why don't we, you give you, why don't we start with, with your opening statement?

Eric Wall: Right. So, my name is Eric Wall. I'm the chief investment officer of a Scandinavian cryptocurrency investment firm. And, I would like to say that just starting off that I think that the, halvening has [00:04:00] become sort of, religious holiday in a certain way for us Bitcoiners.

I mean, I think it's a fantastic way it's it happens once every four years. It's, that’s something that brings a lot of excitement. And I remember the last halvening I was, putting the, block explorers on display for my, in real life friends explaining to them this event. And I think it's generally something that we can all get together and celebrate.

I think a lot of us in this industry. has to be very grateful when it comes to Bitcoin, I think that Pierre. And myself both share that, that we are extremely grateful that we have a Bitcoin. Now it's a, it's, it's a great, monetary phenomenon. It's really, it's something that we, that is great for our personal lives.

I'm so happy that, I get to be here, and I can work with Bitcoin full time. It's my passion. It's my, what I devote myself, to 100%. I just think that, when we are celebrating such an event as the halvening, it's important to set sort of the. Expectations. Right. I think that if [00:05:00] you tell new people coming into Bitcoin, that's well, you know, the halvening, it's going to decrease the ratio in which Bitcoin gets released into the system.

And that's that obviously has. Some sort of positive effect on the price. I mean, supply and demand if the supply is lower than, than the price goes up. But I think it's kind of ridiculous to assume that the main driver of price development in Bitcoin comes from this internal, ingredient in the protocol.

It's something that's been programmed so that we can say that, you know, it doesn't really matter what happened. Like it doesn't really matter if we get institutional adoption. Doesn't really matter if we get more people excited about Bitcoin, the only thing that really matters to the price and we can observe this statistics statistically, is that there's, a decrease in the, inflation, the monetary inflation rates in Bitcoin.

And I mean, Pierre you have been around as long as I have. And you must realize that Bitcoin has grown as a phenomenon [00:06:00] in the world. tremendously. I mean, I remember when Bitcoin hit $1 and I remember how few of us it was. It was around at the time. And since then, you know, Bitcoin has been exploding and people has, has really understand that, yes, we can have a digital type of asset that has a fixed amount of supply and that's awesome.

And we can transfer it and we can move around value. I think we had a, the largest transaction in Bitcoin in history just a couple of days ago. I think it was Bitfinex that had a transfer that was over a billion dollars for just a, 70 cents was the transaction fee. And I mean, I think that it's those things, the, the, the, the idea that we can build a new monetary system and we are, we're waking people up to the idea that we can create a digital scarcity and we can have a finite supply of an asset.

That we can transfer around and getting people attracted to that concept is what has led to hundreds and thousands, millions of people getting attracted to Bitcoin and choosing to allocate their capital [00:07:00] to Bitcoin. So that's what we're seeing now, when we have millions of people around the globe that are getting more and more attracted to Bitcoin and.

I don't think that it really would have mattered if the inflation rate in Bitcoin was a 2% or two and a half percent or 1.5% or 1%. I mean, those obviously, I mean, it, it, it is one of the parameters, but the main, the main driver of the price is. How much capital do people want to allocate to Bitcoin is Bitcoin growing as a phenomenon?

Is it, are people getting more skeptical about the concept? I mean, those are the drivers of the price. And I think that everybody who's in Bitcoin knows that. I mean, we know when the price is going up, it is when people are signing up to the exchanges buying Bitcoin and I've never in my life. Heard a person say, you know, I was skeptical of Bitcoin when the inflation rate was 3.6%, but at 1.8%, I'm going to allocate 10 times as much capital to this [00:08:00] asset because that's the one thing that I care about.

I think that the final scarcity that we can have a digital scarcity that has a fixed cap. That's what attracts people and I've never heard anybody of all the people that have ever discussed bitcoin with focusing on this one, single special parameter. So I'm, I'm, I'm just curious that how you could even imagine that's a small fluctuation in the supply rate of Bitcoin would actually determine the price in the future and drive the price from $10,000 to $100,000.

So just conceptually, I don't see that the theory behind it makes sense. so I'd just like to hear, like, how does the rationale behind the stuff that's almost on a theoretical level, even play out.

Pierre Rochard: Yeah, absolutely. So I think that, what what's missing in, in your, your framework for this is having a distinction between risk and uncertainty [00:09:00] and, risk is something that you can insure against.

uncertainty is something that you can't insure against. And when you think about, all of the properties of Bitcoin, it's permissionless, censorship resistant, seizure resistant, and the monetary policy, and how those properties are, let's say enforced, right, with the decentralization, being able to run your own node, being able to hold your own keys.

what, what the Bitcoin system does is try to minimize uncertainty from an endogenous perspective of, its properties. And, you know, we, we could. Criticize, whether it goes overboard in kind of maximizing, that, that, lack of uncertainty, you know, and that's, I think been a criticism on the scaling side, on the privacy side, that, Bitcoin is like over optimized for, for certainty.

and so when you have a, a system with these properties where, [00:10:00] your, your. The, the uncertainty factor has been minimized. I do think that, it makes sense that then on the demand side, the demand side actually, has a certain, let's, let's say, Constancy to it, that, while you may believe that the demand side is very flighty, you know, and that, people suddenly change their subjective preferences with regards to, Bitcoin.

and thus the, the price could oscillate, kind of over any natural number range, and that there is no, you know, anchoring of, of, demand. I, I disagree fundamentally with that. I think that, demand actually has a very strong anchor. In the fundamentals of the system, which are tuned to be, the, the least uncertain in the world.

If you could compare monetary systems, or transactional, [00:11:00] ledger systems and that thus, if you have a constancy on the demand side, then it would make sense to me that, while demand may oscillate around, the models forecast, right? In this case stock to flow, that you would actually see it essentially mean revert.

when price has gone, you know, far above, you know, the, the model forecast and it comes back it's because. You're layering on top of the fundamentals, human psychology, right. And the animal spirits and the, the, the bull and bear cycle. And so I think that if you combine, a very stable bedrock layer of fundamentals, and put a layer on top of that, human psychology that what you have is, okay, so now we can talk about why pick out stock to flow, right?

And I think that this conceptually is, is a kind of a debate, [00:12:00] less on the model and more on, less on plan B's model and more on Saifedean's analysis, in, in the Bitcoin standard. And, In conversations about supply. I think that the first thing to establish is that demand is basically infinite, right?

And so people want to own as much Bitcoin as they possibly can. and now, you know, we can talk about portfolio allocation and, you know, are, do people know about bitcoins uncertainty or it's relative lack of it. and then the education process and all of that. But I think that, the reason why, rather than trying to analyze Bitcoin from an epidemiological, I'm going to try to use that word.

I've been trying it. Now with coronavirus, but, where basically this, the knowledge about Bitcoin is spreading like a virus. Right? And so then, we would expect the price to be following that rather than the price to be [00:13:00] following a certain stock to flow ratio. I think it has to do with the, issuance and.

The burning of electricity. All right. what's behind stock, to flow, it's consumption of real resources in the real world, that is actually suppressing the price because you are putting supply onto the market and that if you stop suppressing the price, then it's gonna go up now. There's a tension.

There were a lot like, okay, we're also trying to get this asset out in the world. So, you know, if, if we have an asset that has a, an issuance of zero, which is like, okay, all the 21 million Bitcoin already exists or zero Bitcoin exists, or anything in between, like, that to me is like, all right, this, this model is going to break.

Right. And I think we should talk about that too. just like a Moore's law, you know, broke as well for semiconductors. and so I think that once [00:14:00] Bitcoins of all, you know, materially been mined, which is much sooner than when they all have been mined, Then Bitcoins stock to flow. You know, modeling will pretty much be obsolete, but anyway, I've rambled on.

So I'll let you respond.

Eric Wall: Yeah. I, I, the one thing that you said that I take most issue with here is that you seem to rely on a notion that the demand is somehow supposed to be constant through all of this. I mean the demand, the demand for Bitcoin. That's a, it's not, it's not that that's a human, a human element that could have developed in either.

I mean, it could have, we could have seen marginal, I mean, tiny amount, only people, you know, buying Bitcoin for darknet purposes, or we could have seen, a narrative such as the digital gold, narrative take, hold and grow. And propagated through society. I mean, that's a highly volatile thing and there's no way that we can predict whether or not, you know, these narratives are going to take hold in the market and how [00:15:00] large that demand is going to be.

But you're talking about us if you know, we're going to have to demand for Bitcoin and it's going to grow as this expand exponential phenomenon, and then it's the stock to flow. That's going to, that's going to, determine exactly how large those bubbles get. But I would say that, you know, rolling back the tape five years from now.

We it's a human phenomenon and it could have gone either way. It could have gone to, you know, just 1% the interest in Bitcoin could have been just 1% of what it was yesterday, or it could have been, you know, one, 100 times higher and it's followed a particular trajectory right now. And. When you're relying on the stock to flow model, you're essentially saying that the final price that is being set, it didn't have to do with whether or not these, narratives, developed successful in society.

It only had to do with that. There was, you know, some type of demand and then the stock, the flow sorted out the rest. So I don't really, I don't understand this consistency of, of [00:16:00] demand argument that you’re making at all. It could have been, it could have been at extremely different levels. So that's a very, very strange argument to make in, in my opinion.

And. We should probably also discuss, because it's not only a theory, it's not only a theory that you have this stock to flow, the model is based on, and it's not that theory that is actually attracting people into believing in the stock default model. It's also the statistics and you Pierre you've been at one of the most Valiant, proponents of actually looking at the R squared values.

and looking at the coin integration tests. That was the, it was those tests in the, in the quantitative analysis. That was the thing that made people, looking at stock to flow the stock to flow model as something that cannot be denied. And it's more than just the theory. So I think we should probably dive more into that.

And as you probably know, and during the last couple of weeks or days or so, Much of the quantitative model. [00:17:00] And I  for a long time criticized that these quantitative models that are being used are not robust. And the cointegration analysis that people have been relying on are not fully understood.

And people are using this to blow the model up into something that is much more, than, than what it is in reality. So I think that's, you know, I'd like to hear also your view on. What do you, how, how, how, how much do you rely today on the statistical support for the stock to flow model?

Because I think that's the thing that's breaking down right now. And if you don't have that, then you only have this hand wavy wishy washy. You know, I think that when minor, when, when, when the inflation rate goes down, but the price goes up, but there's no support for that. I don't think that the case that you've made for the demand side being consistent is, has support.

And I don't think that we have even support in the statistics side of this anymore, so we can discuss R squared. coin integration I mean, just give me your best. yeah.

[00:18:00] Pierre Rochard: So, on the demand side, I think that what you're missing is that the fundamentals have not changed. And so, Bitcoin's fundamentals of trustless, permissionless, seizure resistant, censorship resistant, and then it's monetary policy.

Those have been constant. And so then everything that you're talking about in terms of memes and narratives and, dark net markets, et cetera, all of those. Are downstream of the fundamentals. And so, if they ultimately are not supported by the fundamentals, then they get crippled and annihilated, right.

if they are supported by the fundamentals, then they can grow and amplify. And, so I think that on, on the demand side, the reason why you have this base amount of constancy is because of Bitcoin's fundamentals. And then you layer on top of that. Yes. There's psychology of, you know, people getting into the HODL meme or Bitcoin [00:19:00] gold or digital gold or whatever, like, but those are downstream from the fundamentals and they would not exist.

if it was not for the fundamentals, right? Like if Hodling actually had negative results in the sense that your purchasing power would have decreased over the past decade, then that wouldn't be a meme. No one would be like promoting it as, as something. That's a good idea. The reason why. Became and stays a meme is because it resonates as true because of people's experiences with Bitcoin.

And because they have experienced these properties that we are, so strongly championing everyday.

Eric Wall: I have to, sorry, I have to interrupt you there because fundamental is yes, they are constant. That's one thing. But the thing that drives the price are people's appreciation and understanding of the fundamentals.

How well are Bitcoin's fundamentals understood. And how much are they being valued in society? There [00:20:00] is no fixed formula. For how quickly people are going to understand that the fundamentals of Bitcoin are good and reliable, and the people want to allocate capital to that, especially when we're dealing with such a new and arcane and strange phenomenon.

This Bitcoin, that's an extremely complicated and multi-factored thing that reflects on how, in us as humans, how we appreciate those fundamentals and you cannot say, well, we have the fundamentals and we would just. Because of the fundamentals, that demand was just going to go according to this pre-fixed plan.

I mean, it's still, I mean, you have some fundamentals, you roll the dice and you throw this phenomenon into a human society and how the price develops completely. It's the description of the appreciation of those fundamentals, not the fundamentals themselves. And that's why I'm saying you cannot, you cannot predictably model.

that the price that the demand for Bitcoin would have been constant or nearly at the level that it is [00:21:00] today. so yeah, but maybe we could leave that aside and go back to what are the statistics, what are the statistical support for this model? Because you have been on Twitter and towards me and many other, stock-to-flow critics have been, reminding our, retorts by saying there is statistical evidence for this model, that cannot be rebuked.

So how do you view the statistics of the stock to flow model and the R squared and the cointegration today? Have you changed your perspective on that? I would like to see perhaps a little more humility in that sense that we have some statistics. We have been able to make, OLS regressions on this data, but we, I don't think that there's any evidence that we have been able to identify a spurious relationship from a non spurious, relationship.

at least if you ask the most UpToDate quants on the stock to flow model right now,

Pierre Rochard: Yeah, absolutely. [00:22:00] So, now on the demand side, you said that, the appreciation of the fundamentals is what matters. I think that takes kind of a, a very idealistic view of markets in the sense of you're essentially ignoring Adam Smith's invisible hand and asserting that the hand has to be very visible.

in order for market participants to be pricing this correctly. And I think that's just wrong. I think that you can have people using Bitcoin without actually understanding its fundamentals or being able to verbalize them or consciously aware of them. And still yet have the same economic phenomenon go on.

And so if you drop a technology like bitcoin into society, I do think that there's a certain like diffusion equation, right. Of people, learning even like what a Bitcoin address is and like how to actually interact with the system. but that, [00:23:00] that, that process is actually. Mediated also through the price.

Like we know how many people, see the price going up and decide to jump in because of that. And I think that in terms of like different assets are going to be susceptible to reflexivity at different, rates. Right. And so. you know, a consumption asset, not so much a monetary asset. It's the only thing it's got is, is that Keynesian, beauty contest of other people using it.

so if, if we take that as kind of the second layer, right on top of Bitcoin's fundamentals is the social Keynesian beauty contest part of it. That's where I think that you get into, okay. Here's why, you know, here's why there was two bubbles in 2013 and why it oscillated around, it's, let's call it fundamental value.

and that it's not like [00:24:00] people. Receive Bitcoin don't understand its properties. and thus that like causes the price to crash. Like that's not what actually moves the price of people like, Oh, people understood Bitcoin better in December of 2017. And then they like, forgot about it. The fundamentals for two years.

And so we had a bear market. Like I don't buy that argument at all. I think that there's a lot.

Eric Wall: I have a, I have an extremely simple question for you then Pierre.

Christian: So really

quick, Eric, I don't mean to interrupt. We do need to get to the last word. So maybe you can pose your question as part of your last word, but why don't you use this time to wrap up and pose a question to Pierre and then a Pierre can close it out.

Eric Wall: Okay. Well, my stance is that the thing, the underlying theory behind the stock to flow model is a weak I don't. And I don't think that the statistical models have been successful at identifying [00:25:00] as a spurious from a non-spurious relationship. And I think that much of the hype around the stock to flow model stuff, we had the cointegration test.

That have now been proven to not the well, the quants that did the analysis have now rebuked from that and say, and have said that well, we did the cointegration tests incorrectly, and it's nothing even Marcel Burger says that, you know, when you have two trending variables, it's not that strange to find an R squared variable that is very high.

So there is actually nothing that is in support here that the stock to flow model actually has any. A statistic, a background and being predictive in any, in any, in any sense of the word. And so my last questions appear would be, so right now in Bitcoin, the miners in Bitcoin, they could choose to burn a part of the block, reward.

And if they just choose to, after the havening, they choose to burn 50% of that, that would bring us to a stock to flow. That would be, the stock to flow that we would have [00:26:00] after 2024. So we would jump according to the stock to flow model. If minors just choose to decrease the, if they just choose to burn 50% of the supply, that would bring us according to the stock to flow logic immediately to $1 million per Bitcoin.

If they just choose to do that. Meanwhile, they're still getting more rewards. They're still getting paid more in dollar terms because of the Bitcoins that are left. Are now worth 1 million each. So three Bitcoin, that would be 3 million per block that they would earn if they would just choose to burn 50% of the, of the block rewards.

So why don't we just do that? Why don't we just skip to the, to the, to the next halvening basically by using a soft fork in the, in the Bitcoin system, because that's what the, what the stock to the flow model proposes.

Pierre Rochard: yeah, I, you know, I think that changing Bitcoin's reward schedule is kind of a third rail in Bitcoin politics, then you don't [00:27:00] want to touch.

Eric Wall: It's not changing it. The monetary policy only says that miners have the ability to extract, you know, 12.5 or six point 25, but they can choose according to the monetary policy that we hold that

Pierre Rochard: this is where like, your lack of understanding of the Bitcoin system really shows because the problem that a miner would have doing this would be to get other miners, to cooperate with them.

And to actually like go with the soft fork

Eric Wall: It's a positive selling point,

it would benefit all of them. You only need five or six miners to agree to agree to this. And they would know that we would get. Yeah.

Pierre Rochard: So it's important to understand the difference between miners and mining pools. So while you might look at a graph and you might think, Oh, you know, like this mining pool controls 40%.

Eric Wall: I agree with that. I agree with that. But do you believe that if they did that, cause this is interesting to me. Do you believe that if they did that, if they each chose to burn [00:28:00] 50% of the block reward that we would see a 10 times increase in price, if they just choose to do that?

Pierre Rochard: No. Why would that happen?

Eric Wall: I guess then the stock the flow would according to the stock to flow model, then the price of Bitcoin shouldn't be 1 million per Bitcoin.

If you just run the, the stock to flow math.

Pierre Rochard: Yeah. So I think this is where, people focus on the math too much and don't focus on the fundamentals enough. Like the fundamental table stakes is that Bitcoin is the system with the least uncertainty. Possible. Right. And so once you start getting into, soft forking economic properties of the system, you're now dialing up the uncertainty in the system.

And so I would expect that the price would crash, right. That people would be like, Hey, what's going on? That, there's a mining cartel are being manipulated like this,

Eric Wall: and this is my point. It's not the stock to flow. That matters. [00:29:00] It's the appreciation of the fundamentals of the system that actually matters.

It's not that we have the stock to flow. That is at an exact variable. It's the whole Bitcoin system and the appreciation of the fundamentals that drive the demand for the currency, not, the specific S2F variable that we have right now. I think that,

Christian: I think this has been a fantastic discussion.

Let's allow Pierre to give his final word, maybe respond to that question or that take and then final word, and then let's close it out.

Pierre Rochard: Yeah. I think that the, you know, the fundamentals, are ultimately what, what drives the value of Bitcoin. And one of the fundamentals is the monetary policy and the stock to flow and, and the, the lack of uncertainty around it.

And then seeing that lack of uncertainty. you know, validated with each block, and then, through the halvings. So, that's, that's where I think that there's, overlap now on the statistics side. I don't know, I'm [00:30:00] not a quant, I just look at what people are saying and parrot what they're saying.

So, when people, when the quants find something, I'm happy to promote it, when they find that they were wrong, I'm happy to promote that as well. I find it odd that, we, we don't want to, actually. refute the quants on their level. and instead, there's, there's kind of the quants have to refute themselves.

Right. And so, like it wasn't Eric that actually did the work to figure out that the cointegration problems. It was the people who were, you know, initially, promoting cointegration, and discovering it that they were the ones who found the problem.

Eric Wall: So I think that you were parroting it basically. Yeah, that's also kind of what happened.

Pierre Rochard: Yeah. So if you have a bias in either direction, so my bias has always been for stock to flow, right. And this goes back to my interest in Austrian economics. and your bias I guess, was against it. and that's fine to have a [00:31:00] bias, but ultimately like the work has to happen in order to refute the, the other side.

and, and that's kind of how it moves forward is through falsification.

Eric Wall: Alright. Well, it's been a great discussion. I'm happy that we're here for the halvening. I think it's a great celebration for all of us. it's okay to have different ideas, but you know, I've made my points. You made yours. Let's just agree to celebrate, at least in the light of all of this.


Pierre Rochard: happy having folks

Christian: happy, having.