How to use Bitcoin as a store of value

Bitcoin is often considered a store of value due to its limited supply and decentralized nature. Unlike fiat currencies, which can be printed at will by central banks, Bitcoin has a fixed maximum supply of 21 million coins, which makes it a deflationary asset. This means that as demand for Bitcoin increases, its price can rise because there is a limited amount available for purchase.

Furthermore, Bitcoin’s decentralized nature means that it is not controlled by any central authority, such as a government or central bank, which can help protect it from inflationary pressures that may affect traditional currencies. This decentralization also makes Bitcoin resistant to censorship and seizure, as it is not subject to government control.

However, it is worth noting that Bitcoin is a relatively new asset and its value is subject to extreme volatility. Its price can fluctuate wildly over short periods of time, which can make it a risky investment for those who are not prepared for such volatility. Additionally, its use as a store of value is still a matter of debate, and there are those who argue that its lack of intrinsic value makes it unsuitable for this purpose.

Overall, whether or not Bitcoin is a suitable store of value depends on individual opinions and risk tolerance. It is important to do your own research and carefully consider the risks and benefits before investing in Bitcoin or any other cryptocurrency.

The Top 5 Reasons Why Bitcoin is a Reliable Store of Value for Savvy Investors

Store of Value
Image by Shaun from Pixabay

Here are five reasons why Bitcoin is often considered a powerful and reliable store of value:

  1. Limited Supply: Bitcoin has a maximum supply of 21 million coins, which makes it a deflationary asset. This means that as demand for Bitcoin increases, its price can rise because there is a limited amount available for purchase.

  2. Decentralization: Bitcoin is not controlled by any central authority, such as a government or central bank, which can help protect it from inflationary pressures that may affect traditional currencies. This decentralization also makes Bitcoin resistant to censorship and seizure.

  3. Security: Bitcoin’s underlying blockchain technology is highly secure and resistant to tampering. This provides a high level of security for those who hold Bitcoin as a store of value.

  4. Global Acceptance: Bitcoin is increasingly being accepted as a legitimate form of payment by merchants and individuals around the world. This widespread acceptance helps to increase its value as a store of value.

  5. Historical Performance: Despite its volatility, Bitcoin has demonstrated strong long-term performance, with significant price increases over time. This historical performance has helped to establish Bitcoin as a reliable store of value for many investors.

Moving Beyond the Debate: Exploring the Value of a ‘Store of Value’ in Money and Assets

Lets put aside the argument about whether store of value is a valid property of money, or if it should be an attribute of an asset.

Instead, let’s ask the question, what do you want from your store of value? What is its job? Is its job to make you richer so you can buy more toys, or is its job to maintain its value so you can plan your life well? And if the job of the thing is to make you richer so you can buy more toys, how much volatility and downside risk are you willing to stomach? Are we talking about a short-term store of value, perhaps a speculative investment, or a long-term store of value, often a lower risk asset?

Bitcoin as a speculative investment has performed amazingly well.

Anything that starts at a price of zero, and is not currently at a price of zero, is great. Bitcoin started at zero value in 2009 and now, less than ten years later, each Bitcoin is worth thousands of dollars. So, it has certainly appreciated in value since its creation. But would you buy it now? Would you move all your savings into this asset to store value (as opposed to gamble and hope for a quick price appreciation)?

Stable store of value

Well, due to its price volatility, which is very high compared to most fiat currencies, the answer is probably no if you are looking for a stable store of value. As a long-term store of value I suppose you want, as a minimum, something that can be used to buy a basket of goods in twenty years’ time roughly identical to the basket you can buy with it now. So, if you had bought it at the right time, Bitcoin has certainly been a good investment, but its volatility makes it a nauseating store of value.

Does Bitcoin, or do other cryptocurrencies, have the potential to keep value over the long term, as some people expect from gold? Possibly.

According to its current protocol rules, bitcoins are created at a known rate (12.5 BTC every 10 minutes or so)—and that rate will decrease over time. So, the supply of it is understood and predictable, capped to almost 21 million BTC and not subject to arbitrary creation, unlike fiat currencies. Limiting the supply of something can help maintain its value if demand is stable or increases, though the downside of a known, predictable, and completely inelastic supply unrelated to a fluctuating demand results in perpetual price volatility11, which is not good if you are looking for price stability.

Bitcoin as a Unit of Account:

As a unit of account, Bitcoin fails miserably, due to its price volatility against USD and everything else in the world. The fact that there are almost no merchants who are willing to price items in bitcoins (not even merchants who sell cryptocurrency related paraphernalia) is evidence that bitcoins are not a good unit of account.

binance, Bitcoin as a Unit of Account

  • You would not keep your accounts in BTC.
  • You would not record the price of your laptop in BTC.

You certainly would not do your year-end bookkeeping in BTC, and if you tried to file mandatory accounts in BTC you would fall foul of accounting standards in all jurisdictions. If you were a masochist, you could prepare an inventory and denominate everything in BTC, but first you would figure out the price of things in USD (say, my laptop is worth about $200), then you would convert that number to a Bitcoin number at a ‘what is the price of Bitcoin in dollars at this very second?’ ratio.

So then, very briefly, you could say ‘all my worldly possessions are worth 3.0364 BTC’. Within minutes or hours, that BTC number would almost certainly be meaningless as the BTC to USD price fluctuates so rapidly.

The price volatility of Bitcoin

Monetary economist JP Koning compared the price volatility of Bitcoin to gold and made the following observation on Twitter:

Will the price volatility of Bitcoin decrease? It is anyone’s guess, but I personally, doubt it. One argument I used to hear was, ‘When the price of BTC gets really high, the price volatility will decrease because it will take a lot more money to bully the price up and down’. The argument is flawed. A price can be high, but if a market is illiquid, small amounts of money can still push the price around. Stability is determined more by the liquidity of a market (how many people are willing to buy and sell at any price point), then the price of an asset.

But even liquid markets can move quickly if the market’s perception of the value of the asset changes suddenly. Also, this argument is predicated on the price of Bitcoin getting high… There is no good reason why the price of Bitcoin should ever go ‘really high’. Furthermore, as discussed earlier, Bitcoin’s supply is inelastic. If there is a spike in demand, there is no impact on the rate at which bitcoins are generated, unlike normal goods and services, so there is no dampening effect on the price, and this holds true for any price point—even if volatility decreased, traders may just take bigger bets, often with leverage, which would then move the price again.

Stable coins

At the time of writing there is a quest for ‘stable coins’—cryptocurrencies whose prices are relatively stable compared to some other thing, for example a US dollar. Unless they are backed 1 to 1 with the relevant asset, stable coins are very hard to produce because essentially you are trying to peg the price of something dynamic to something else with a different dynamic, and as we will see in the next section about history of money, no one has ever been successful at this in the long term: Pegs always eventually break. If a successful stable coin were to emerge, things could become more interesting.

There is one case where BTC may be used as a unit of account: when valuing baskets of other cryptocurrencies. If you are a normal trader trading normal assets like shares, it is a good idea to understand the current value of your assets in your home currency—for example USD, EUR, or GBP.

If you are a cryptocurrency trader, you probably still want to understand your total asset value in your home currency, but in this very specific case, you may also want to understand your total balance in BTC as it is the market leader in the cryptocurrency world—you could say BTC is the USD of cryptocurrencies. Perhaps your investors let you manage some bitcoins with the hope that you will turn their bitcoins into more bitcoins. In this case, the value of your assets in BTC is more important than the value in USD. This is a niche case.

The Current State of Cryptocurrencies as Money Mark Carney,

Cryptocurrencies as Money Mark Carney
Image by WorldSpectrum from Pixabay

Governor of the Bank of England, summarized the current state of the moneyness of Bitcoin during a Q&A session at Regent’s University London on 19 February 2018: ‘[Bitcoin] has pretty much failed thus far on…the traditional aspects of money. It is not a store of value because it is all over the map.

Nobody uses it as a medium of exchange…’

Bitcoin may be suffering growing pains in its infancy, but this does not mean that we should write it off and that the story must end here.

Dead over 300 times

According to the Bitcoin Obituary website, Bitcoin has been declared dead over 300 times! But it lives on—at the very least, it still trades on exchanges with a nonzero price. It seems that people try to fit Bitcoin into an existing bucket (‘It is a currency asset property / digital gold’), and when it exhibits some properties that do not match others in that bucket, it is declared a failure. Maybe the answer is to not try to fit it into any existing bucket, but to design or define a new bucket, and to judge Bitcoin and other cryptoassets on their own merits.

Also note that central bankers have a potential conflict of interest when commenting on new forms of money. Central bankers have a critical role to maintain monetary and economic stability, and their tools (quantity of money in the economy and the price of borrowing money) are applied to their respective fiat currencies.

Any new form of money, if widely adopted and if not under the control of the central bank, could potentially undermine the ability of the central bank to fulfil its mandate. New forms of money could be disruptive and destabilize economies, which, from a of money could be disruptive and destabilize economies, which, from a central banker’s point of view is not a good thing. So you wouldn’t expect central bankers to warmly embrace new forms of money that are not under their control.

Store of Value Conclusion

Bitcoin is often regarded as a promising store of value due to its limited supply, decentralization, security, global acceptance, and historical performance. Despite its volatility, many investors see Bitcoin as a reliable asset to hold and protect their wealth over the long term. While there may be ongoing debates about whether ‘store of value’ is a valid property of money or an attribute of an asset, the fact remains that the concept of a store of value is crucial for individuals seeking to preserve their wealth in a volatile economic landscape. As such, Bitcoin and other assets that offer similar properties should continue to attract attention as potential stores of value for savvy investors.