The true advantage of Bitcoin lies in its ability to serve as a reliable long-term store of value... rather than its capacity to provide ubiquitous or cheap transactions.
—— Saifedean Ammous, (The Bitcoin Standard)
It is surprising that many have uncritically accepted the notion that even if Bitcoin cannot be used as digital cash, it can still store value. In fact, the reality is more likely the opposite: if Bitcoin can prove itself to be a superior currency in the long term, the market may accept it as a store of value. But this requires years of practicality and stability to demonstrate. At this stage, calling any existing cryptocurrency a 'reliable long-term store of value' is premature, as significant price fluctuations are common. The dramatic increase in BTC prices over the past decade does not mean it is a store of value.
The idea of 'don't touch it'
Saifedean Ammous proposed an extreme 'digital gold supremacism.' He envisioned a future where ordinary people do not even touch the blockchain, and on-chain transactions are reserved for high-value transfers. In (The Bitcoin Standard), he wrote:
Bitcoin can be seen as an emerging reserve currency for online transactions, with equivalents of online 'banks' issuing Bitcoin-backed tokens to users while keeping their Bitcoin stored in cold wallets...
He wrote during an online discussion:
Bitcoin on-chain payments are not designed for merchants but for central banks. You can build a global payment network on Bitcoin, with only on-chain settlements. BTC is like the gold held by central banks under the gold standard.
The famous Bitcoin commentator Tuur Demeester also expressed a similar viewpoint:
When Bitcoin fully matures, using the Bitcoin blockchain will be as rare and specialized as renting a tanker.
These views are now discussed as if they have been the dominant vision from the beginning. However, compared to Bitcoin's original design, these ideas are both arrogant and superfluous. I have never subscribed to this version of Bitcoin, nor have countless entrepreneurs who collaborated with me early on. The beauty of Bitcoin lies in the blockchain being accessible to everyone, rather than exclusive to bankers. People like Amous and Demeester, while talking extensively about Bitcoin, merely assume that additional layers can solve BTC's usability issues, while in reality, the feasibility of these additional layers remains uncertain without expanding the base layer.
Moreover, a future reliant on 'Bitcoin-backed tokens' is destined to face persistent arbitrary inflation issues. History shows that the supportive value of money eventually becomes lost. If people are forced to trade on the 'promise of Bitcoin' rather than actual Bitcoin, the number of these promises will eventually far exceed the actual supply of Bitcoin. Additional layers will only make this inflation more likely.
The shift in narrative
In the Bitcoin community, the narrative shift from 'digital cash' to 'store of value' has been a gradual process over several years. Even in 2016, most Bitcoin supporters were still promoting the technology as an online currency—they liked to call it 'magic internet money.' Whenever a company announced it would accept Bitcoin as payment, people would cheer and celebrate. With each additional merchant accepting Bitcoin, its credibility and usability increased.
However, after transaction fees skyrocketed at the end of 2017, the most influential supporters of Bitcoin did not acknowledge the existence of the problem, but cleverly changed the narrative—if Bitcoin is merely a 'store of value,' then high fees no longer matter. In recent years, people have even been encouraged not to use Bitcoin in commerce because the purpose of BTC is to buy and hold indefinitely. I believe the narrative of 'buy, hold, and never use' is a brilliant way to artificially create scarcity. If enough people believe that purchasing and holding an asset with a limited supply can lead to wealth, then extreme price increases are an inevitable result.
The economics of storing value
To understand the issue of 'merely as a store of value,' we need to delve into economics. I was fortunate to be exposed to Austrian School economics early on. Great thinkers like Ludwig von Mises and Murray Rothbard helped me understand the world through the lens of economics. I knew Bitcoin would become popular because I had previously read their views on money. I could see that Bitcoin possesses the attributes of a high-quality currency, which meant I should buy some immediately.
The potential of Bitcoin as a store of value is an interesting economic puzzle. In fact, value itself is a puzzle that has perplexed economists for centuries. Why does anything have value? The Austrian School of Economics provides an insight that has since been accepted by mainstream economics: value is subjective. Value does not exist within the item itself, but rather in the minds of humans. Things themselves do not possess value; we assign value to them because we believe they can satisfy our needs.
'Store of value' does not literally mean to 'store' value, as if it were a physical box that one can put value into for future retrieval. Rather, if something is a store of value, it merely means it has a historical record of being continuously assigned value among humans. Due to its successful history, people have ample reason to believe it will be assigned value in the future as well. Therefore, it can retain its purchasing power over time. Many things have been used to store value. For example, livestock has long been a store of value. Humans have ample reasons to believe livestock can meet their needs, such as for milk, meat, or farm labor. Due to this usability, if you want to sell your livestock, you are likely to find a buyer.
Real estate is another long-established store of value. People have ample reason to believe that owning land brings benefits. They can live on the land, produce food with it, develop it, rent it out, etc. A thousand years from now, livestock and real estate will likely still be valued by humanity. And the most popular store of value is money.
Compared to livestock or real estate, money as an economic phenomenon is somewhat more complex. To understand it, we need to grasp an additional concept: the distinction between direct exchange and indirect exchange.
Imagine a scenario: a farmer raises chickens, and his neighbor is a tailor producing shirts. If the farmer wants a shirt, and the tailor wants some chickens, they can engage in the simplest form of economic exchange, called 'direct exchange' or 'barter.' This exchange occurs when the farmer directly trades chickens for the tailor's shirt. However, barter often proves clumsy and inefficient because it requires both parties to want the items the other is trading. If the farmer wants shoes instead of a shirt, the trade cannot happen.
Unlike barter, 'indirect exchange' occurs when the traded items are not the final goods desired. For example, a farmer might exchange his chickens for gasoline, not because he needs gasoline, but because he can use gasoline to trade for the tailor's shirt. In this case, we would call gasoline the 'medium of exchange'—an intermediate step from the farmer to his final desired goods.
Medium of exchange is remarkable. It allows a large number of people to trade and cooperate within a network without needing to know each other, speak the same language, or share the same preferences. In an economy, the most popular medium of exchange is money, which essentially allows any good to be exchanged for another. A farmer who sells enough chickens for money can ultimately exchange that money for a Lamborghini.
Money makes planning, saving, and investing much easier. A farmer can sell his chickens for money in the summer to cover expenses he plans to incur in the winter. Or he can invest that money into projects that can yield returns. Without money, coordinating investments would be much more difficult—the farmer would need to find projects willing to directly accept chickens as investment. But by using money, he can sell his chickens for euros and then invest those euros into other projects. Indeed, money is a great invention that makes us all richer.
Money is also an excellent store of value. The Austrian School of Economics provides the best explanation for this. According to Ludwig von Mises:
The function of money to transmit value across time and space can be traced directly back to its function as a medium of exchange.
Murray Rothbard reached the same conclusion:
Many textbooks state that money has several functions: medium of exchange, unit of account or 'measure of value,' store of value, etc. But it is clear that these functions are all inferences of one great function—medium of exchange.
In other words, it is precisely because money is a commonly used medium of exchange that it has the capacity to store value. Therefore, if Bitcoin is considered a currency, then claiming it can store value without being a medium of exchange is akin to 'putting the cart before the horse.'
Viewing 'store of value' as a prediction is very helpful. You are trying to guess which goods will be assigned value in the future. If something is useful to people—like real estate—it is more likely to be assigned value. If something has already been used as a medium of exchange—like paper currency—this indicates it is likely to continue being assigned value in the future. Of course, this is not absolute, as we have seen paper currency sometimes lose value due to excessive issuance of money supply by central banks, but it is still a strong signal.
If people lose confidence in whether something can serve as a medium of exchange in the future, they are also less likely to use it as a store of value. Imagine you live on an island where shells are commonly used as a medium of exchange. One day, you hear on the radio about a groundbreaking study that shows holding shells is dangerous and may even be carcinogenic. You would expect that the number of people accepting shells as a medium of exchange would significantly decrease, meaning shells would become a worse store of value. Even if this study is wrong, and shells do not cause cancer, the mere belief among the public that they might cause cancer is enough to render a once-functional currency worthless.
The failures of the Bitcoin core network in 2017 and 2021—along with some companies subsequently ceasing to adopt it as a payment option—gave reason to doubt whether BTC can serve as a medium of exchange. This reduces its potential to become a true store of value in the future.
Money and value
While all currencies can store value, not all stores of value are money. Livestock and real estate are often viewed as stores of value, but they are not money because they serve other non-monetary purposes. This raises a key question: does Bitcoin store value like money does through its role as a medium of exchange, or does it store value for non-monetary reasons like livestock and real estate?
In 2010, Satoshi discussed this topic on forums, as people were debating how Bitcoin gains value and why it gains value. He stated:
As a thought experiment, imagine a base metal that is as rare as gold but has the following properties:
Dull gray appearance
Poor conductivity
Not particularly sturdy, but neither flexible nor easy to work with
Has no practical or decorative use
But it has a special, magical property:
Can be transmitted through communication channels
If it gains any value for some reason, then anyone wanting to transfer wealth over a distance can buy some, transmit it to the other party, and then the recipient can sell it.
Perhaps it could achieve initial value, as you mentioned, through people foreseeing its potential value as a medium of exchange, thereby cyclically acquiring it. (I would definitely want some) or due to collectors, or any random reason could trigger its value.
I believe that traditional monetary standards are based on the assumption that there are many scarce, competitive items in the world, and items with intrinsic value will always prevail over those without intrinsic value. But if there are no items with intrinsic value that can serve as money, only scarce items without intrinsic value, I believe people will still choose something.
This statement is important for several reasons. First of all, here, Satoshi used the term 'intrinsic value' to refer to the value of non-monetary uses. For example, gold and silver are excellent mediums of exchange, but can also be used industrially. Historical mediums of exchange like tobacco and salt can be directly consumed.
Bitcoin does have some non-monetary uses, which will be explained later. However, this thought experiment by Satoshi Nakamoto demonstrates that even if Bitcoin had no non-monetary uses, just its scarcity and the ability to be transmitted through communication channels (i.e., very low transaction costs) would be sufficient to assign it value, as it possesses 'potential value as a medium of exchange.' In other words, Nakamoto believed that Bitcoin could self-start its value as people recognized it could become an excellent medium of exchange. This makes Bitcoin a very unique invention. It is a system designed specifically for payments, using a currency that has been designed to have better monetary properties than any existing currency.
Other uses
At first glance, Bitcoin seems to lack any functions beyond transferring value. However, it does have other uses. The Bitcoin blockchain is an online public ledger maintained by a decentralized network of computers, and Bitcoin transactions control the records on that ledger. This function can be utilized for various non-monetary purposes. For instance, the blockchain can store valuable data, although this method is much more costly than other data storage methods. Some new social media companies leverage this feature to create uncensorable platforms on the blockchain. Other applications might include asset registration, new voting systems, or identity verification to enhance online security. Compared to the practicality of Bitcoin as a general payment system, these functions may seem secondary, but they do exist.
To consider Bitcoin a 'store of value' because of its non-monetary attributes is like considering a dollar bill a store of value because it can be used as kindling or toilet paper. While these uses do exist, they are trivial compared to its value as a secure, international, frictionless medium of exchange.
Satoshi understood that the transferability of Bitcoin is a core characteristic that grants it value. However, this characteristic has been intentionally undermined by Bitcoin Core developers, leaving BTC with almost no unique value proposition when compared to other cryptocurrencies. Not only do other cryptocurrencies have lower fees, but their non-monetary functions are also stronger.
Given the subjectivity of value, it is conceivable that the market could choose BTC as a store of value. But it is equally conceivable that the market might choose a stinky old sock as a store of value—though the likelihood is low. A more reasonable perspective is that cryptocurrencies aspiring to become stores of value need to maximize all positive attributes while minimizing all negative attributes. Clumsy and expensive transactions are clearly not ideal characteristics for any store of value or medium of exchange.
Famous internet entrepreneur Kim Dotcom, founder of MegaUpload, expressed a similar viewpoint in a conversation in January 2020, saying:
If you want to be a very successful cryptocurrency, you need to provide fast and cheap transactions, which is unavoidable. Being a store of value is good, but if you really want to succeed in this space, you need to be electronic cash.
Gold also points out that the vast majority of people still have no experience using cryptocurrency, and for them to get started, fees must be low, and reliability must be high:
[Most people] are unaware of the strife or toxic culture currently occurring within the crypto community. They will choose currencies that offer the lowest fees, fastest transactions, and highest reliability, and unfortunately, that is not Bitcoin [core] at the moment.
Imagine a cryptocurrency that possesses all the attributes of BTC while also providing instant, almost free transactions for the entire world, designed as a dedicated medium of exchange for the 21st century. Its utility would be several orders of magnitude higher than that of currencies lacking this function. This was the original plan for Bitcoin and the goal of Bitcoin Cash and other cryptocurrencies.
Excerpt from <Hijacking Bitcoin>
Original author Roger Ver
