Introduction
When talking about safe-haven assets, perhaps what you think of are precious metals such as gold and silver. These assets are investments that many choose as a hedge against traditional market volatility.
The debate about whether Bitcoin is following in the footsteps of these assets is starting to surface. In this article, we will look at some of the main arguments for and against Bitcoin as a store of value.
What is meant by store of value?
A store of value is an asset that is able to maintain value over time. If you buy a good store of value today, you can be sure its value will not decrease over time. In the future, you can expect those assets to be worth as much (or even more).
When you think of “safe haven” assets, gold or silver probably comes to mind. This makes perfect sense, as there are several reasons why this has traditionally had value, which we will discuss shortly.
What are the characteristics of a good store of value?
To understand what makes a good store of value, let's first look at the characteristics of a bad store of value. If we want something to be stored for a long time, then the item must be durable.
For example food. Apples and bananas have intrinsic value, because humans need nutrients to live. When food was scarce, these items were certainly very valuable. But this does not make food a good store of value. The value of apples and bananas will be greatly reduced if you store them in a safe for several years, because obviously, these foods will rot.
But what about something that is both intrinsically valuable and long-lasting? Say, dry pasta? Dried pasta is better in the long run, but there's still no guarantee it will retain its value. Pasta is produced cheaply from sources that are always available. Anyone can flood the market with more pasta, so that the pasta in circulation will decrease in value as supply exceeds demand. Thus, for something to maintain value, it must also be rare.
Some people consider fiat currencies (dollars, euros, yen) a good way to store wealth because they retain value over the long term. However, fiat currency is actually a poor store of value, purchasing power will drop significantly as more units are created (just like pasta). You could withdraw your savings and put it under the mattress for twenty years, but it won't have the same purchasing power compared to when you spend it now.
In 2000, with $100,000, you could buy more things than today. This occurs because of inflation, which shows rising prices of goods and services. In many cases, inflation is caused by an excessive supply of fiat currency due to governments printing very large amounts of money.
To illustrate, let's say you hold 25% of the total supply of $100 billion – so you have $25 billion. Time is running out, and the government decides to print an additional $800 billion to stimulate the economy. Now your slice of the pie is suddenly down to ~3%. There's more money floating around, so it makes sense that your share doesn't have as much purchasing power as it used to.
Weak purchasing power from time to time.
Like the pasta we discussed earlier, it is not expensive to produce in dollars. The illustration above can happen in a matter of days. With a good store of value, it will be very difficult to flood the market with new units. In other words, your slice of the pie will decrease very slowly, or not at all.
Taking gold as an example, we know that its supply is limited. We also know that gold is very difficult to mine. So, even if demand for gold suddenly rises, you can't turn on the printer to make more gold, but rather, as usual, it has to be extracted from the ground first. Even though there is an increase in demand, supply cannot be increased materially to meet that need.
Which supports Bitcoin as a store of value
Since Bitcoin's early days, its supporters have considered the cryptocurrency to be more akin to “digital gold” than a simple digital currency. In recent years, this narrative has been echoed by many Bitcoin enthusiasts.
The thesis regarding Bitcoin as a store of value argues that Bitcoin is one of the healthiest assets known to man. Proponents of this thesis believe that Bitcoin is the best way to store wealth so that it does not devalue over time.
Bitcoin is known for its wild volatility. It may seem counterintuitive that an asset that can lose 20% of its value in a day is considered by many to be a store of value. However, even taking into account its many drawbacks, the cryptocurrency remains the best-performing asset class to date.
So, why is Bitcoin being glorified as a store of value?
Scarcity
Perhaps one of the most favorable arguments for the thesis of Bitcoin as a store of value is that Bitcoin has a limited supply. If you still remember, in our article entitled What is Bitcoin?, there will never be more than 21 million bitcoins. The protocol ensures this with unchangeable rules.
The only way new coins can be created is through the mining process, which is analogous to mining gold. But instead of drilling the earth, Bitcoin miners must solve cryptographic puzzles using computing power to earn fresh coins.
As time goes by, rewards decrease due to an event known as a halving. If you guessed that this was a reward halving event, you were right. In the early days of Bitcoin, the system rewarded 50 BTC to any miner who produced a valid block. During the first halving, this amount was reduced to 25 BTC. The next halving cut rewards to 12.5 BTC, and the next one will cut miner rewards to 6.25 bitcoins per block. This process will continue for the next 100 years until the last coin enters circulation.
To compare it with the previous fiat currency example, let's imagine the following scenario, let's say you have bought 25% of the Bitcoin supply (a total of 5,250,000 coins) a few years ago. When you acquire these coins, you know that your percentage will remain the same because neither party can afford to add more coins to the system. There's no governance or governance here – well, not in the traditional sense (more on this in a moment). So if you bought (and held or HODLed) 25% of the maximum supply in 2010, even today you still have 25%.
Decentralization
It's open-source software, you might think, I can copy the code and create my own version for an extra 100 million coins.
Of course you can do it. For example, let's say you create a clone of the software, make some changes, and then run node. It seems everything is going well. However, there is one problem: your node cannot be connected to other nodes. So, when changing software parameters, Bitcoin network participants will ignore you. You will be forked, and the programs you run will not be accepted as Bitcoin anywhere.
What you just did is like taking a photo of the Mona Lisa and claiming that there are now two Mona Lisas. You can convince yourself that there really are two Mona Lisas, but, as for convincing others, good luck!
We have already discussed that there is a kind of governance within Bitcoin. This governance is created by each user who runs the software. The only way in which a protocol can be changed is if a majority of users agree with the proposed change.
Convincing the majority of users to add coins is not an easy task – you are asking them to reduce the value of their own holdings. Given the current state of affairs, even seemingly insignificant features can take years to reach consensus across the network.
As the size continues to increase, it will become increasingly difficult to propose changes. Therefore, holders are quite confident that inventory will not increase. Although this software is man-made, the decentralization of the network means that Bitcoin actually acts more like a natural resource, rather than code that can be changed arbitrarily.
The good nature of money
Proponents of the Bitcoin as a store of value thesis also argue that Bitcoin is good money. Not only is it a rare digital treasure, but it also has the properties of currency that have been traditionally adopted for centuries.
Gold has been used as money in civilization since its discovery. There is some reasons. We have already discussed durability and rarity. These characteristics can make an asset good, but not necessarily good in the form of currency. For that, you also need fungibility, portability, and shareability.
Compatibility
Equivalence or fungibility means that the units are indistinguishable. With gold, two ounces here and two ounces there are worth the same. Also applies to shares and cash. It doesn't matter which unit you keep – they will all be worth the same if they are the same type.
Bitcoin's fungibility is somewhat debated. It shouldn't matter which coin units you keep. 1 BTC = 1 BTC. But where things get a little complicated is if you imagine that each unit can be tied to a previous transaction. There have been several cases where business people blacklisted funds that they believed were related to criminal activity, even though the holders did not know anything because they received them afterward.
Is this important? Actually no. When you pay for something with dollars, neither you nor the merchant know where the money was used in the previous three transactions. There is no concept of transaction history – new money is not worth more than money once used.
However, in a worst-case scenario, it is likely that older bitcoins (with more history) sell for slightly less than relatively new bitcoins. Depending on who you ask, this scenario could be the biggest threat to Bitcoin, or even nothing to worry about. For now, however, Bitcoin is functionally fungible. There have only been a few specific incidents where coins have been frozen due to suspicious history.
Portability
Portability means ease of transporting assets. $10,000 in $100 bills? Quite easy to carry. $10,000 worth of oil? Does not matter.
A good currency should have a small form factor. Easy to carry so everyone can pay for each other's goods and services.
Gold is traditionally very good in this regard. At the time of writing, a standard gold coin has a value of $1,500. It's unlikely that you'll make a purchase worth a full ounce of gold, so smaller denominations take up less space.
Bitcoin is actually superior to precious metals in terms of ease of transport. Bitcoin doesn't even have a physical appearance. You can store trillions of dollars of wealth in a palm-sized hardware device.
Moving a billion dollars worth of gold (currently over 20 tons) requires enormous effort and expense. Even with cash, you need to carry several pallets of $100 bills. However, with Bitcoin, you can send the same amount to anywhere in the world for less than a dollar.
Can be shared
Another important quality of currency is its divisible nature – that is, the ability to divide it into smaller units. With gold, you can take a one-ounce coin and cut it down the middle to produce two half-ounce units. You may lose your premium for ruining a nice eagle or buffalo picture on it, but the value of the gold remains the same. You can cut your half-ounce units again and again to produce smaller denominations.
The divisible nature is also an advantage of Bitcoin. There are only twenty-one million coins, but each unit consists of one hundred million smaller units (satoshi). This makes it easier for users to control transactions, as they can specify the amount to send up to eight decimal places. Bitcoin's divisible nature also makes it easier for small investors to purchase BTC fractions.
Store of Value, Medium of Exchange, and Unit of Account
Sentiment is divided based on Bitcoin's current role. Many believe that Bitcoin is just a currency – a means of moving funds from point A to point B. We'll get to this later, but this view goes against the theory that Bitcoin is a store of value.
SoV supporters argue that Bitcoin must go through stages before becoming a mainstream currency. Started as a collection (its current position): it has proven itself to be a functional and safe asset, but has not been widely adopted. The main users still consist of hobbyists and speculators.
Only if there is broader education, institutional infrastructure, and more confidence in its ability to retain value will it be able to move to the next stage: store of value. Some people even believe that this level has already been reached.
At this point, Bitcoin is not widely spent due to Gresham's law, which states that bad money drives out good money. That is, when given a choice of two types of currency, a person will tend to spend the inferior currency and save the superior currency. Bitcoin users prefer to spend fiat currency, as they have less confidence in its long-term durability. They hold (or HODL) bitcoin, because they believe that this crypto asset will retain value.
If the Bitcoin network continues to grow, more users will adopt, liquidity will increase, and prices will be more stable. Due to strengthening stability, the incentive to hold them in the hope of generating future profits will not be as much as there is now. So, we can expect this crypto asset to be used more in everyday buying and selling and payments, as a powerful medium of exchange.
Increased use will make prices more stable. In the final stage, Bitcoin will become a unit of account – it will be used to determine the prices of other assets. Just as you value a gallon of oil at $4, when Bitcoin thrives, you will calculate its value in bitcoins.
If these three monetary benchmarks are achieved, proponents see the future of Bitcoin as a new standard that will replace currently used currencies.
Which opposes Bitcoin as a store of value
The arguments presented in the previous section may sound perfectly logical to some people, and implausible to others. There has been some criticism of the idea of Bitcoin as “digital gold,” coming from both Bitcoiners and cryptocurrency skeptics.
Bitcoin as digital money
Many are quick to point to Bitcoin's white paper when debate on this topic arises. To them, it was clear from the start that Satoshi intended Bitcoin to be spent. In fact, this intention is written in the title: Bitcoin: A Peer-to-Peer Electronic Cash System.
This argument suggests that Bitcoin is only valuable if users spend their coins. By keeping it, you're not helping adoption – you're hurting it. If Bitcoin is not widely appreciated as digital money, then its core proposition is not driven by utility, but rather speculation.
These ideological differences led to a fork in 2017. A minority of Bitcoiners wanted a system with larger blocks, which meant cheaper transaction fees. Due to increased network usage, transaction fees can rise dramatically, hurting many users with lower value transactions. If the average cost is $10, it doesn't make sense for you to spend coins on a $3 item.
The forked network is now known as Bitcoin Cash. The original network performed an upgrade, known as SegWit. SegWit increases block capacity, but that is not its main goal. It also builds the foundation for the development of the Lightning Network, which seeks to facilitate low-cost transactions by doing so off-chain.
However, in practice, the Lightning Network is far from perfect. Typical Bitcoin transactions are easier to understand, while managing Lightning Network channels and capacity requires deep understanding. It remains to be seen whether this network can be simplified, or whether the design is fundamentally too complex to implement.
Due to the ever-increasing demand for block capacity, on-chain transactions are no longer cheap during peak hours. Thus, one could argue that if the block size is not increased, this will undermine Bitcoin's usefulness as a currency.
No intrinsic value
For many people, the comparison between gold and Bitcoin is simply absurd. The history of gold is basically the history of civilization. Precious metals have been an important part of society for thousands of years. It must be admitted that gold has lost some of its dominance since the removal of the gold standard, but to this day it remains a classic safe-haven asset.
It is indeed not worth comparing the network effects of an asset king with a protocol that is only eleven years old. Gold has been revered, both as a status symbol, and as an industrial metal for thousands of years.
On the other hand, Bitcoin is useless outside its network. You can't use it as a conductor in electronics, nor can you make it into a very shiny necklace when you decide to start a career in the hip-hop world. Maybe Bitcoin imitates gold (in terms of mining, limited supply, etc.), but that doesn't change the fact that Bitcoin is a digital asset.
To some extent, all money is a shared belief – the dollar has value only because the government says so and society accepts it. Gold has value only because everyone agrees. Bitcoin is no different, but those who provide value are still a small group in the grand scheme of things. You've probably had this conversation in your personal life, where you've had to explain at length what Bitcoin is, because most people have never heard of it.
Volatility and correlation
Those who own Bitcoin at the start certainly enjoy an increased wealth value. For them, Bitcoin does store value – of course it does. But those who bought the first coin at an all-time high price had no such experience. Many incur huge losses by selling afterwards.
Bitcoin has high volatility, and its markets are unpredictable. Metals like gold and silver have insignificant fluctuations when compared to Bitcoin. You could say that this opinion is premature, prices will eventually stabilize. If so, in itself, this could indicate that Bitcoin is not currently a store of value.
Bitcoin's connection to traditional markets is also worth considering. Since its inception, Bitcoin has been on a steady upward trend. This cryptocurrency has not really been proven as a safe-haven asset if all other asset classes are also doing well. Bitcoin enthusiasts may call it “uncorrelated” with other assets, however, there is no way to know that Bitcoin remains stable when other assets decline.
Tulip Mania and Beanie Babies
Criticism of the notion that Bitcoin is a store of value would be incomplete if we did not discuss Tulip Mania and Beanie Babies. Both may be weak analogies, but they serve to illustrate the dangers of bursting bubbles.
In both cases, investors flock to buy items they consider rare in the hope of reselling them for a profit. For themselves, these items are not that valuable – they are relatively easy to produce. Bubbles pop when investors realize that they have, massively, overvalued their investments, with the result: the market for tulips and Beanie babies collapses.
Again, this is a weak analogy. Bitcoin's value does come from user trust, but unlike tulips, more Bitcoin cannot be planted to meet demand. However, nothing guarantees that investors will not see Bitcoin overvalued in the future, which would lead to the bursting of the bubble.
Closing
Like gold, Bitcoin of course has most of the properties of a store of value. The number of units is limited, the network is decentralized enough to offer security for holders, and can be used to store and transfer value.
But ultimately, Bitcoin still has to prove its worth as a safe-haven asset – it's too early to see that now. Things could go both ways – the world might turn to Bitcoin in times of economic turmoil, or the crypto asset would instead continue to be used only by a minority group.
Time will tell.
