Bitcoin's 'Store-of-Value' Narrative Holds True, But Has Minimal Effect on Prices

The markets are inherently disorderly and tumultuous, prompting us as humans to seek structure and logic. This often entails seeking justifications for why prices are fluctuating or what incited a sudden shift.

Frequently, a clear rationale exists for market movements, such as an unanticipated corporate development or a surprise in earnings. At other times, the underlying cause may be less apparent, like shifts in financial flows, changes in user demographics, or consistent product enhancements.

Noelle Acheson, previously the head of research at CoinDesk and Genesis Trading, writes the Crypto Is Macro Now newsletter, which examines the intersection between the evolving cryptocurrency and macroeconomic landscapes. The views expressed are solely her own, and any information presented should not be construed as investment advice.

Determining the catalysts behind fluctuating sentiment in the Bitcoin (BTC) market is particularly challenging due to its lack of earnings, absence of corporate actions, and less regulatory threat compared to other cryptocurrencies. Additionally, the narratives surrounding Bitcoin are diverse and abundant, and there is no consensus on what Bitcoin represents, let alone what influences its valuation.

Despite the unpredictability and disorder of the markets, our instinct to find rationale leads us to cling onto concepts that provide a sense of order. If these concepts align with our interests and correspond with relevant trends, all the more reason to hold onto them.

Store of value

The term "store of value" is frequently used in current discussions, although its meaning can vary depending on the individual. Generally speaking, it alludes to an asset that retains its value compared to a diverse range of other assets over an extended period of time.

Despite Bitcoin's tendency towards short-term price fluctuations and significant downturns, it is regarded as a store of value due to its exclusive status as an asset traded on highly liquid exchanges, featuring a programmatic and verifiable hard cap. In contrast to other "hard assets" like gold, diamonds, or real estate, there is uncertainty surrounding their supply cap and the quantity presently in circulation.

Furthermore, with other "hard assets," the price has a direct impact on the potential supply. If the price of gold were to skyrocket from $2,000 to $20,000 per ounce, novel extraction techniques would become economically feasible, thereby increasing the theoretical supply cap. Bitcoin stands out in this respect, being the sole asset traded on highly liquid exchanges where the price has no bearing on the supply whatsoever. This factor establishes it as the toughest of all hard assets.

Additionally, the supply of its most prevalent unit of measurement, the U.S. dollar, has been steadily growing over the years, with recent times marking an unprecedented pace. As a means of counteracting dwindling economic growth and consumption, it appears we are poised to undertake another round of monetary easing, which will involve lower interest rates and encouraging the acquisition of credit.

In the event of an expansion in the supply of USD beyond what economic growth can accommodate, all other variables remaining constant, its value will inevitably plummet compared to alternative assets. Basic arithmetic reveals that if the value of the denominator decreases, that of the ratio will increase. Bitcoin acts as a store of value and a safeguard against the debasement of currency.

Finally, Bitcoin the asset exists on a decentralized network (also confusingly called Bitcoin, but distinguished here with uppercase), which provides an almost unparalleled level of resistance to seizure. While other hard assets can be held “off the grid” (such as gold kept under the kitchen floorboards or a cabin in the woods), they are difficult to transport and can still be seized. In contrast, Bitcoin ownership does not reside on centralized ledgers unless the holder requests it, which many choose to do for convenience. Moreover, the asset’s inherent resistance to seizure and mobility further enhance its qualities as a store of value.

"Trader-led expectation of growing interest in the store of value narrative is probably behind more of the recent price move than is actual interest"

Long-term holders

In the face of mounting economic uncertainty, it is reasonable that investors are seeking to fortify their portfolios with safe-haven assets, and it is logical that an increasing number of them are turning to bitcoin. We are informed that this rising interest is one of the primary drivers behind the cryptocurrency's more than 80% price appreciation since the start of this year.

However, that's not strictly correct.

Longer-term investors typically focus on stores of value, whereas Bitcoin's price is determined by short-term traders.

The store-of-value narrative has been a significant factor driving Bitcoin investment since its early days. Whether in bull or bear markets, those with a long-term investment outlook have remained steadfast in their accumulation of Bitcoin. On-chain metrics reveal that nearly 30% of Bitcoin in circulation has remained dormant for over five years, and this percentage continued to rise even during the severe market downturn of last year. While some of this Bitcoin may have been lost permanently, the majority likely represents long-term store-of-value investors. More than 40% of Bitcoin has remained inactive for over three years, and over 50% has remained idle for over two years. These statistics paint a clear picture.

The consistent and steady accumulation of Bitcoin by long-term investors has not been responsible for the cryptocurrency's volatile price movements. These fluctuations are largely driven by speculation surrounding various narratives, including Bitcoin's potential as a store of value.

Short-term traders

The price in any public market is determined by the latest trade. In highly liquid markets, trades occur at an incredibly fast pace, often every nanosecond, and are typically executed at prices similar to the previous trade. However, the price can fluctuate depending on changing preferences, which can be influenced by news and narratives. These short-term moves are often exploited by traders and market makers seeking to profit from them.

Regarding bitcoin, although we don't have direct access to the exchange volumes' turnover because those transactions happen off-chain, we can still gather insights from the average age of on-chain movements. Since a significant amount of bitcoin trading occurs off-chain, we can assume that on-chain movements are somewhat indicative of the exchange volume's composition. According to Glassnode's chart below, at least half of the bitcoin transferred between addresses on any given day had been moved within the previous 24 hours (the light and dark yellow bands). This indicates that even on-chain, the bitcoin market experiences high turnover, with short-term traders dominating the scene.

Regarding bitcoin, the recent price movement is likely driven more by the anticipation of increased interest in the store-of-value narrative among traders than by actual demand. While investors may view bitcoin as a viable store of value, driving up demand and prices due to its fixed supply, the majority of price fluctuations are the result of traders speculating on this demand rather than participating in it directly.

This emphasizes the significant impact that narratives have on the crypto markets, particularly when compared to markets that have a more consistent flow of fundamental data.

Narratives tend to magnify price fluctuations in both directions, amplifying upward and downward movements. Unlike fundamental drivers of value, narratives are subject to inflation and deflation based on sentiment, which is influenced by an extensive and often unpredictable range of factors. In fact, narratives can even influence themselves.

Price as the story

The typical pattern in bitcoin cycles is that the dominant narrative initially centers around a particular theme, such as its function as a store of value, but ultimately shifts towards price. Regardless of what may be perceived as the primary driving force behind the current wave of interest - for instance, store of value is currently the most commonly discussed - our focus inevitably gravitates towards fluctuations in price, which ultimately take center stage and become the prevailing storyline.

It is important to remain vigilant about this because we have witnessed how such narratives can cause prices to surge, which is positive, but can also lead to a swift loss of support if circumstances change. When the "price" becomes the central focus, we must acknowledge that the sentiment behind it is becoming more fragile. Traders are no longer basing their decisions on the actions of long-term investors but rather on the behavior of other traders.