What Is A Store Of Value Asset?
A store-of-value asset retains its purchasing power. Gold has often been referred to as a store of value. In other words, if you were able to purchase a vehicle for 3 ounces of gold 5 years ago, you should be able to do likewise today. The price may vary over time. However, it is equally powerful in terms of purchasing power, regardless of the timeframe.
Everyone Lapped Up The “Bitcoin Is Digital Gold” Narrative
Looking back on when this narrative was born, I immediately disagreed, but perhaps not in the way many would expect. Regular readers will remember my post, “Bitcoin Is Not Gold 2.0 – So What Is It?” in which I laid out my perspective. I also recently posted another article in which I addressed gold’s performance and its clear failure as a store of value.
In this article, I will address how gold has not been an effective store of value for some time, as well as recent perceptions of gold. Many now say that Bitcoin has failed to be a store of value. Declaring that the narrative is no longer applicable and that Bitcoin has failed in this regard. In my own writings, I never made this comparison, but I suggested another viewpoint that is actually superior to the traditional store-of-value dynamic.
First Time Investors
Another thing to remember is that many crypto investors only entered the space in 2017 and have very little history or experience. Furthermore, for many, investing in crypto is their first exposure to financial markets. It is important to note that some of the most influential voices in crypto are also highly knowledgeable about macroeconomics, whereas Tradfi remains somewhat ignorant of crypto and blockchain technology.
To have an edge in crypto, a grounding in traditional markets and economics is a must. It has been very clear of late that crypto is not an isolated market but one that is, in many ways, affected by macroeconomics. Gold is an asset that has endured for thousands of years, and understanding its role can help us grasp its relationship with Bitcoin and the comparisons being made.
A Store Of Value
The idea of a store of value should be viewed over time. Let’s be honest, up until 2020, your dollar didn’t really lose much value over six to twelve months. Saying that Bitcoin has lost its store-of-value status due to price action over the past months is not accurate, in my opinion. Even holding dollars for short periods will preserve value to some extent. Dollar loss of value occurs over years, so a store of value should also be measured over the same period.
Who really cares what happens from month to month anyway? The dollar has lost 97% against BTC in the last five years! This is way more than a store of value, and understanding how Bitcoin behaves is imperative to understanding the dynamic that I laid out in my initial post in 2020.
If It’s Good For Gold, Why Not Bitcoin?
It’s strange how BTC can lose value over months, even though it’s said to no longer be a store of value, or “digital gold”. On the other hand, gold can lose value over a multi-year period, yet it is still considered a store of value. How on earth is that even logical? Looking at the graph below, it is clear that since 2012, gold’s value has not increased.
So, if you invested $10K in 2012, it would still be worth $10K in 2022, which is by no means a store of value. Factor in inflation and the dollar’s depreciation, and you lost value over ten years. What’s worse is that had you bought in 2012 and viewed your investment in 2019, it would have been down 32%! How can a 32% loss over a seven-year period be a store of value?
Stores Of Value Protect Against The Decay Of Time
Stores of value need to operate as such over extended periods. As mentioned earlier, even the dollar will hold most of your value over a period of months. You cannot expect the value to remain stable over weeks and months, as volatility is part and parcel of all markets. However, over time, the growth curve should become apparent. This is the dynamic of Bitcoin, just that it is even more extreme.
Bitcoin Makes Little Sense In The Present
The volatility and unpredictability of Bitcoin make it an asset that often appears extremely bullish or bearish in the present moment. However, over time, Bitcoin has increased tremendously, allowing it not only to store value but also to multiply it. I will wrap it up with the closing of my initial article on gold from August 2020.
Bitcoin is an asset that stores value and can be transported without means, moved without permission, and then multiplies its stored value by the factor of time.
Gold stores value, is transported by great means, and can only be moved with permission; it cannot create new value.
It appears as if the final sentence is already not applicable, as we can clearly see that gold does, in fact, not store value over time! The 10-year period of zero growth is a good example. Anyone who purchased gold at the beginning of that period would have lost at least 20% of its purchasing power due to inflation.
Furthermore, this is the best-case scenario with inflation at 2%, which, as we all know, is significantly higher in real terms. Over a 10-year period, Bitcoin not only preserves its purchasing power but also increases it. It is important to note that a store of value is primarily a long-term concept.
In other words, holding dollars month on month is not necessarily dangerous in terms of loss of value. Over a multi-year period, Bitcoin functions exceptionally well. However, it requires multiple years to achieve this aim due to extremely high short-term volatility. At first glance, Bitcoin as a store of value might sound unrealistic.
However, it is important to note that, historically, once a Bitcoin holder surpasses the 4- to 5-year timeframe, not only is value preserved, but additional value is accrued to their holdings. Essentially, the initial period of a Bitcoin investment can be volatile. However, over time, as an investment, it becomes much more stable and starts generating gains.
Why Scarcity Drives Bitcoin’s Long-Term Value
Gold is commonly referred to as a store-of-value asset. However, gold is being mined and discovered at a rate that makes it inherently inflationary. Markets are driven by supply and demand, and when gold’s supply is given, it becomes like any other asset or commodity. Bitcoin, on the other hand, is unique regarding its supply. Unlike gold, Bitcoin is finite.
The cryptocurrency is limited to 21 million units, which ultimately aids in long-term price appreciation. The halving event reduces newly mined BTC within the network by 50% every 4 years. This ultimately reduces supply, creating the perfect dynamic for long-term adoption and price appreciation, thereby securing it as a store of value.
What Are The Best Places To Buy And Store Bitcoin?
Bitcoin is readily available for purchase on any crypto exchange. However, where possible, it is always advisable to remain with industry leaders such as Binance, Bybit, and KuCoin. The safest way to store Bitcoin is with a cold wallet, which remains offline, ultimately reducing the possibility of hacks. Cold wallets commonly come in the form of a hardware wallet.
As standard practice, we work with well-established companies such as Trezor, Ledger, and SafePal. This form of custody is especially effective for long-term storage, as a HODLer can allocate their assets to cold storage and forget about them, much like storing gold in a vault.
Final Thoughts
I can understand why so many people are referring to Bitcoin as the new form of digital gold. However, upon closer examination, it becomes clear that Bitcoin is, in fact, superior to gold in multiple ways, not just in terms of preserving value. Bitcoin is an entirely new asset class that serves multiple purposes and roles in the digital era for which it was ultimately created. Visit this article for passive and semi-passive ways to amass free Bitcoin.