The Evolving Roles of Gold and Bitcoin as Stores of Value

The Evolving Landscape of Gold and Bitcoin as Stores of Value

In this edition, Ilan Solot from Marex Solutions delves into the intricate roles of gold and bitcoin as stores of value. He explores how these roles are not static but evolve over time, influenced by various market dynamics. Following this, DJ Windle from Windle Wealth elaborates on the similarities and differences between bitcoin and gold in the Ask an Expert section.

– Sarah Morton

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The Weakening Store of Value Argument for Gold and Bitcoin

Summary: The recent approvals of bitcoin and Ethereum ETFs might signify a transformative shift in the market akin to the changes seen in gold markets following the actions of central banks after 2022. This shift could temporarily eclipse traditional narratives, including the long-held “store of value” concept.

The August market sell-off left many supporters of bitcoin’s store-of-value proposition disheartened. Despite a notable downturn in cryptocurrency values, gold experienced a rally during this period. To add to the disappointment, bitcoin struggled to regain momentum even when other markets rebounded. Interestingly, while gold prices appreciated, it too may be losing some of its status as a reliable store of value. Starting around 2022, the connection between price and narrative began to diverge. Traditional investors continued their long-standing trend of offloading gold as real yields and inflation expectations increased in anticipation of central bank tightening. However, this time, gold prices behaved unexpectedly.

What is causing gold’s price to remain unresponsive to its store of value macro drivers? A significant change in market structure occurred when Asian central banks ramped up gold purchases in the wake of geopolitical tensions, particularly following Russia’s invasion of Ukraine and the subsequent freezing of its foreign exchange reserves. This development suggests that these governments are pursuing their own narratives regarding gold’s value.

From the perspective of Russian, Indian, and Chinese policymakers, gold’s appeal as a “store of value” may not align with Western investors’ views. Factors such as Federal Reserve policies, inflation expectations, and libertarian principles may not significantly sway the accumulation and eventual utilization of their gold reserves.

Over time, the acceptance of crypto ETFs in the U.S. may mirror the market structure disruptions previously witnessed in gold. This could alter the prevailing narratives surrounding bitcoin as a store of value and Ethereum as a technological asset, aligning them closer to traditional investment vehicles. In essence, ETF investors may adopt different narratives and demand patterns—such as portfolio rebalancing or disposable income considerations—compared to those who are deeply rooted in the crypto ecosystem, much like how Asian central banks buy gold for reasons distinct from traditional investors.

The recent data regarding ETFs and bitcoin prices appears to support this perspective. Despite recent volatility and shifting narratives surrounding bitcoin, ETFs have continued to attract substantial inflows. While this observation is based on a relatively short timeframe and should be interpreted cautiously, it seems to indicate a directional trend. Notably, the effects of Grayscale outflows in BTC and ETH provide insights into how ETF flows, which can be considered cycle-agnostic, may influence price movements.

Does this imply that gold and bitcoin are no longer valid stores of value? Not necessarily. It’s important to recognize that narratives can coexist, evolve, weaken, and take turns in influencing market prices. Nevertheless, the introduction of significant and diverse investor groups into the markets for both assets is likely to dilute the original narratives and alter price responses to macroeconomic events.

– Ilan Solot, Senior Global Market Strategist, Marex Solutions

Ask an Expert

• Q. What is a store of value?
• A. A store of value is an asset that can be saved, retrieved, and exchanged in the future without significantly diminishing its purchasing power. Traditionally, assets such as gold, real estate, or stable currencies have served this purpose, as they tend to retain value over time, even during market downturns. While they can experience short-term volatility, the core idea is to offer protection against inflation, currency devaluation, and economic instability, allowing investors to preserve wealth across generations.
• Q. How is bitcoin similar to gold?
• A. Bitcoin and gold share several characteristics that render them appealing as stores of value. Both are finite in supply—gold due to its natural scarcity and bitcoin because of its capped supply of 21 million coins. Neither asset is controlled by any central government, making them attractive alternatives to conventional fiat currencies. However, both bitcoin and gold come with their unique security risks that investors must consider. During times of economic uncertainty or inflation, investors often flock to these assets to maintain value, viewing them as hedges against market volatility and loss of purchasing power.
• Q. How is bitcoin different from gold?
• A. Bitcoin introduces several attributes that gold lacks. As a digital asset, bitcoin can be transferred globally within minutes, in stark contrast to gold, which is cumbersome and expensive to transport. The underlying blockchain technology of bitcoin ensures transparency, allowing for verifiable ownership and transactions. Additionally, bitcoin is programmable, enabling integration into digital applications like smart contracts and decentralized finance (DeFi) platforms, enhancing its versatility in the modern financial landscape. These features position bitcoin as an innovative alternative extending beyond the conventional uses of gold.

– DJ Windle, Founder and Portfolio Manager, Windle Wealth

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