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Knowing what we don’t know: Understanding Bitcoin’s store-of-value thesis in an uncertain macro environment

Notes du CIO

The sentiment many of us in the asset management business have intuitively felt for some time—that the macroeconomic uncertainty we are living with today is higher than at other points in history—was confirmed by a new report from AQR that quantifies this uncertainty by measuring levels of economic predictability over time. 

The report notes that this macro uncertainty will likely remain for the foreseeable future, a claim supported by the fact that current economic and financial conditions are just now starting to feel the impact of monetary tightening as central banks balance managing employment and inflation and expectations for interest rates, inflation, and growth are all over the map. 

With an outlook of prolonged economic uncertainty, we see even further support for the thesis that bitcoin (BTC) is an increasingly attractive store-of-value asset that can be a critical component to a diversified, long-term oriented portfolio. Bitcoin’s year-to-date performance is a signal that many investors are recognizing the digital asset as an important portfolio consideration and I believe this sentiment will help drive its price to another all time high (ATH) within 18 months. To support this hypothesis—which can be impacted by any number of macro unknowns—let’s consider what we do know about the factors that are advantageous for Bitcoin in the near term.  


1. Risk asset recovery cycle

The market is already pricing in an interest rate decline by Q4 this year, and when that happens, Bitcoin tends to recover faster than equities. This is because of the size premium (i.e., Bitcoin is very small relative to the equity markets) and the fact that economic recovery takes longer to be reflected on corporate balance sheets. In addition, investors remain in search of alternative investment opportunities that offer better returns and lower correlations to traditional investments. Bitcoin, being the world’s first decentralized and immutable digital asset with a fixed supply, provides an attractive alternative to many traditional alternatives, making it a viable option for investors seeking higher returns.

       Source: Hashdex Research

2. Bitcoin halving in 2024

Bitcoin’s next halving will take place in April or May 2024. The halving process occurs every four years, whereby the block reward for Bitcoin mining is cut in half. This means that miners will receive 3.125 BTC for solving a block, instead of the current 6.25 reward. This process is designed to control the inflation rate of Bitcoin, and historically, prices have surpassed their last ATH six months after the halving. For example, in 2020, Bitcoin underwent its third halving event, and true to form, its price rose sharply in the months that followed. The following chart shows Bitcoin returns between each halving and its next ATH.


Source: Hashdex Research with data from Glassnode


3. On-chain metrics

On-chain metrics refer to data that is generated on the blockchain, which can be used to determine the activity and behavior of Bitcoin holders. By analyzing on-chain metrics, we can determine the number of long-term holders of Bitcoin, which can help us to gauge its scarcity. Scarcity is a key factor that contributes to Bitcoin’s value. As more people invest in Bitcoin and hold it for the long term, its scarcity increases, which in turn drives up its price. In fact, just last week, the number of individuals owning at least one bitcoin reached one million. And, according to recent data, the number of long-term holders is growing, which suggests that Bitcoin's scarcity is also increasing. This bodes well for Bitcoin's price, as scarcity is a key factor that drives up demand and price. As the following chart shows, the percent of BTC supply that hasn't moved for six or more months reached an ATH this month. Because these longer-term holdings increase Bitcoin’s scarcity, this can be a leading indicator of a bull market.


               Source: Hashdex Research

4. Banking crisis response

This year’s banking crisis has highlighted the relevance of Bitcoin's investment thesis and increased demand from investors in search of a hedge against the risks posed by Fed policy and financial institutions with excessive debt burdens. This flight-to-quality movement has included Bitcoin because of its combination of store-of-value attributes that differentiate BTC from other assets. This has helped better position bitcoin as a “digital gold” available during market upheavals and uncertainty. BTC’s unique attributes have led to it being referred to as the “faster horse” compared to gold, which was particularly evident in the first quarter of this year as the banking crisis unfolded. 


Source: TradingView (05/11/2023). US Regional Banks are represented by the iShares US Regional Banks ETF (IAT), whereas European banks are represented by the NASDAQ Europe Banks Index (NQEU3010).


5. De-dollarization and the weaponization of Swift


Swift, the global financial network that facilitates cross-border transactions, has traditionally been used by the US government to impose economic sanctions on countries it deems hostile. For better or worse, this has led to countries such as Russia, China, and Iran looking for alternatives to Swift to avoid being subjected to these sanctions or payment restrictions. Recently, the BRICS countries (Brazil, Russia, India, China, and South Africa) have set up their own international payment system called BRICS Pay. And Saudi Arabia, one of the largest oil exporters in the world, has started selling its oil in Chinese yuan. A recent report from Eurizon SLJ Capital noted that the US dollar has lost about 11% of its market share since 2016, including a “stunning collapse in 2022” in its dominance as a reserve currency likely due to the US government’s use of sanctions. As the pace of de-dollarization of the global economy accelerates and more countries are less dependent on the US dollar, bitcoin's appeal as a decentralized alternative to traditional currencies becomes even more evident.


Source: Eurizon SLJ Capital

Bitcoin’s long-term investment thesis remains as strong as ever


As important as these five factors are in understanding how Bitcoin’s current investment thesis is developing, we have never based our investment case for BTC off short-term market dynamics or events. To that end, it’s worth highlighting the longer-term, secular changes that are creating more demand for store-of-value assets. For example, as we’ve seen in all of the countries that have experienced high inflation periods since Bitcoin was created (e.g., Greece, Turkey, Argentina, Venezuela, and several countries in Africa), economic uncertainty creates demand for store-of-value assets and helps accelerate the adoption of Bitcoin. If we continue to see a scenario of higher inflation for longer in the developed world, this too will increase demand for BTC. 

There are two other important structural factors worth mentioning. The first is the generational shift that is taking place that is similar to what happened with internet adoption. Over time, a new digital-native generation is taking control of more wealth and is far more familiar with the concepts behind Bitcoin and other crypto assets. This will increase the use of BTC as a store of value over traditional “analog” alternatives such as real estate and gold. Moreover, these younger generations are slowly taking leadership positions in relevant sectors that are heavy users of store-of-value assets, including insurance companies, pension funds, and central banks. This movement can be accelerated (or slowed down) by how open a society is to innovation. Given the regulatory backlash in the US and the fact that crypto has become subjected to political polarization, we’re pessimistic that this adoption can be accelerated in the US until a new generation takes over. But some regions, like Europe, Brazil, Hong Kong, and the Middle East, are on the other end of the spectrum, creating environments where it's easier for businesses and individuals to adopt digital assets.

A second structural factor is the regulatory clarity and integration into capital markets we have seen in the last several years. Without regulatory clarity, Bitcoin will only be a good store of value for people trying to evade the government. This can be valuable for those in countries that are trying to restrict economic freedoms, but it’s not going to help adoption in developed and more mature democracies. As we have more regulatory clarity and integration to capital markets (ETFs, futures markets, and regulated bitcoin exchanges) this will create an environment where heavy users of store-of-value assets can consider BTC.

Regardless of how the specifics of these longer-term structural factors develop or how nearer-term developments play out, the role of BTC as an emerging store of value is clearly strengthening. While our perspective that bitcoin's potential for growth in the next 18 months is significant, we remain committed to focusing on the fundamentals and unique characteristics that make BTC an attractive long-term opportunity that will help build more resilient portfolios that stand the test of time. 


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