Gold as the gateway (?)
Markets need liquidity
For all of my life, I've never been a fan of "gold bugs". These are the people that for the last several decades would make you go deaf due to the non-stop chattering about gold. Only gold.
When I learned about Bitcoin in 2012, it was through gold bugs on Twitter and Stockwits. Given my dislike of gold bugs, I dismissed Bitcoin at the time. I know, shame, but you get the point. Over time, many gold bugs would even learn to hate Bitcoin too.
Ten years later, here we are. Cancel culture's deplatforming has become the de facto solution to any problem, including foreign policy. Instead of confronting problems head on, fighting ideas we don't like and/or having a real dialogue, we cancel. For some strange reason, cancel culture expects no unintended consequences from any of their actions. The idea of second and third order effects by some groups are not even contemplated.
On the financial side of things, the confiscation of Russia's foreign currency reserves (i.e. their money held at institutions like the U.S. Federal Reserve and European Central Bank) and partial block from the SWIFT money transfer system begs many questions.
One of them is "do these recent financial de-platforming actions increase the demand for assets that you can self custody, like Bitcoin"?
Conceptually, the consensus answer is usually yes.
When we zoom out to the 10,000 feet big picture, things seem structurally more bullish for Bitcoin than 6 months ago (e.g. global de-platforming, expectation of regulatory clarity in U.S. and Europe) . The "value" of Bitcoin appears higher.
While we can be structurally bullish Bitcoin, we also know that things don't just always move because of perceived higher value. People must take action (i.e. buy) due to the perceived value for it to become a reality. Think about the traditional investment approach of "value investing" practiced by the likes of Warren Buffet. He finds stocks with "value" that he expects the market to later recognize. The expectation is that the value of the stock will go up when such value is recognized (i.e. other peple buy the stock too). It's conceptually a great approach, but it’s not always the best performing strategy. As an example, value investing has underperformed growth investing for the last 15 years. We would think that buying “cheap” stocks would always be the best strategy, but it’s not the case. People have to buy what you believe is a cheap stock for its price to go up. In the last 15 years, markets were more focused on buying stocks that had big potential instead of the cheap ones.
With this in mind, we can look for proxies or early indicators that signal a potential phase of "value recognition" in Bitcoin. The last post, Bitcoin and Tech Stocks Correlation Misinformation, showed how Bitcoin usually expands in price during U.S. dollar downcycles. The positive risk appetite of those regimes puts wind in Bitcoin's sail.
Now let's think about how gold could be another early indicator, specifically for this "governments will want a decentralized currency" thesis. Governments, or any other large institution, wouldn't be evaluating only one factor - decentralization / control of asset - before shifting their assets from one place to another. Among many things, another very important property in this search is liquidity.
U.S. treasuries are great for storing value because it's also the largest and deepest financial market in the world. Given its deep liquidity, anyone can move billions of dollars in treasuries without moving its price.
Imagine that we're now in some dim-lit boardroom of a non-US financial government agency. We don't see any Gen Z people. These are some old school folks who likely lean on tried-and-trusted instead of better-and-new. Not only that, they also have a lot of money to move around. If we take Russia as an example, they have $600 billion in foreign reserves where $300 billion has been frozen by G-7 countries.
Bitcoin's market cap is currently around ~$785 Billion. Russia's foreign reserves alone is almost all of Bitcoin's market capitalization. Moving that kind of money in and out of Bitcoin would greatly affect price. It just doesn't work...right now.
The presenter in this boardroom is obviously there to show options. We can imagine the PowerPoint slide with multiple bullet points. Perhaps one of them says Bitcoin, but certainly one of them has to say gold. The page probably has Chinese Renminbi liabilities and other assets that are not controlled by Western institutions too.
With gold though:
An institution can have control of the asset through self custody
There is greater liquidity versus Bitcoin (gold market size is ~$12 trillion)
There is no learning curve. The procedures, legal work, storage structure and market analysis already exists for the asset
Which leads to the following hypothesis:
If governments are actually going to move more reserves into decentralized assets, we'd expect gold to be one of the first benefactors from these actions
Gold's price is currently at ~$1,920 per ounce. The all-time high price is $2,075. We can draw a simple line in the sand. Another money flow indicator to watch in our dashboards.
All else equal, if gold is pushing to new highs (above $2,075) and trending upwards in the next 6-12 months, just maybe, this money flow into decentralized/self-custody assets has bigger legs.
(I still dislike gold bugs)
All opinions are my own. This is not investment advice.