Chances are you’ve heard of many people investing in Bitcoin and then sharing stories about the incredible returns they’ve made. While some investors have done well to enter and exit the market at the right times, extreme returns aren’t always accessible. Aside from using Bitcoin as a payment method, Bitcoin also has another great use case. Here we’re breaking down why Bitcoin is an excellent store of value.
What Is A Store Of Value
Before we start diving into Bitcoin’s potential, let’s cover what a store of value actually is. A store of value is an asset that can maintain its worth over time, increasing in value rather than decreasing. Gold is a common example of a store of value as it has proven to be the case over past centuries. In order for an asset to be a store of value, it needs to tick two boxes: it must be durable and scarce.
Durable refers to whether it can maintain its desirability. Looking at food as an example to illustrate this point. A pita might have intrinsic value today in terms of feeding someone in order for survival, but it will have no value after it surpasses its expiry date. The flour used to make the pita might have long term potential (to be stored) however it is cheap and easily available (i.e. can flood the market).
Scarce refers to the amount of the asset available, currently and in total. The more flour available on the market, the less valuable it becomes. Fiat money works the same, as inflation rates rise the value of the notes and coins will drop over time. Or as more money is printed, as was the case in 2020.
Gold ticks both these boxes as it cannot destruct over time nor can it be reproduced. If you want more gold you need to go and mine it.
Is Bitcoin A Store Of Value?
If we take into account these two qualifying factors, let’s see where Bitcoin fairs in the amount of durability and scarcity offered.
In terms of scarcity, the payment network was designed to only ever have 21 million coins in circulation. While new coins enter the network when miners verify transactions and add them to blocks on the blockchain, Satoshi Nakamoto designed a mechanism to limit this. The mechanism is referred to as a halving and gradually limits the number of new coins that enter circulation.
Every 210,000 blocks or roughly four years the rewards miners receive for adding blocks halves. When launched the reward was 50 BTC per block, reducing to 25 BTC in 2012 and 12.5 BTC in 2016. The latest halving in May of 2020 saw the reward decrease to 6.25 BTC. This process will continue until there are no new coins to mine, currently expected to be in 2140.
In terms of durability, Bitcoin ticks the boxes by processing several traits of a good payment system. Most notably, it is portable, meaning that it is easy to trade with. As Bitcoin is a digital currency, it is stored online and can be sent in something as simple as an email. The number of Bitcoin in your wallet makes no difference in the physical space. It is also fungibile, meaning that it can be spent on a number of things and no one coin is different to the other. Much like any fiat currency. Another aspect that proves this is the case is that it is divisible. One Bitcoin can be broken down into 100 million units, the smallest of which is called a Satoshi (0.00000001 BTC). This makes Bitcoin useful for everything from buying a house to a microtip.
The Argument Against Bitcoin
While gold, and silver, have maintained their value relatively well over the initial years of Bitcoin’s existence, many have compared the two. A strong argument against Bitcoin being an excellent store of value is the volatility it is known to experience. While volatility isn’t necessarily a bad thing, it can make a dent in the case. Something that is often overlooked in the conversation of volatility is that every new market is subject to it, even gold and silver when they first started trading.
The next point is a favourite of Warren Buffett, and that is that Bitcoin has no intrinsic value. So while gold can be used in jewellery and as a good conductor for electricity, Bitcoin can not be used outside of the financial world, particularly if the internet was down.
Why Bitcoin Is An Excellent Store Of Value
Considering that Bitcoin is only 12 years old while gold has been around for civilizations, there is certainly a lot of ground to cover. But due to the similar properties of both gold and Bitcoin, many believe that Bitcoin’s market value will one day surpass that of gold. As gold is currently valued at $9 trillion, when Bitcoin gets there 1 BTC will be worth $500,000.
This past year we’ve seen Bitcoin prove to be a reliable asset as it pulled itself from the pandemic lows to greater highs than previously witnessed. The original cryptocurrency continued to gain momentum as corporations put their reserves in as well as big companies putting their name behind it. The institutional investment for one thing proves why Bitcoin is an excellent store of value. It’s time to get into crypto, build your crypto portfolio conveniently, securely, with certified and trustworthy account. Get started with Oobit.com! You’ll be up and running in no time.