Ecoinometrics - Bitcoin: The return of digital gold

The store of value narrative is alive.

Together with macro economic forces, the dominant narrative around an investment thesis is one of the largest factor influencing price trends. After all investing is as much about psychology as it is about fund flows. 

For Bitcoin the stickiest narrative has been that of the store of value a.k.a. digital gold. But after the COVID crash and a lacklustre post halving bull market the talking points around Bitcoin as a store of value lost some of their strength. 

Turns out they are making a comeback.

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Bitcoin: The return of digital gold

Why the narrative matters

Unless you have only dealt with financial markets as an academic you will have certainly noticed that market participants aren’t particularly rational. And markets themselves aren’t very efficient when it comes to pricing things based on known information.

My personal experience is that the two largest forces shaping big trends on financial assets are:

• The macro environment as it puts some constraints on how much money is flowing into the system and where it can reasonably go.

• The dominant narrative as it fuels the reflexive or mimetic feedback loop of investor behaviours. 

The first factor is never priced in immediately. The second one is absolutely not rational.

But I’ve found that tracking these two factors helps a lot to understand big trends. Look at the macro data to understand what regime we are in and what are the long term constraints on the markets. Then on top of that try to accurately identify and interpret the dominant narrative and guess how it might impact Bitcoin’s price.

When I was a quant in a hedge fund one PM used to say that building your investment thesis without understanding the dominant narrative and the macro environment is like building one of those elaborate sandcastle sculptures right at the edge of the sea. You might be making the best sandcastle ever but when the tide comes in (and it always does), you are going to wish you’d paid more attention to the ocean’s schedule.

He was saying that about quants building models that don’t take into account various regime changes. That thing stuck with me over the years.