Crypto for Advisors: Bitcoin and Gold, Stores of Value

Subsequently, DJ Windle, a financial expert at Windle Wealth, elucidates on the similarities and contrasts between Bitcoin and Gold as forms of value storage within the Ask an Expert segment

– Sarah Morton

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The Weakening Store of Value Argument for Gold and Bitcoin

As a seasoned crypto investor, I find myself pondering over the potential impact of the upcoming approval of Bitcoin and Ethereum ETFs. This could potentially resemble the shift in gold markets post-2022, brought about by central banks. Just as these institutions introduced a new factor that temporarily overshadowed traditional narratives surrounding gold as a ‘store of value’, the ETF approval might do the same for Bitcoin and Ethereum, at least for a while. This could disrupt our current understanding and perception of these digital assets

Critics of bitcoin as a store of value felt dismayed during August, as cryptocurrencies took significant losses, whereas gold experienced gains. To make matters worse, bitcoin failed to keep pace with the market recovery

Although gold prices have risen, it appears that some of its traditional ‘safe haven’ qualities may be waning. By around 2022, there was a disconnect between price and narrative as conventional investors followed their established pattern: selling gold as real yields and inflation expectations climbed before anticipated central bank tightening. However, in this instance, the trend reversed

Could it be that the gold price has failed to react due to a shift in market dynamics? Notably, Asian central banks have significantly boosted their gold acquisitions coinciding with Russia’s invasion of Ukraine and the seizure of its foreign exchange reserves. In essence, these governments seem to be pursuing their own distinct narratives

It appears that Russian, Indian, and Chinese decision-makers show little interest in gold as a “store of value” from a Western investor’s point of view, as their approach to gold is influenced by factors other than Federal policy, inflation expectations, or libertarian principles when it comes to the accumulation and eventual utilization of their gold reserves

With time, the acceptance of cryptocurrency Exchange Traded Funds (ETFs) in the U.S. might bring about a comparable transformation in market dynamics as the one observed with gold. This could lead to adjustments in the perception surrounding Bitcoin (as a store of value) and Ethereum (as a technology-driven crypto asset). Essentially, investors buying ETFs may have distinct narratives and investment patterns (such as portfolio readjustment or disposable income) compared to those who invest directly in cryptocurrencies. This mirrors the distinction between central banks in Asia purchasing gold for specific reasons versus traditional investors

The latest trends in ETF investments and bitcoin pricing appear to lend credence to this notion. Even amidst Bitcoin’s volatile price swings and changing sentiments, ETFs have been receiving steady inflows recently. However, since we are dealing with a relatively short period, it is essential to view these findings cautiously. Nevertheless, the current trend seems to align with our conclusion. Moreover, the outflows from Grayscale Bitcoin and Ethereum might suggest how ETF investments, irrespective of market cycles, can potentially influence prices

Could it be that gold and bitcoin are no longer regarded as valuable assets? Not necessarily. Multiple stories can exist, evolve, weaken, and even swap places in influencing price trends. But given the emergence of diverse, substantial, and novel investor groups in both these markets, there’s a good chance that established narratives will be altered, causing prices to respond differently to broader economic events

– Ilan Solot, senior global market strategist, Marex Solutions

Ask an Expert

Q. What is a store of value?

A.

An asset that can be safely stored for future use while maintaining its worth is called a store of value. Historically, items like gold, property, or reliable currencies have fulfilled this role because they tend to hold their value well, even during financial crises and market drops. However, it’s essential to note that these assets can be unpredictable in the short term. The fundamental concept revolves around ensuring stability against inflation, currency depreciation, and overall economic uncertainty over the long term, allowing investors to safeguard wealth for future generations

Q. How is bitcoin similar to gold?

A.

Bitcoin and gold possess numerous features that make them desirable as means of storing value. They’re both scarce – gold due to its inherent rarity, while bitcoin because its total supply is limited to 21 million coins. Unlike traditional fiat currencies, which are managed by central governments, neither gold nor bitcoin falls under the control of any single entity, making them alluring alternatives. However, it’s crucial to be aware that both assets come with distinct security risks when investing in them. During periods of economic instability or inflation, these assets are frequently sought after as a means to maintain value and protect against market fluctuations and loss of purchasing power

Q. How is bitcoin different from gold?

A.

Bitcoin offers unique advantages that gold cannot match due to its digital nature. Unlike gold, which is difficult and expensive to transport, Bitcoins can be swiftly transferred anywhere in the world within minutes. Furthermore, the technology behind Bitcoin, known as blockchain, provides transparency, enabling easy verification of ownership and transactions. Moreover, Bitcoin’s programmable nature allows it to work seamlessly with digital applications such as smart contracts and decentralized finance platforms, making it a valuable asset in today’s digital financial landscape. Consequently, Bitcoin stands out as an innovative alternative beyond traditional gold uses

– DJ Windle, founder and portfolio manager, Windle Wealth

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