Bitcoin as a store of value
According to the project desctiption published on Coinmarketrate.com, the main problem of Bitcoin is its high volatility that leads to the fact that its price can rise or fall significantly in a matter of days or hours. Thus, in 2014 it lost 58% of its value, and in 2018 – 73%.
On the other hand, the fact that it has worked so well in the last decade does not mean that it will continue to do so in the future. The future is generally an unknown variable.
Now the idea that Bitcoin is a safe heaven is gaining popularity For that reason, more and more people are buying this crypto believing that it will keep high in the long-term run, or, at least, will remain its value.
Let’s analyze together whether Bitcoin can really be considered a valuable haven, consider the arguments for and against this idea.
And so…
First of all, we need to define what a store of value is. After all, only then will we be able to understand whether BTC is such or not.
Generally speaking, a store of value is any asset that retains its purchasing power in the future. But it should also be easily exchangeable for other goods.
In even simpler terms:
- This item should be able to cost the same or more in the future.
- It should be interchangeable with other goods (such as house, ruble, etc.).
This imposes certain restrictions on assets that can be turned into a store of value. It is undesirable for an asset to have a short service life, for example, food.
It should also be sufficiently liquid, which is an indicator of how easy or difficult it is to exchange it for another one. For example, it is easier to exchange fiat money for food than a house for fiat money.
In this case, fiat money is more liquid than a house. And this is important because if no one wants to accept an asset used as a store of value, then it has no value.
Finally, the store of value should be scarce or at least hard to access. While gold is hard to mine, the air we breathe, no matter how valuable it is, is abundant on our planet.
Examples of value stores
There are many goods that a person uses as a store of value to protect himself from inflation:
- PHYSICAL MONEY
Fiduciary money, such as the ruble, dollar or euro, or any currency used in different countries, is used as a store of value, since this is what we use on a daily basis.
Their advantage is that they are extremely liquid, are used in most of our daily operations and are accepted by everyone.
They are used as a store of value because people trust the financial system behind them. Although there is also the fact that countries authorize and establish that everyone must pay taxes and settle their debts with them.
However, we all know about the disadvantages of these currencies. If mismanaged, they suffer from inflation, as a result of which their purchasing power decreases over time.
In the case of hyperinflation, which is not a common occurrence, but we have witnessed some cases in history, the value of fiat currencies falls completely. This is the result of poor monetary policy, geopolitical conditions and uncontrolled money printing.
- PRECIOUS METALS
Gold or silver can be used as a safe haven because they are historically scarce precious metals, they are easy to transport, they are useful and liquid.
Precious metals are rare compared to other natural minerals. This means that in order to obtain them, people must consume a lot of resources, for example, those used for digging them out of the ground and processing them.
True, they are not as easy to transport as fiat money, but they are easier to exchange than property. We just have to find someone who is willing to pay for them in cash. Therefore, we can say that they are highly liquid.
They are also very useful for a number of industries, including electronics and jewelry.
All these factors combined lead to the fact that in the long run they rarely lose in value. Therefore, we can understand that they are a good safe haven.
However, we see that over time they sometimes fall short of other assets, especially in the short term. That is why they are not such a good investment.
Features
Like precious metals, real estate has proven itself well as a store of value. Land, houses and some objects, such as paintings and collectibles, have proven to retain their value over time. Their shortage is also unsurpassed: sometimes there is only one such asset.
Unfortunately, their main problem is liquidity – they are illiquid havens of value.
If we want to buy or sell a house, we will certainly spend months, or even years. It is necessary to find a person who is ready to buy this asset and has the necessary funds for this.
The fact that these assets are so difficult to exchange sometimes makes them less valuable. That’s why they are not for everyone, and only the richest people tend to use them for this purpose.
Is Bitcoin a store of Value
Now that we know what a store of value is, we can analyze whether Bitcoin has everything it needs to become one. Let’s look at the arguments opposing this idea, as well as those that protect BTC as a whole.
- Why not?
Bitcoin is an asset that generates large returns, but it is also true that it is a relatively young asset. This argument is enough to make many people not consider it a valuable haven.
The examples above have a much longer track record as a haven of value, and this gives them a definite advantage.
Another negative aspect of the BTC, which should be included in this selected group, is the fact of its volatility. Strong falls or rises of more than 50% are not uncommon for Bitcoin, while this happens extremely rarely for other assets.
This makes risk averse people think twice before buying.
Finally, many argue that Bitcoin uses an outdated technology that is outdated compared to more mature cryptocurrencies that solve the problems of the BTC in a more elegant way.
For them, it will not be able to stand the test of time, so it is not a valuable haven, as it can be replaced by any other cryptocurrency.
Why?
The argument about Bitcoin’s youth cannot be denied, but this aspect does not necessarily have to be negative in itself.
For example, about 14 years ago, almost at the same age as Bitcoin, the first smartphone (iPhone) was released. Today, everyone uses this device to perform tasks that we used to do (browsing the web, taking photos, communicating), but in a different, more modern and better way.
Bitcoin also achieves something similar, but in comparison with money and finance.
Volatility is normal for something new and disruptive like this cryptocurrency, but if you step back and look at its price over time, the falls are significantly outweighed by the price increase. There is a reason why this asset is the most efficient in the last decade.
Critics who point out that the deficit is artificial are mistaken. Firstly, many assets that are used as safe havens are artificially scarce. Fiat money is such to the extent that politicians decide it’s time to expand the monetary base.
Although some countries seek to maintain this deficit, the reality is that it is a very big temptation for those in power. The amount of BTC that can exist is only 21 million, and it is defined in such a way that exchange is practically impossible.
Indeed, Bitcoin is not the most modern blockchain of all, but it should not be perceived as something bad, rather the opposite. It is the most reliable!
While other technologies offer their advantages, the reality is that Bitcoin has stood the test of time and no bugs or exploits have been found so far.
From the point of view of liquidity, it is a liquid asset that is getting better and better every year. They are easier to trade than gold, although it is less liquid than fiat money.
Business acceptance of this cryptocurrency is growing, making it also a payment method, especially thanks to technologies such as the Lightning Network.
In particular, recently a very important application of the MTC is the payment of international money transfers, since there is no cheaper and faster way to transfer money across borders.
But perhaps one of the most important arguments in its favor, in terms of its use as a store of value, is its decentralization and purely digital nature.
Bitcoin is everywhere and nowhere at the same time. This cryptocurrency is very difficult to withdraw, but it is very easy to carry around everywhere. This gives enormous power to people as a haven of values, who do not need to rely on third parties, be it a bank, the state.
For example, people who keep their money in a bank run the risk that the bank will not have the money to pay them back because of fractional reserve. This can also happen with gold certificates and centralized repositories.
Conclusion
Although we can store all the specific value vaults discussed in this article, since they are tangible assets, moving them or storing them securely becomes more risky and complicated than Bitcoin.
The arguments in favor of Bitcoin as a safe haven of values are increasingly weightier than the arguments of the other side. Perhaps that is why more and more private companies, banks and individuals are paying attention to this asset precisely for this quality.