Bitcoin’s ‘Store-of-Value’ Narrative Is Real, But Not a Price Movement

Markets are noisy, chaotic things that we humans instinctively try to imbue with order and reason. This generally involves searching for explanations for why prices are trending up or down or what triggered a sharp move.

Often there is an obvious explanation – an earnings surprise or an unexpected corporate action. Sometimes the reason is not so easy to see – cash flows, an evolving user base, steady product development and so on.

Noelle Acheson is the former head of research at CoinDesk and Genesis Trading. This article is an excerpt from her Crypto is macro now newsletter, which focuses on the overlap between the changing crypto and macro landscape. These opinions are hers and nothing she writes should be taken as investment advice.

With bitcoin (BTC), it is even more difficult to discern what is driving sentiment shifts at any given time because it has no earnings, there are no corporate actions, regulation is not the threat it is for some other crypto assets and the narratives are many and varied. There isn’t even universal agreement on what bitcoin is, let alone what drives its price.

But our search for sanity in the midst of chaos encourages us to latch on to something that makes sense, and if it’s a narrative that justifies our interest while highlighting a timely concept, so much the better.

A phrase we hear a lot these days is “value store”. It tends to mean different things to different people, but generally it refers to an asset that holds its value relative to a broad basket of other assets over a long period of time.

Despite short-term price volatility and sharp bear markets, bitcoin is a store of value because it is the only asset traded on liquid exchanges today with a programmatic and verifiable hard cap. With other “hard assets” (those with limited supply) such as gold, diamonds or real estate, we do not know the supply limit, nor do we know how much currently exists.

In addition, with other “hard assets”, price affects the potential supply. For example, if gold were to rise from $2,000 to $20,000 per ounce, new extraction methods would become viable, increasing the theoretical limit. Bitcoin is the only asset traded on liquid exchanges where the price has no influence whatsoever on the supply. It is the most difficult of hard assets.

Moreover, the supply of its most common denominator – the US dollar – has increased over the decades, and lately at an astonishing pace. We are likely to embark on a new wave of monetary policy easing, involving lower interest rates and encouraging credit to overcome falling economic growth and consumption.

An increase in the supply of USD beyond what economic growth can absorb will – all things being equal – reduce its value relative to other assets, and by basic math, if the value of the denominator falls, the ratio increases. Bitcoin is a store of value and a hedge against currency depreciation.

Finally, the bitcoin asset lives on a decentralized network (confusingly also called Bitcoin, here distinguished by capital letters), which gives this store of value an almost unique degree of attack resistance. It can be argued that other hard assets can be kept “off the grid” (gold can be kept under the kitchen floorboards, and maybe no one knows about the cabin in the woods), but they are complicated to transport and can be seized. Bitcoin ownership does not reside on centralized ledgers unless at the holder’s request, an option many choose for convenience. Yet the asset’s inherent resistance to attack and mobility further enhance its store of value quality.

Given the exploding economic uncertainty, it makes sense that investors would want to bolster their portfolios with stores of value, and it makes sense that many are starting to pay more attention to this new asset. This growing interest, we’re told, is one of the main factors behind bitcoin’s more than 80% price increase since the beginning of the year.

Only technically it is not.

Stores of value are generally of interest to long-term investors. Bitcoin’s price is set by short-term traders.

That’s not to say that the store-of-value narrative hasn’t been a key driver of bitcoin investment since the early days. In bull markets and bears, those with a long-term thesis have been steady accumulators – calculations tracking the movement of bitcoin on the chain show that nearly 30% of bitcoin in circulation has not moved in over five years, and even during the painful drawdown of last year, this percentage continued to go up and to the right (admittedly, some of this bitcoin may be lost permanently, but most of it most likely corresponds to valuable investors). Almost 40% have not moved for over three years, over 50% have not moved in for over two. You get the picture.

But this steady accumulation has been quiet and consistent, not accounting for bitcoin’s wild price swings. They are driven by speculation about this and other stories.

In any public market, the last trade determines the price. In liquid markets there are trades every nanosecond and they are usually at prices close to the last, but changing preferences will move this up or down. These are usually from traders and market makers hoping to profit from short-term moves, which are influenced by narratives and news.

For bitcoin, while we don’t have access to churn in exchange volumes since these happen off-chain, we do know the average age of on-chain movements. Much more trading is done off-chain than on-chain, and therefore we can assume that they are at least representative of the composition of exchange volumes. The chart below from Glassnode shows that at least half of the bitcoin transferred between addresses on a given day had last been moved in the previous 24 hours (the light and dark yellow bands). Even on-chain, the bitcoin market has high turnover, and short-term traders dominate.

So, in the case of bitcoin, the trader-led expectation of growing interest in the store of value is probably behind more of the recent price movement than actual interest. Investors may increasingly view bitcoin as a store of value, and increasing demand in the face of a fixed supply will obviously push the price up. But the bulk of the price moves come from traders betting on this demand rather than actually being part of it.

This highlights the key role narratives play in crypto markets, more so than in other markets with a smoother flow of fundamental data.

It also exaggerates upward and downward price movements. Unlike fundamental value drivers, narratives are inflated and deflated by sentiment, which is influenced by an incomprehensible range of factors. It even ends up affecting itself.

What usually happens in bitcoin cycles is that the prevailing narrative starts out being about one thing (eg store of value) and ends up being about another (price). Whatever you think is the main story driving current interest – the store of value happens to be what I hear the most about these days, but there’s also money liquidity, the need for bancassurance and more – our attention always turns to price movements, which themselves end up to become history.

We need to keep an eye on this because we’ve all seen how that kind of narrative can push the price up (which is good) but quickly remove support when the wind changes. When “price” becomes the story, we must be aware that sentiment will weaken, because traders are no longer betting on what long-term investors will do, they are betting on what other traders will do.

The underlying potential growth may not have changed, and accumulation by those with an eye on the bigger picture will continue regardless. But sentiment and price tend to be driven by short-term market players who are influenced by much more than a good story. This has implications for market momentum, and serves as a warning against becoming too wedded to any particular narrative when trying to understand market movements.