Hedge fund bear Russell Clark puts bitcoin valuation model under scrutiny


Well-known hedge fund bear Russell Clark is questioning how valuable bitcoin is under the stock-to-flow model, a framework traditionally used for precious metals such as gold and platinum, in light of recent sharp price volatility.

In a market commentary this week, Clark – who leads global equities asset manager Russell Clark Investment Management – threw the spotlight onto how the world’s foremost cryptocurrency is valued.

As a digital asset, the supply of bitcoin is designed to fall by half every four years, which strengthens its value in a stock-to-flow model. Under this system, bitcoin starts like platinum, with large flow and small stock, and ends like gold with large stock and small flow, Clark explained.

“The idea is that scarce assets will have value. The scarcer the asset, the more valuable it will become,” he explained.

But Clark – who is well-known for his contrarian calls on a range of markets globally – noted that the stock-to-flow model, while often “elegant and intriguing”, also has a history of failing.  He pointed to the “spurious” relationship between the stock-to-flow multiple of gold and its market cap over the course of several decades.

“Stock/Flow models are tricky, and lack of supply has often been used as a reason to drive asset prices to very high levels,” he wrote.

Cryptocurrencies’ worth has come into sharp focus in recent weeks, following violent price shocks across a number of digital coins including bitcoin and ether.

Clark said: “To crypto enthusiasts, bitcoin’s function as a global currency with no central organisation controlling supply makes it valuable. The question for financial investors, is how valuable?”

Recent shifts in market behaviour have indicated liquidity may be a bigger driver of price movements in bitcoin, he added, noting that shares in Grayscale Bitcoin Trust, the largest bitcoin security, have risen in line with bitcoin, with Grayscale moving from trading at a premium to trading at a discount for the first time.

He wrote: “Bitcoin is a scarce asset by definition, but it was also an illiquid asset. That is no longer true. Will Bitcoin’s price now diverge from the Stock/Flow model, just like gold diverged from the money supply model in the 1980s and 1990s? Time will tell.”

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Hugh Leask
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Editor, Hedgeweek