Module 1 · What Money Actually Is / 1.4
The pile and the trickle.
One ratio can describe supply. It cannot tell you a price.
A jar already holds one hundred tokens. Each year, the workshop makes two more.
Beside it sits an identical jar with one hundred tokens. Its workshop makes twenty more each year.
Both jars start with the same amount. The second supply grows much faster. We can put a number on that difference without knowing whether anybody wants either token.
What exists, and what arrives.
The amount already in existence is the stock. The new amount produced during a period is the flow. We will use one year.
Divide the stock by the annual flow. For the first jar, 100 ÷ 2 = 50 years. For the second, 100 ÷ 20 = 5 years. This is the stock-to-flow ratio.
Fifty means that, at an unchanged output of two tokens a year, producing another hundred would take fifty years. It does not mean the supply doubles every fifty years forever. That would require assumptions about future production.
Keep the units consistent. Dividing a stock in tonnes by a yearly flow in kilograms without converting them would give a misleading result.
100 ÷ 2 = 50 years. At this unchanged production rate, making another 100 units takes 50 years.
The reverse calculation is useful too. Two new tokens against a starting stock of one hundred is 2% annual growth. A ratio of fifty years corresponds to that starting growth rate. It is a description of these numbers, not a price target.
Why people use the ratio for gold.
Gold is durable. Much of what people mined long ago still exists as jewelry, bars, coins, or other holdings. Annual mining adds a relatively small amount to that accumulated stock.
That is why gold is a familiar example of a high stock-to-flow ratio. The exact figure changes with the estimate of existing gold and the year’s mine production. It is not a permanent number carved into the metal.
A higher gold price can encourage exploration, recycling, and mining. New mines still take time and resources. Recycling an existing necklace changes where the gold is available; it does not create new gold. Whether recycled material belongs in a “flow” depends on the question being measured.
For this comparison, flow means newly mined production. You must state that definition before comparing results.
Compare the same kinds of piles.
Copper and silver are also mined, held, used, and recycled. It is easy to get a dramatic ratio by comparing one metal’s entire above-ground stock with another metal’s exchange warehouse inventory. It is also a bad comparison.
Inventory ready for sale is not the same as everything that exists. Industrial use changes how much material is easy to recover. Production responds to price with different costs and delays.
So do not memorize “gold wins, copper loses.” Copper has in fact been used in money. Historical choices between gold and silver also involved laws, minting rules, trade, and political decisions. One supply ratio cannot explain that history by itself.
The missing half is demand.
Return to the two jars. Imagine the workshop locks the first jar forever. No new tokens can be made.
Then everyone stops using those tokens.
The supply limit has not failed. The market price still can. A ratio with zero annual production has no finite value, but that does not make its tokens infinitely valuable.
Stock-to-flow says nothing directly about usefulness, willingness to buy, liquidity, or the risks of holding an asset. A price forecast needs a model of demand and other influences, plus evidence that it works outside the examples used to build it.
You will meet Bitcoin’s issuance schedule later. Use the same disciplined question: what does the supply rule establish, and what does it leave open?
These buyers want to acquire tokens. The supply limit is only one part of the market.
The idea to keep
Stock divided by annual flow describes how large existing supply is relative to new production. It is useful when the definitions match.
A supply measure is not a valuation method. Never let a clean number answer a question it was not built to answer.