I have often mused that at a point in time, a small percentage of investors will believe that Bitcoin(BTC) is equal to or a better a "store of value" (SOV) than gold. This would be a be significant shift for institutional investors as they throw out their old playbook and adopt a new asset class. Bitcoin is a unique store of value (SOV) which has a built-in payment rail and more importantly its own deflationary monetary system. This payment rail means you can easily store your bitcoin on a computer or device known as a hard wallet and move it around the globe over the internet, as opposed to golds bulky mechanism for storage and payments. Unlike sovereign currencies, which can be printed at the whim of the central bank or government, Bitcoin uses an open-source code which by virtue of design limits the amount of Bitcoin that can be created. The bottom line is, unlike fiat currencies, you just can't print more Bitcoin. It's open-source software code, which by virtue of its software design (rules), strictly limits the amount of Bitcoin that will ever be created to 21 million. In fact the last one that will be mined(created) will not be mathematically solved until approximately the year 2140 due to the fact that each block of transactions on the Bitcoin system are forced by the software to occur every ten minutes. These rules are enforced by the software code built on blockchain which by it's cryptographic nature makes the supply and security immutable. For example if you own BTC, you can determine your relative value through the formula of X/21mm, X being the amount of bitcoins in your wallet divided by the total supply. To determine your value of US Dollars(USD) using the same formula it would look more like X/&, where X is the amount of dollars you have, while the denominator is infinity, which represents the ability to print unlimited dollars by the US Treasury. The chart below shows inflow of investors into Gold exchange traded funds over the last several years in response to the centrals banks around the world debt issuance and money printing. The chart also shows the price of BTC priced in Gold which clearly demonstrates BTC dominance in price appreciation.
Store of Value
An asset that holds its value and appreciates over time is referred to as a store of value and is perceived as a safe haven. Historically this has been fine art, real estate and most often precious metals like gold and silver. During inflationary times, which is where the cost of everyday items gets more expensive, purchasing power is reduced in a native currency. This is the typical time that gold has seen its value rise to protect the value of assets as inflation debases the currency. As the world deals with the Covid-19 pandemic, the Central banks have unleashed unprecedented stimulus also know as "printed money". Over the course of history, this has led to rampant inflation and is an environment where investors look to hide or "store" value. So it's natural conclusion that investors would start making a larger allocation to these types of assets.
Money, Money Money
On August 15,1971, the United States terminated what was known as the Bretton Woods System which pegged the US Dollar (USD) to Gold. The USD on that day became a fiat currency, meaning its value was backed by the good faith of the US Government and its taxpayers. During this time in the US, stores of values expanded to very liquid and tradeable short term sovereign IOUs like Treasuries. At that time in the 70s, the rate of return was around 3.50$ for every 100$ for a duration of 90 days, today you would receive 10 cents for every 100$. Given todays risk return scenario, investors have been pushed into riskier assets for acceptable rates of return or have had to look to precious metals as a store of value. However, when we look a the recent price movement of precious metals and BTC, we start to see compelling evidence that investors are more inclined to be voting to store their value in BTC over Gold.
Inflection Point?
Andy Grove, Intel co-founder described a strategic inflection point as an event that changes the way we think and act. There is evidence to suggest we are in the midst of a strategic inflection point in how investors choose to invest their safe haven assets.
In the chart below we can compare how SOV assets have behaved over time. The white line represents gold returns, which have moved in a similar trend to silver and copper for the most part over 2020. However we see the relationship breakdown at the end of 2020 as silver rallied and the gold price faltered. This price dislocation also happened while BTC showed considerable strength in price.
When we introduce Bitcoin returns to the graph starting in August 2020, which capture its
meteoric rise, interestingly we notice the breakdown of gold prices in a similar time period. This is happening at a time where there is 2 trillion dollars of stimulus in the US which leads to more printing of more US Dollars. We would think in this economic atmosphere investors would be moving to safe havens like gold and silver. However, we see continued strength in silver, copper and BTC while Gold flounders.
Another interesting piece of data shows the correlation of silver and gold. Historically this relationship was around 82 pct., meaning the the price of the two metals traded in the same direction 82 percent of the time. In 2019 that percentage dropped to 79% which equates to a 3.5% move down. This decoupling accelerated 12.5% in 2020 through February 2021 as the correlation was measured at 69%. While this maybe a short term divergence, it's hard to ignore BTC's price movement at the same time as gold underperforms and decouples from silver. The two charts below shows the historical correlation of precious metals, BTC, equities and currencies.
*(XAU-Gold, XAG-Silver, XPT-Platinum, XPD-Palladium, XBT-BTC)
Markets
The legendary value investor Benjamin Graham, has said that "markets are voting machines in the short term, but in the long run, the market is a weighing machine". It was an explanation of equity markets price as being votes in the short term but the true value (weighing) of an asset accrues over longer time frames. Gold has a 7 trillion dollar market as a store of value while there is another 4 trillion used in jewelry or for industrial use. Bitcoin currently has a market value of just under 1 trillion as compared to Gold's 7 trillion. So will Bitcoin become the new store of value in the digital age? Given what we have seen of trading over the last several years, millions of investors, with billions of dollars are voting for BTC over Gold as a store of value. If this voting trend continues, it's not hard to imagine BTC "weighing" a whole lot more in the future.
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