Depending on whom you pose the question to, bitcoin can be many things. Most see it as a speculative asset, whereas others think of BTC as a payment method. However, the bigger question is whether it can be a store of value and protect against inflation and other economic turmoil.
Table of contents
- The Store Of Value Concept
- What Is Needed To Achieve Store Of Value?
- Can Bitcoin Become A Store Of Value?
- What Makes An Asset “Sound Money”?
- Is Bitcoin Fungible?
- Why Bitcoin May Not Be A Store Of Value
- Closing Thoughts
The Store Of Value Concept
On paper, a store of value is a straightforward concept. It pertains to an asset that can retain its value over time, particularly during times of economic uncertainty. However, very few assets can live up to those expectations as everything is subject to market volatility sooner or later. However, as precious metals are widely regarded as a hedge against inflation and a good store of value, there are some exceptions. Primarily gold and silver are of interest to traders globally, as they have a strong record of maintaining value over time.
The upside of gold and silver is how they are not subject to banks and governments. More specifically, neither institution can issue or mint gold on their own accord. That makes these assets very different from paper notes and bills, which central banks can add to the circulation on demand. Unlimited printing of money will end up in catastrophe, no matter how one wants to spin the narrative. Store of value assets is often those forms of money that escape the grasp of banks and governments.
What Is Needed To Achieve Store Of Value?
To become a safe haven asset, the asset in question must meet some stringent demands. It cannot be a poor store of value, as those forms of money and value will only become worthless over time. Instead, we need something that can retain its value and hopefully slowly appreciate over time.
Of the assets that come to mind, anything that isn’t durable can be removed from the equation. That means anything from apples to paper notes is never a store of value, as they either spoil or need replacing. Food has intrinsic value, however, as all living beings on this planet need it to survive. However, it is unwise to invest millions in bananas just in case a shortage were ever to occur. Thus, preserving wealth through food is impossible, no matter how one wants to tackle this concept.
Dried and canned goods could offer better options, as they are durable and have intrinsic value. Unfortunately, no one can guarantee that dried or canned goods will hold their value over time, as they are often made cheaply and exist in abundance. All it takes is one person flooding the market to depreciate the value of everything else. Scarcity is a crucial aspect of a store of value, although challenging to come by.
As mentioned earlier, fiat currencies – the notes and coins issued by central banks – do not make a good store of value. Purchasing power is dropping continually and in an accelerating manner. They may hold the same face value, but they offer less value when trying to spend them. Cash cannot appreciate, making it a poor option. In the face of inflation, fiat currencies are the worst option.
This phenomenon often occurs due to an excessive supply of currency due to governments continuously printing more. As a result, prices for goods and services will rise, reducing purchasing power. More money in circulation will erode the value of what was already there before. It is an unfortunate yet vicious circle that keeps repeating itself. Cash money is easy and cheap to produce, nullifying any option to become a store of value.
Precious metals are very different in this regard. Both gold and silver have a finite supply, and they aren’t easy to mine. Moreover, they have various use cases outside of being a store of value. Gold and silver are “hard money” that isn’t easy to come by, making it appreciate as time progresses.
Can Bitcoin Become A Store Of Value?
That is a very tricky question with no straightforward answer. Bitcoin has the necessary traits to fall into this category, but several factors work against it. Since its inception, supporters have claimed how Bitcoin is a form of digital gold, thus a store of value. While that concept still holds true today, it is far from akin to gold in the value department, either for better or worse.
With its hard-capped supply of 21 million and mining process, Bitcoin is a sound asset. Moreover, it is a form of storing wealth beyond the control of governments and central banks. All of these aspects are ideal were it not for the price volatility. Unlike gold and silver, Bitcoin can see wild price swings daily. Losing or gaining over 10% is not uncommon, making it less appealing as a store of value.
Despite its volatile track record, Bitcoin is still performing well. Its yearly performance is unmatched by other assets on the market today. Seeing a gain of over 100% per year is not abnormal for this cryptocurrency, which benefits those seeking alternative stores or values. But what makes Bitcoin a solid fit for the “store of value” title?
It Is Scarce
As highlighted before, a store of value can only be viable if it has a scarce or limited supply. Precious metals have a finite supply, although no one knows the exact numbers. With Bitcoin, that number has been set in stone at 21 million BTC by developer Satoshi Nakamoto. Thus, no more than 21 million BTC will ever be created, even though not all of them will be inactive circulation by the time that happens. As such, its limited supply becomes more scarce over time.
On the creation of new Bitcoins, one can only do this through a process known as mining. Bitcoin miners need to try and solve complex cryptographic puzzles through computational power. That power can come from powerful computers or dedicated hardware, known as ASICs. In exchange for their work, miners will earn block rewards and transaction fees proportionally to the amount of work they provide.
It is worth noting that Bitcoin’s mining reward decreases by 50% every four years. This process, known as a “halving,” has occurred multiple times since the network’s inception. For example, the initial mining reward of 50 BTC per block was halved to 25, halved again to 12.5, and currently sits at 6.25 BTC. The halving process will continue until all BTC have been mined, which will complete in the year 2140.
The Bitcoin supply emission is very different from bank-issued currencies. Rather than reducing the supply, financial institutions and governments continue to increase the circulating supply of coins and paper notes. That process will eventually trigger inflation, reducing consumers’ purchasing power, and requiring more money to be brought into circulation. An unsustainable model that offers no room for improvement or hope, unfortunately.
Decentralization is Essential
A suitable store of value will only work if there is no option for governments or banks to interfere actively. Precious metals are one example, but so are cryptocurrencies. Despite being open-source software anyone can copy, setting up a network on the scale of Bitcoin requires tremendous effort and resources. Convincing people to set up a network node and keep it running 24/7 is daunting. Moreover, the project is unlikely to get support from Bitcoin users, as they will see it as another “fork” no one asked for or needs.
Even though there is no centralized authority in Bitcoin, that doesn’t mean there is no government. Every user running the software has a say in how the ecosystem evolves and which changes may prove worthwhile. To introduce changes, the network needs to achieve majority consensus from its users. That is never an easy process, although most upgrades have occurred without conflict.
Imagine if someone proposes to inflate Bitcoin’s supply of 21 million to 25 million. A user can put the proposal forward, but it is unlikely too many people will vote in favor. A higher supply will dilute the existing currency in circulation, just like what happens to fiat currencies. Users can rest assured that such a change is unlikely to occur, although one can’t deny the possibility.
What Makes An Asset “Sound Money”?
Another trait a store of value has to adhere to is being classified as “sound money”. That term is a bit conflicting, as it would require an asset to be scarce and outside the control of banks and governments and share characteristics with precious metals and other stores of value.
Sound money is often achieved by possessing the following traits: fungibility, divisibility, and profitability. Bitcoin can, in theory, adhere to all three aspects, even though its fungibility is often questionable among cryptographic experts.
Is Bitcoin Fungible?
One can make arguments as to why Bitcoin is or isn’t a fungible asset. Fungibility requires asset units to be indistinguishable from one another. With precious metals, an ounce of silver is the same as the next ounce, and they have the same value. Stocks and cash have a similar trait, as they will hold equal value to any other of the same type of asset.
With Bitcoin, that situation is a bit different. Theoretically, one BTC equals one BTC, and the story ends there. In practice, however, it is trickier due to how the linking of BTC balances to transactions works. In addition, payment processors and businesses can blacklist some funds due to expected association with criminal activities. As such, Bitcoin is not fungible by definition, yet the question is whether enough people care. It is unlikely to impact Bitcoin’s future adoption, yet it is essential to know where this discussion stems from.
The Portability Aspect
Unlike other stores of value, such as precious metals, Bitcoin is more portable than others. It is very easy to transport this digital asset, whereas moving large quantities of precious metals or cash can become a logistical nightmare. Bitcoin may have the smallest form factor of any sound money, as it does not exist in physical form.
Another factor working against precious metals is how paying for groceries with gold is impossible. It should be a viable option, yet no store will accept bullion payments for a few oranges, two steaks, and bread. That situation is unlikely to change in the future. For cash, purchasing a specific amount is impossible due to bank restrictions. Bitcoin solves all of these problems and much more.
Ease Of Divisibility
Although most people don’t give it a second thought, money would be hard to spend were it not divisible. Not everyone is a fan of change currency, but it is essential to split sound money into smaller bits. Gold and silver are easy to divide into kilograms and grams, for example. Money has change, although both are limited in their divisibility.
Bitcoin and other cryptocurrencies have changed this narrative for the better. Even though Bitcoin only has 21 million “full” units, it is divisible by up to one hundred millionth of a unit. Such a small unit of account allows for broader transaction control thanks to working with eight decimal places. It also allows for investors to buy smaller quantities of BTC, rather than a full Bitcoin every time.
Why Bitcoin May Not Be A Store Of Value
For all the positive aspects and traits Bitcoin may depict, there are counterarguments to be made. That is only normal, as this form of money is still unusual to many people.
The Digital Cash Aspect
In the original Bitcoin whitepaper, Satoshi Nakamoto refers to Bitcoin as a peer-to-peer electronic cash system. As such, the ecosystem would only have value if users spend their coins rather than hoarding them. Bitcoin has not lived up to the digital cash standard over the years but has rather become an asset for long-term investing and speculation.
This particular aspect of Bitcoin has created a community split, resulting in the creation of Bitcoin Cash in 2017. Bitcoin Cash claims to be a better form of digital cash, whereas Bitcoin is unsuitable and unappealing for payments.
Opinions remain divided on this front, as Bitcoin can still serve as a payment solution thanks to SegWit and the Lightning Network. The LN implementation still requires a lot of work as it is too complex to use. However, it proves a viable solution to make Bitcoin digital cash again.
Intrinsic Value And Volatility
It does not require a PhD in economics to see why people claim Bitcoin is incredibly volatile. Its value never remains stable, raising the question of whether there is any intrinsic value at all. It has no real use outside of its network and only exists in digital form, unlike precious metals. However, one can also argue that money is a “belief” rather than ‘value”, as it only serves a purpose when governments uphold their promise of giving it value. Bitcoin isn’t different in that regard, yet also very unique in others.
Despite the differing opinions on Bitcoin’s intrinsic value, the world’s leading cryptocurrency is too volatile to be a traditional store of value. Although its potential for appreciation is massive, the market can easily head in the other direction. It is also unlikely Bitcoin’s value will ever stabilize, creating a new debate regarding its store of value ambitions.
It is very difficult to determine whether Bitcoin can ever be a store of value. While it shares the most important traits of a store of value, it lacks some other aspects. Moreover, volatility remains a topic of debate, as does its intrinsic value.
It may take time for Bitcoin to prove itself as a worthy candidate for this label. Despite being around for over eleven years, cryptocurrency still has much to prove to those not involved in cryptocurrencies today.