November 3, 2020
Are Gold and Bitcoin a ‘Store of Value’?

In the beginning of October, US-based payments company Square, founded by Twitter CEO - Jack Dorsey, acquired 4,709 Bitcoin at an average cost of approximately $10,600 per Bitcoin, leading London Capital Group's head of research to claim "This purchase from Square could make sure $10,000 remains a floor to the price". Dorsey believes that Bitcoin will become the world's “single currency” and intends to make its use more accessible through Square. Square joins the ranks of a slew of major institutions pouring money into the 'gold' digital currency, fuelling the fire that long term enthusiasts hold that Bitcoin will turn parabolic in the near future.

Business intelligence giant, MicroStrategy, also invested $425 million into Bitcoin with its CEO saying that Bitcoin is digital gold and explained his choice in diversifying his company’s investment portfolio with the mainstream cryptocurrency over gold because, among other factors, Bitcoin is scarcer than Gold which can lead to a secure increase in price as we close towards Bitcoins ultimate supply.

Having two companies like Square and MicroStrategy deciding that Bitcoin has merit as a store of value, sets a massive precedent and is bolstered by growing disquiet amongst institutional investors over fiscal stimulus packages that could, many analysts predict, force the dollar into a collapse, an idea that only a few short months ago would have been dismissed as the ramblings of a madman. Noted economist Stephen Roach added to the speculation, "the current-account deficit in the United States, which is the broadest measure of our international imbalance with the rest of the world, suffered a record deterioration."

Heralding a historic double-dip recession, Roach suggested that a rise in COVID-19 infection rates in the winter season would lead to further turmoil.

"As we head into flu season with the new infection rates moving back up again, with mortality unacceptably high, the risk of an aftershock is not something you can dismiss," he said. "So that's a tough combination. And I think the record of history suggests that this is not a time, unlike what the frothy markets are doing, to bet that this is different."

Bitcoin, although relatively young, has been described as the 'best-performing asset class of all time' - of course, that depends on when you bought in and sold. As an example, if you had bought $1000 dollars of BTC on the 1st of Jan 2015 you would have made an annualised return of nearly 186% (a total return of 3505%) Of course, the issue here is that historical returns are not an indication of future profits, so let's park that thought for now.

But is Bitcoin the store of value that many investors believe? Gold has traditionally been the standard and, whilst bitcoin continues to be a popular choice, as investors prepare themselves for, what many see as, a post-COVID 19 economic winter, Bitcoin's surge in popular dominance reraises the question of this, historically volatile, asset as a 'safe haven'

So let's examine each asset individually to let you make up your own minds, but first, let's define a 'store of value' as described in Investopedia

"What Is a Store Of Value?

A store of value is an asset that maintains its value without depreciating. Gold and other metals are stores of value, as their shelf lives are essentially perpetual. Milk is a poor store of value because it will decay and become worthless.”

For investors, Interest-bearing assets such as U.S. Treasury bonds (T-bonds), are good stores of value because they retain their value while generating income."

GOLD as a store of value

Gold has several factors that make up its enduring popularity as a store of value. Firstly, it is valuable as a resource for consumer products such as electrical components, jewellery and a multitude of other things. Gold cannot be printed, manufactured or created in any way - it has to be found, dug up and processed providing it with both scarcity and limit (albeit an unknown limit) in its supply.

Gold often performs well in recessions as even if it does not rise in value, an asset that can remain static versus a deflating fiat is nonetheless useful as a hedge. Adding to that, in times of crisis in the financial sector, as people turn towards gold as a store of value, the price tends to increase quite dramatically as demand rises and supply remains relatively low.

Bitcoin as a store of value:

Much like gold, there is a limited supply of Bitcoin - 21 million coins in total. It is also like gold in that it doesn't seem to have a strong correlation to other asset types (other Cryptocurrencies excluded) Due to the nature of how Bitcoin is created, it is considered immutable and almost impossible to interfere with (almost, but not quite - see the Mt. Gox disaster for more). Each transaction is recorded across the blockchain on many thousands of different devices, making it immutable. 

Proponents of the value of Bitcoin also point out that it meets the requirements of Aristotle's four characteristics of good money - durability, portability, divisibility and intrinsic value.

Lastly, and one of the main selling points for many proponents of Bitcoin, is the fact that it cannot be stopped, short of ‘switching off’ the entire internet, as it exists simultaneously across many multiples of devices.

One thing is almost for certain, the golden, immutable elephant in the room - there are choppy waters ahead in global finance. Money is being printed and debased in almost every continent, negative interest rates loom in much of Europe, parts of Asia and, potentially, the US. Global unemployment is reaching catastrophic levels. There is, unfortunately, no clear and absolute path ahead. Whether you choose gold, Bitcoin or some other asset class in which to ‘raft’ your savings through the financial flood, nothing seems certain. It’s part of the reason we believe so passionately at Pynk that working together is the best solution to position ourselves and our portfolios for the coming storm. 

It’s not just a slogan - it’s at the heart of everything we do..

Invest. Better. Together.

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Disclaimer: Please bear in mind that this information does not constitute any form of advice or recommendation by Pynk One Ltd. and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Appropriate independent advice should be obtained before making any such decision. When investing, your capital is at risk and you may recover less than the initial investment.

Written by
Alistair Wallace
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