On the 31st of October 2009, a special asset was created with the publishing of its whitepaper by one mysterious Satoshi Nakamoto. Bitcoin was built to be a peer to peer protocol for payment where customers are custodians of their assets instead of a centralized authority like a central bank or other large financial organizations. Bitcoin has grown famously especially during its parabolic bull run in 2017 and early 2018.
Despite its positive impact on the crypto world and occupying the alpha position for over 10 years, many analysts and economists still don't view bitcoin as a store value, mainly to its volatility and decentralized protocol. The most common safe-haven asset in the industry are precious metals like gold or silver, which acts as hedges over unfavorable market conditions, The debate over whether Bitcoin follows in the footsteps of these assets rages on, However, we going to know how Bitcoin fits in as a store value, in effect acting as digital gold.
Bitcoin and what makes It a good Store of Value
Frist to understand how bitcoin fills this position as a store of value we have to get to know what a store of value means and how it applies to Bitcoin.
What is a store of value?
By definition, a store of value can be a commodity or asset that’s not perishable or subject to depreciation over time versus main reference assets, like national currencies or currency baskets.
This means for an asset to be considered a perfect store of value it has to retain its value or appreciate over time. When we think of assets that retain its value and a perfect store of value, most people would likely think about Gold or silver, but Gold has occupied the top gunner position and often used in comparison to Bitcoin.
Clearly for a commodity to be compared as a good store of value it must possess these two characteristics, Durability and Scarcity. For further explanation let us consider a perishable commodity like Apples that are valuable to humans due to its nutritional properties, however, when these apples become scarce due to the change in seasons and lesser apples are available for consumption they become highly valuable due to its scarcity. But when stored these apples deteriorate and lose value. Considering the apple, it doesn't fit the properties of a store of value asset.
Think about fiat currencies(USD, GBP, NGN), most people consider these currencies are a safe haven asset and store their values there and it retains its value over time, however, fiats are poor stores of value because of the drop of its purchasing power. For instance, in the 1990s, $100,000 could buy you a lot more than it can today. This is mainly due to inflation, which refers to the increase in the price of goods and services. In many cases, inflation is caused by an excessive supply of fiat currency due to the government practice of printing more money, for instance, the federal reserve prints more than USD 210 billion in a month. Considering the dollar, it lost a portion of its purchasing power due to the excessive supply of the dollar.
A pie chart illustrating the decline in purchasing power
How does this apply to Bitcoin
Bitcoin has what it takes to be considered as a store of value, lets talk about bitcoins properties that make it a good store of value.
Bitcoin is created in a way that even though more bitcoins are mined each day, it eventually will become scarce. Bitcoin has a maximum supply of 21 million bitcoins, which means there cant be more than 21 million of the digital assets lying around. New coins can only be created by miners, who mine fresh coins out of the 21 million finite supply graphic by solving cryptographic puzzles using heavy computation power.
As time goes on, the reward diminishes due to events known as halvings. Whenever a halving occurs the rewards that miners earn for solving cryptographic problems are halved. In the early days of Bitcoin, the system rewarded 50 BTC to any miner that produced a valid block. During the first halving, this number was reduced to 25 BTC. The subsequent halving cut it in half to 12.5 BTC, and the next one will slash miners’ reward to 6.25 bitcoins per block. This process will continue on for another 100+ years until the final fraction of a coin has entered into circulation.
This module ensures that bitcoin will eventually get scarce, imagine you purchased 25% of bitcoin 10 years ago, and the total supply of bitcoin was completely mined by 2030, you would still own 25% of bitcoin total supply.
This is the major reason most gold enthusiasts have faulted bitcoin due to its volatile nature, How can it be a store of value when its price moves 20% in a month?. Volatility is one of the major characteristics of bitcoin and can be both profitable or loss to holders.
Insisting that a new store of value emerge fully formed in its long-term steady-state is asking too much. In fact, you would expect two things from any store of value as it established itself:
- A Rapidly Appreciating Price At First, Slowing Over Time: The price of a new store of value would likely start out very low, as few would believe in it. As it became established, prices would rise exponentially. Over time, this price appreciation would slow as it reached a steady state.
- High-But-Declining Volatility: Similarly, early volatility would be extreme, as its long-term sustainability would be in question. But over time, that volatility would tail off as the asset became more established.
Different seasoned traders have come to understand this, one Tone Vays, trader and crypto analyst have this to say about bitcoin volatility-
“Bitcoin might be the greatest store of value in the history of the world. Yes, it's volatile — as it's only been useful for about seven years — but its ‘unconfiscatability’ property is unmatched. That is its true store of value, as gold is confiscatable and all other assets even easier.”
Bitcoin operates on a decentralized consensus mechanism. which makes it interesting, cause if bitcoin was owned by a centralized body I am sure censorship would exist and decisions made on the platform wouldn't really benefit the rest of bitcoin holders. However, bitcoin operates a decentralized network, it's a kinda government where the network is made up of every user that runs the software. The only way in which the protocol can be changed is if the majority of users agree on changes.
Due to its consensus mechanism making changes will only get more difficult. Holders can, therefore, be reasonably confident that the supply won’t be inflated. While the software is man-made, the decentralization of the network means that Bitcoin acts more like a natural resource than code that can be arbitrarily changed.
Bitcoin posses the property of Money
Regardless of its volatility and fluctuations bitcoin possess the properties of good money. Just like gold, it's been used as money for many years, both pre-civilization and post-civilization. There are a handful of reasons for this. We’ve talked about durability and scarcity already. These can make good assets, but not necessarily good forms of currency. For that, you want fungibility, portability, and divisibility.
Fungibility-Fungibility means that units are indistinguishable, just like traditional currencies that will always hold an equal value to any other of the same kind. likewise bitcoin, 1BTC will always worth the same against another BTC(1BTC=1BTC)
Portability-Portability refers to the ability to have smaller denominations thus making it easier to carry. Gold has traditionally been excellent in this regard. At the time of this writing, a standard gold coin holds almost $1,500 in value. It’s unlikely that you’d be making purchases worth a full ounce of gold, so smaller denominations take up even less space. Bitcoin is even better when compared with gold cause it's a digital asset that can be transferred from a mobile phone or computer. You can send as much as 1 billion dollars to as small as 0.006 BTC.
"Bitcoin is not gold. Gold is heavy, hard to carry around. Bitcoin is better."
— Changpeng Zhao, CEO of Binance
Divisibility- Divisibility is, the ability to split it into smaller units. A gold coin can be cut in half while retaining its original value, or you can cut into a quarter. however, with bitcoin it's even better, there can only be 21 million bitcoins but in every 1BTC there are one-hundred million smaller units known as satoshis. This gives users a great deal of control over their transactions, as they can specify an amount to send up to eight decimal places. Bitcoin’s divisibility also makes it easier for small investors to buy fractions of BTC.
Bitcoin has only been around not more than 11 years and it has shown tremendous growth and earned a place as one of the safe haven assets with the likes of gold and sliver.
I also strongly believe that bitcoin will still prove many critics wrong and make the perfect store of value.
This post was made in response to #steemcryptochallenge, Week-5- I Love Bitcoin.