Cryptonomics: Bitcoin and Stores of Value

When looking for investments, it is essential to invest in assets that will not depreciate in the future. With its limited supply, fungibility, portability, and divisibility, Bitcoin merits consideration as a good store of value.

Utulu Hope
March 17, 2021


Let us consider the entire market structure. If asked to pick an asset whose value would appreciate with time, the first options that would come to mind would probably be the precious metals, Gold or Silver. This would not be out of place since these assets have established themselves in the industry for years. Besides, they dominate the stock market.

Arguments are ongoing on whether Bitcoin should be classified with these precious metals as a reliable asset. Recent price increase suggests that Bitcoin may seem to be a good asset, but critics point to its high volatility.  In this write-up, we will discuss Bitcoin, as a good store of value. However, we are keeping in mind other stores of values.

Store of Value Explained

A store of value is an asset that can retain its value over time. This means that any asset that maintains its value without depreciating is a store of value.

When you purchase an asset, you would expect that it would retain its value or increase in the future. However, many assets fall short when it comes to this description.

The question now is, "How does one decide on the assets to buy with the hope that they increase or retain value in the future"? Read along, as we will enlighten you on detecting an asset with a good store of value.

What is a Good Store of Value?

It is important to know the factors that make an asset a poor store of value. This will be key in detecting a good store of value. Consider fruits, for instance; people need fruits like bananas, oranges, and watermelons because of their obvious health benefits. If these fruits become scarce, their value will increase. However, the sudden increase in value due to scarcity is not the criterion for being a good store of value. This is because if you keep these fruits, they will not increase in value. Instead, they will depreciate, as fruits tend to spoil when preserved for long. This does not obey the definition of a good store of value, given that its quality depreciates with time.

Even if fruits are scarce, it does not make it a good store of value. But, scarcity is an important requirement. Let us illustrate this with another example. Pasta is a product that is cheap to produce and will last for a longer period. It is easy for anyone to produce, but it may need to be relatively scarce for its value to increase. Here is the logic: as many people produce pasta, its price tends to drop because there is enough pasta to satisfy consumers' needs and even more in circulation. For its value not to drop, it needs to be sought-after. This is where scarcity comes into play.

Like pasta, the value of traditional currencies like the U.S Dollar tends to depreciate as more units are in circulation. Many people may consider these traditional currencies as good stores of value, but if you save a currency such as Euro in the bank, it does not retain its value over time. What €2000 can get you now could get much more just a few years ago. The fact that these currencies are readily available implies that they are very cheap to produce. Therefore, the steady supply of traditional or fiat currencies will lead to consistent inflation in the prices of goods.

Knowing what makes an asset a bad store of value makes it a good store of value? As stated earlier, scarcity is a good agent of increase in value. Consider gold, for example. Its availability is limited because, unlike money, it is complicated to produce. When people demand large quantities of gold to it may take some time before the demand is met. Gold is a good store of value as its supply is limited, and it can be saved without deteriorating in value.

Bitcoin as a Store of Value

The world has gone digital, and we now have digital currencies. One digital currency that is dominating the market is Bitcoin. Many people have coined it "digital gold" because of its importance.

The theory of Bitcoin as a store of value came because it has witnessed unprecedented growth. Bitcoin's value has not depreciated since its inception, which strongly supports the theory. Bitcoin, like every other cryptocurrency, can be quite volatile. The value of one Bitcoin can swing downwards by as much as 15% in the space of some minutes, yet it is still widely regarded as a great asset. All that needs to be noted is that Bitcoin was one dollar 10 years ago, and it is now trading above $50,000.

Reasons Why Bitcoin is Seen as a Good Store of Value

The high rate of volatility suggests that Bitcoin is an inferior asset. However, some of the reasons why it is regarded as a good store of value are as follows:

● Scarcity

The supply of Bitcoin is limited. Just like gold, Bitcoin can be 'mined' by computer hardware that performs some cryptographic calculations to obtain fresh coins. However, the total minable quantity of Bitcoin is limited to 21 million Bitcoins. This means that any percentage you acquire will remain the same. Even if you buy 10% of the entire supply from the market, you will still have 10% in the next five years.

● Bitcoin is Decentralized

By this, we mean that Bitcoin is more like a natural resource than something that is easily manipulable. Therefore, holders of the cryptocurrency can rest assured that the supply is fixed and cannot be amplified.

Advantages of Bitcoin as a Good Store of Value

Bitcoin has many advantages as a good store of value, but we will narrow them to these two.

  • Bitcoin is very portable: This means that Bitcoin is straightforward to transport. It is not easy to move other assets around like Bitcoin. For instance, moving assets like oil or even fruits require a lot of effort.

For a currency to be portable, it needs to have a small form. It needs to be movable with ease when required for making transactions.

Bitcoin, unlike other precious metals, is more significant in this aspect. You can move several million dollars worth of Bitcoin from one place to another using a computer. To transport other metals from one place to another, one has to pay immense transportation costs. Millions of Bitcoin can be easily transferred for much lesser fees.

  • Bitcoin is divisible: Bitcoin is made of smaller units called Satoshis. This makes it easier for small-scale investors to buy minute quantities.

Closing Remarks

Many investors believe that Bitcoin is a good store of value. However, its volatility places a huge question mark on the minds of analysts. Towards the end of 2020, head of Fidelity Digital Assets, Tom Jessop termed the asset as a "potential store of value." In spite of its volatility, Bitcoin, with its limited supply, fungibility, portability, and divisibility, merits consideration as a good store of value.

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Utulu Hope

UC Hope is a passionate fan of crypto who could weave the latest event into sparks of inspiration and information. He leaves no stone unturned to get to the core of a story. Aside from writing, he spends his hours poring over algorithms and protocols, preparing for a future career as a computer programmer.