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Do you remember how gold behaved following the abandonment of the Gold Standard in August of 1971? Neither do I, so let’s refresh our memories. Gold returned 2,050% between 1971 and 1980, which translated to roughly 41% annualized returns.
Gold price with returns indicated on the chart
Given that the Gold Standard was in fact a “standard,” its abandonment meant that gold’s value could fluctuate freely. As a result, gold’s price volatility increased markedly. Gold was no longer an asset tethered to a currency’s value and came to be viewed as a potential store of value by investors given its limited supply. Sound familiar?
The below chart shows Gold’s rolling 1-year volatility from 1971 to 1986. For context, annual volatility of 100% would imply a daily move of 6.3% in Gold’s price. As you can see, gold’s volatility declined after adoption increased during the early 1970s and liquidity improved as more market participants traded the precious metal.
We need to rewind the clock to the Global Financial Crisis (GFC) of 2008–2009 to find the next stage of “standard” abandonment. As multiple quantitative easing rounds were announced (QE1 in 2008, QE2 in 2010, and QE3 in 2012) in an effort to lower long-term interest rates and stimulate the economy during and after the GFC, it became clear that “traditional” monetary policy, or the central banking “standard” had come into question. Adjusting interest rates was no longer the sole way to tighten or loosen monetary policy.
Just as gold experienced increased price appreciation following the abandonment of the gold standard, bitcoin began to experience price appreciation and higher volatility as central banks began to flood the monetary system with liquidity.
The below chart shows bitcoin’s rolling 1-year volatility from 2013 onwards. For context, annual volatility of 200% implies a daily move of 12.6% in bitcoin’s price. Just as gold’s volatility declined after adoption increased during the early 1970s, bitcoin’s volatility is falling as well.
One additional similarity worth noting is the rate of change in the supply of money, or M2. During the early 1970s, the supply of money started to increase rapidly from very low levels — from roughly 2.5% per year to over 10% per year. As you can see, we are way above that level following the combined monetary and fiscal response to COVID-19.
The below chart from RDQ economics shows the size of the fiscal stimulus packages passed over the past year in response to COVID-19. Interestingly, the upcoming American Rescue Plan is set to be even larger than the packages passed during the depths of COVID-19. So, while monetary policy has entered uncharted waters, so, too, has fiscal policy.
Historically, large increases in the supply of money led to higher rates of inflation as more money chased a constant amount of goods present in the economy. This leaves out a crucial point about the velocity of money (how fast money is transacting throughout the economy, but we will leave that aside for now). The below chart shows the year-over-year rate of change in M2, or money stock, in the U.S. As you can see, we are at the highest levels in history.
The early 1970s saw oil production peaks in many countries. U.S. production peaked in the late 1960s, which made the U.S. reliant upon other countries for excess supply of oil (see chart below). As OPEC held back oil supplies in 1973, the price of oil skyrocketed and drove up consumer prices in the U.S. As investors sought protection from inflation, gold became the hedge of choice — scarce, a store of value for U.S. Dollars, and backed by a physical, or “real” asset.
The chart below shows the sharp inflation (headline consumer price index) increases during the 1970s, which resulted from an increasing money supply and oil supply shocks, among other things. Ever since, the U.S. economy has transitioned into a more technologically-driven economy, which places downward pressure on prices. Consider a Macbook, which has been roughly the same price for the past ten years. Then consider the technological advances (speed, memory, display, mousepad enhancements, etc.) made between the 2011 Macbook and the 2021 Macbook. You are getting a lot more “bang for your buck” now.
Additionally, U.S. oil production ramped up dramatically during President Obama’s term, which made the country less reliant upon foreign oil production. However, President Biden is already taking steps to limit U.S. oil exploration and production going forward. Should the U.S. suddenly underinvest in the oil sector for the foreseeable future in favor of renewables, we may, ironically, be headed towards increased oil prices for longer.
So, where does bitcoin come in to this? As a divisible, portable, and secure digital store of wealth during a time of transition away from traditional monetary (and fiscal) policy, increasing money supply, and increasing commodity prices, bitcoin likely has a lot more upside as investors and companies increase bitcoin holdings on their balance sheets.
Impressively, bitcoin’s trading volumes are now comparable to that of a large cap stock, it has been added to the corporate balance sheets of Square, Paypal, and Tesla, to name a few, and institutional investors are looking at ways to add bitcoin to clients’ portfolios. As bitcoin’s (lack of) correlation with other assets makes it attractive from a portfolio diversification standpoint, adoption is likely to increase further, volatility is likely to fall, and its price is likely to rise over the long-term.
Disclaimer: These views are my own and in no way represent the views of the firm that employs me. Thanks for reading!
Join Coinmonks Telegram group and learn about crypto trading and investing
Do you remember how gold behaved following the abandonment of the Gold Standard in August of 1971? Neither do I, so let’s refresh our memories. Gold returned 2,050% between 1971 and 1980, which translated to roughly 41% annualized returns.
Gold price with returns indicated on the chart
Given that the Gold Standard was in fact a “standard,” its abandonment meant that gold’s value could fluctuate freely. As a result, gold’s price volatility increased markedly. Gold was no longer an asset tethered to a currency’s value and came to be viewed as a potential store of value by investors given its limited supply. Sound familiar?
The below chart shows Gold’s rolling 1-year volatility from 1971 to 1986. For context, annual volatility of 100% would imply a daily move of 6.3% in Gold’s price. As you can see, gold’s volatility declined after adoption increased during the early 1970s and liquidity improved as more market participants traded the precious metal.
We need to rewind the clock to the Global Financial Crisis (GFC) of 2008–2009 to find the next stage of “standard” abandonment. As multiple quantitative easing rounds were announced (QE1 in 2008, QE2 in 2010, and QE3 in 2012) in an effort to lower long-term interest rates and stimulate the economy during and after the GFC, it became clear that “traditional” monetary policy, or the central banking “standard” had come into question. Adjusting interest rates was no longer the sole way to tighten or loosen monetary policy.
Just as gold experienced increased price appreciation following the abandonment of the gold standard, bitcoin began to experience price appreciation and higher volatility as central banks began to flood the monetary system with liquidity.
The below chart shows bitcoin’s rolling 1-year volatility from 2013 onwards. For context, annual volatility of 200% implies a daily move of 12.6% in bitcoin’s price. Just as gold’s volatility declined after adoption increased during the early 1970s, bitcoin’s volatility is falling as well.
One additional similarity worth noting is the rate of change in the supply of money, or M2. During the early 1970s, the supply of money started to increase rapidly from very low levels — from roughly 2.5% per year to over 10% per year. As you can see, we are way above that level following the combined monetary and fiscal response to COVID-19.
The below chart from RDQ economics shows the size of the fiscal stimulus packages passed over the past year in response to COVID-19. Interestingly, the upcoming American Rescue Plan is set to be even larger than the packages passed during the depths of COVID-19. So, while monetary policy has entered uncharted waters, so, too, has fiscal policy.
Historically, large increases in the supply of money led to higher rates of inflation as more money chased a constant amount of goods present in the economy. This leaves out a crucial point about the velocity of money (how fast money is transacting throughout the economy, but we will leave that aside for now). The below chart shows the year-over-year rate of change in M2, or money stock, in the U.S. As you can see, we are at the highest levels in history.
The early 1970s saw oil production peaks in many countries. U.S. production peaked in the late 1960s, which made the U.S. reliant upon other countries for excess supply of oil (see chart below). As OPEC held back oil supplies in 1973, the price of oil skyrocketed and drove up consumer prices in the U.S. As investors sought protection from inflation, gold became the hedge of choice — scarce, a store of value for U.S. Dollars, and backed by a physical, or “real” asset.
The chart below shows the sharp inflation (headline consumer price index) increases during the 1970s, which resulted from an increasing money supply and oil supply shocks, among other things. Ever since, the U.S. economy has transitioned into a more technologically-driven economy, which places downward pressure on prices. Consider a Macbook, which has been roughly the same price for the past ten years. Then consider the technological advances (speed, memory, display, mousepad enhancements, etc.) made between the 2011 Macbook and the 2021 Macbook. You are getting a lot more “bang for your buck” now.
Additionally, U.S. oil production ramped up dramatically during President Obama’s term, which made the country less reliant upon foreign oil production. However, President Biden is already taking steps to limit U.S. oil exploration and production going forward. Should the U.S. suddenly underinvest in the oil sector for the foreseeable future in favor of renewables, we may, ironically, be headed towards increased oil prices for longer.
So, where does bitcoin come in to this? As a divisible, portable, and secure digital store of wealth during a time of transition away from traditional monetary (and fiscal) policy, increasing money supply, and increasing commodity prices, bitcoin likely has a lot more upside as investors and companies increase bitcoin holdings on their balance sheets.
Impressively, bitcoin’s trading volumes are now comparable to that of a large cap stock, it has been added to the corporate balance sheets of Square, Paypal, and Tesla, to name a few, and institutional investors are looking at ways to add bitcoin to clients’ portfolios. As bitcoin’s (lack of) correlation with other assets makes it attractive from a portfolio diversification standpoint, adoption is likely to increase further, volatility is likely to fall, and its price is likely to rise over the long-term.
Disclaimer: These views are my own and in no way represent the views of the firm that employs me. Thanks for reading!
Join Coinmonks Telegram group and learn about crypto trading and investing
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