Bitcoin is the poster child of the cryptocurrency world. It has been around for the past 13 years. Investors have gone both long and short on this currency. Here and there bitcoin has made headlines which attracted new investors. Nonetheless, it has been unable to hold a strong footing in the financial arena up till now. The proponents of bitcoin like to call it ‘ digital gold ‘. But, is bitcoin a store of value like gold? We will delineate some arguments around this in our blog. So let’s get started.
Humans like to have a secure financial future. The uncertainty of money can create anxiety in our lives. Therefore, we like to store cash in banks, buy property from it and store it in other ways to keep our future and that of our children secure.
Keeping money in currency notes with you is a poor storage practice. Because at any stage government can fire up the printer create more cash and devalue the currency. So, your $100 savings can turn into a value of $50 or even less after 10 years.
Real estate is also a bad bet. The neighbourhood, surrounding and other factors can change around your piece of land bringing its value significantly down.
The common store of value on which the majority of people trust is gold and silver.
What is a store of value?
In financial terms, the store of value is an asset that retains or gains value over time. You can preserve it for a long time. Let’s say you have one ounce of gold in your closet which is worth $1,863 at the time of this writing. You keep it for one year and decide to sell in 2022. You can be sure that by that time the price of gold will either be the same or appreciated. This surety come from one thing: Scarcity.
A good store of value should be scarce. Its demand must outweigh the supply. Gold is scarce because its supply is limited. Excavating more gold requires time and effort. Therefore, the value of gold with time.
The question ‘is bitcoin a store of value?’ can be answered ‘yes’ if we look at it a certain way.
Bitcoin as a Store of Value:
As mentioned earlier, the proponents of BTC call it ‘digital gold’ due to the same characteristics as regular gold. This narrative is supported by the following points.
Bitcoin is scarce. There are only going to be 21 million bitcoin ever. Once that number is met none can pump more bitcoin and devalue the existing ones.
The production of new bitcoin, like gold mining, is a sophisticated and hard process. It requires a lot of computational power. The miners have to solve a cryptographic puzzle to add new BTC into the system.
In the early days of bitcoin, the reward for mining one block was 50 BTC. However, after every fork, the reward is halved. Currently, miners only get 12.5 BTC in compensation. The halving will continue for many years to come.
Bitcoin is open-source software. Every node on the bitcoin blockchain is connected to the other. All transactions are verifiable. The slightest change in the protocols requires the agreement of every node. Therefore, you cannot add more bitcoin into the system by copy-pasting the code or doing any other sort of fishy activity.
A currency is fungible when its two units are indistinguishable. For instance, 1 Ounce of Gold=1 Ounce of Gold in value. The same is the case with Bitcoin. 1 BTC= 1 BTC in every area and time zone. Thus bitcoin is a fungible currency.
Bitcoin is more portable than gold. You can transfer bitcoin across the borders with a simple action on your handheld device. It requires no logistical effort.
Divisibility is a quality of a good currency. If an asset can be divided into smaller units then it is great for storing value. Bitcoin is divisible into multiple units of Satoshis or Sats. This makes an argument in the favour of bitcoin.
Bitcoin bull rally often attracts some seasoned investors who come only to profit from the price surge. However, they are quickly deterred by the price volatility of BTC. In this scenario, we see a lot of buzz around the argument that BTC has no future.
By going through the arguments made in this blog, you can clearly see that bitcoin makes a strong candidate for a store of value. Although its price is eruptive because it hasn’t been as widely adopted as other stores of value like gold. Hence, we cannot dismiss the potential of bitcoin at this stage.
In our next blog, we will look at the arguments that make bitcoin a bad store of value. You can come up with your stance only after weighing the viewpoints of both sides. So keep visiting our page for more.
Originally published at https://autotradingstrategies.com on January 26, 2021.