Introduction

When you think of a safe haven asset, precious metals like gold or silver probably come to mind. These are investments that investors use as a hedge against turbulence in traditional markets.

The debate rages on whether or not Bitcoin belongs to this asset category. In this article, we'll look at some of the main arguments for and against Bitcoin being a store of value.

What is a store of value?

A store of value is an asset capable of retaining value over time. If you purchased a good store of value today, you could reasonably be sure that its value would not depreciate over time. In the future, you expect the asset to be valued just as well (if not more).

When you think of such a “safe haven” asset, gold or silver probably comes to mind. There are a few reasons why these have retained their value, which we'll cover now.

Take a look at the latest Bitcoin (BTC) quotes.

What defines a good store of value?

To understand what makes a good store of value, let's first look at what can make a bad store of value. If we want something to be preserved for long periods of time, it stands to reason that it must be durable.

Take food for example. Apples and bananas have some intrinsic value because humans need food to live. When food is scarce, these items become very valuable. But that doesn't make it a good store of value. They will be worth much less if you keep them in a safe for several years, as they will degrade.

But what about a valuable item that is also durable? Say, dried pasta? This is better in the long run, but there is still no guarantee that they will retain value. Pasta is produced at a lower cost from easily available resources. Anyone can flood the market with pasta, so the pasta in circulation will lose value as supply exceeds demand. Therefore, for something to retain its value, it must also be rare.

Some consider fiat currencies (dollars, euros, yen) to be a good way to store wealth because they retain their value over the long term. But they are actually bad stores of value, because their purchasing power decreases significantly as more units are created (just like pasta). You can withdraw your savings and hide them under your mattress for twenty years, but they won't have the same purchasing power when you decide to spend them.

In 2000, $100,000 could buy you a lot more things than you 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 excess supply of fiat currencies due to the government practice of printing more money.

To illustrate this, let's say you own 25% of the total supply of $100 billion, so, $25 billion. Time passes, and the government decides to print, for example, an additional $800 billion to stimulate the economy. Your share of the pie has suddenly dropped to ~3%. There's a lot more money circulating, so it makes sense that your share doesn't have as much purchasing power as it once did.

The loss of purchasing power over time.

Like our pasta mentioned above, dollars are cheap to produce. The above can happen within a few days. With a good store of value, it should be difficult to flood the market with new units. In other words, your piece of the pie should dilute very slowly, if at all.

Take the example of gold, we know that its supply is limited. We also know that it is very difficult to extract. So even if the demand for gold suddenly increases, it is not possible to fire up a printer to create more. It must be extracted from the ground, as has always been the case. Although there is an influx of demand, supply cannot be dramatically increased to accommodate it.

The arguments in favor of Bitcoin being a store of value

From the earliest days of Bitcoin, proponents of the cryptocurrency argued that it was more akin to “digital gold” than a simple digital currency. In recent years, this vision has been shared by many Bitcoin enthusiasts.

The thesis of Bitcoin as a store of value states that it is one of the most secure assets known to man. Proponents believe that Bitcoin is the best way to store wealth so that it is not devalued over time.

Bitcoin is known for its excessive volatility. It may seem unintuitive that an asset that can lose 20% of its value in a day would be considered by many to be a store of value. But even accounting for its many declines, it remains the best-performing asset class to date.

So why has Bitcoin gained popularity as a store of value?

Rarity

Perhaps one of the most compelling arguments for the store of value thesis is that Bitcoin's supply is limited. As you may have read in our article What is Bitcoin?, there will never be more than 21 million bitcoins. The protocol ensures this by a hard-coded rule.

The only way to create new units is through the mining process, which is somewhat analogous to how gold is mined. But instead of drilling into the earth, bitcoin miners must solve a cryptographic puzzle using computing power. This allows you to gain new units.

Over time, the reward diminishes due to events known as halvings. If you guessed that this halves the reward, you're absolutely right. In the early days of Bitcoin, the system rewarded 50 BTC to any miner who produced a valid block. During the first halving, this number was reduced to 25 BTC. The next halving cut it in half to 12.5 BTC, and the next one will reduce it to 6.25 bitcoins per block. This process will continue for another 100+ years, until the last Bitcoin is issued.

Let's model this the same way as our previous fiat currency example. Let's say you purchased 25% of the bitcoin supply (i.e. 5,250,000 units) several years ago. When you acquired these bitcoins, you knew that your percentage would remain the same because there is no entity capable of adding additional bitcoins to the system. There is no government here, well, not in the traditional sense (we'll get to that soon). So if you purchased (and HODLed) 25% of the max supply in 2010, you still own 25% today.

Decentralization

You might be thinking about the fact that it’s open source software. You can copy the code and create your own version with 100 million additional units.

You could actually do that. Let's say you clone the software, make the changes, and run a node. Everything seems to be working. There's just one problem: there are no other nodes to connect to. As soon as you changed your software settings, members of the Bitcoin network started ignoring you. You've forked, and the program you're running is no longer accepted worldwide as Bitcoin.

What you just did is functionally equivalent to taking a photo of the Mona Lisa and pretending that there are now two Mona Lisas. You can convince yourself that this is the case, but good luck convincing anyone else.

We said there was some kind of government for Bitcoin. This government is made up of all the users who use the software. The only way the protocol can be changed is if the majority of users accept the changes.

Convincing a majority to add new units would not be an easy task. After all, you are asking them to dispose of their own funds. Currently even seemingly insignificant features take years to reach network-wide consensus.

As decentralization grows, it will become increasingly difficult to impose changes. Holders can therefore be reasonably sure that the supply will not be increased. Although the software is developed by humans, the decentralization of the network means that Bitcoin acts more like a natural resource than code that can be changed arbitrarily.

The properties of good money

Those who believe in the store of value thesis also highlight features of Bitcoin that make it a good currency. It is not only a rare digital asset, but one that shares characteristics traditionally adopted in currencies for centuries.

Gold has been used as currency in all civilizations since their inception. There are a few reasons for this. We've already talked about durability and rarity. They can be good assets, but not necessarily good forms of money. For this you need fungibility, portability and divisibility.

Fungibility

Fungibility means that the units are impossible to differentiate. With gold, you can take two ounces of any gold, and they will be the same value. This also applies to stocks and cash. No matter which unit you hold, it will have the same value as any other of the same type.

The fungibility of Bitcoin is a delicate subject. Which Bitcoin you hold should not matter. In most cases, 1 BTC = 1 BTC. Where things get complicated is when we consider that each unit can be linked to previous transactions. In some cases, companies blacklist funds that they believe were involved in criminal activity, even if the holder subsequently received them.

Is it important ? It's hard to see why. When you pay for something with a dollar bill, neither you nor the merchant knows where it was used three transactions ago. There is no concept of transaction history: new notes are not worth more than those already used.

In the worst case, however, it is possible that older bitcoins (with more history) will be sold for less than newer bitcoins. Depending on who you ask, this scenario could be the biggest threat to Bitcoin or not cause for concern. For now, anyway, Bitcoin is functionally fungible. There have only been isolated incidents of frozen parts due to suspicious history.

Portability

Portability indicates the ease of transporting an asset. $10,000 in $100 bills? Fairly easy to move. $10,000 worth of oil? Not that much.

Good currency should take up little space. It must be easy to transport so that individuals can pay for goods and services.

Gold has traditionally been excellent in this regard. As of this writing, a typical gold coin is worth almost $1,500. You're unlikely to make purchases worth an ounce of gold, so smaller denominations take up even less space.

Bitcoin is actually superior to precious metals when it comes to transportation. He doesn't even have a physical imprint. You can store billions of dollars of wealth on a hardware device that fits in the palm of your hand.

Moving a billion dollars worth of gold (over 20 tons currently) requires considerable effort and expense. Even with cash, you'll need to carry several pallets of $100 bills. With Bitcoin, you can send the same amount anywhere in the world for less than a dollar.

Divisibility

Another vital quality of a currency is its divisibility, that is, the ability to divide it into smaller units. With gold, you can take a one-ounce coin and cut it down the middle to produce two half-ounce units. You may lose a bounty for destroying the cute design of an eagle or buffalo, but the value of the gold remains the same. You can divide your half ounce unit over and over again to produce smaller denominations.

Divisibility is another area where Bitcoin excels. There are only twenty-one million units, but each of them is made up of one hundred million small units (satoshis). This gives users a lot of control over their transactions, since they can specify an amount to send up to eight decimal places. The divisibility of Bitcoin also makes it easier for small investors to purchase fractions of BTC.

Store of value, medium of exchange and unit of account

Feelings are mixed on the current role of Bitcoin. Many believe that Bitcoin is just a currency, a tool for moving funds from point A to point B. We will return to this in the next section, but this view is contrary to what many advocates of the store of value thesis think.

Proponents of Bitcoin as a store of value say it must go through several stages before it becomes the ultimate currency. It starts as a collectible (largely where we are today): it proved functional and secure, but was only adopted by a small niche. Its core audience consists mainly of amateurs and speculators.

Only once there is greater education, infrastructure for institutions, and greater confidence in its ability to retain its value can it move to the next stage: a store of value . Some believe he has already reached this level.

As of now, Bitcoin is not widely used due to Gresham's Law, which states that bad money drives out good money. This means that when presented with two types of currencies, individuals will be inclined to spend the bad currency and accumulate the better currency. Bitcoin users prefer to spend fiat currencies because they have little confidence in their long-term survival. They hold (or HODL) their bitcoins because they believe they will retain their value.

If the Bitcoin network continues to grow, more users will adopt it, liquidity will increase, and the price will become more stable. Due to increased stability, there won't be as much incentive to hold onto it in hopes of higher gains in the future. We would therefore expect it to see much greater use in everyday commerce and payments, as a robust medium of exchange.

Increasing usage further stabilizes the price. In the final stage, Bitcoin would become a unit of account. It would be used to value other assets. In the same way that a gallon of oil is valued at $4, in a world where Bitcoin is the currency, the value of oil would be measured in bitcoins.

If these three monetary milestones are achieved, advocates of Bitcoin as a store of value see a future where Bitcoin becomes a new standard that replaces currencies used today.

The case against Bitcoin being a store of value

The arguments presented in the previous section may seem perfectly logical to some and crazy to others. The idea of ​​making Bitcoin “digital gold” is the subject of criticism, from both pro-bitcoin and crypto-skeptics.

Bitcoin as a digital currency

Many are quick to point back to the Bitcoin white paper when disagreement on the topic arises. To them, it is obvious that Satoshi wanted the bitcoins to be spent from the start. In fact, it's in the very title of the document: Bitcoin: A Peer-to-Peer Electronic Money System.

This argument suggests that Bitcoin can only have value if users spend it. By accumulating it, you are not helping adoption, you are preventing it. While Bitcoin is not widely recognized as a digital currency, its main characteristic is not related to utility, but to speculation.

These ideological differences led to a significant fork in 2017. The pro-Bitcoin minority wanted a system with larger blocks, which meant lower transaction fees. Due to increased usage of the originating network, the cost of a transaction can increase dramatically and prevent many users from making low-value transactions. If the average fee is $10, it makes little sense to make a $3 purchase.

The forked network is now called Bitcoin Cash. The original network rolled out its own upgrade over time, called SegWit. SegWit did increase the nominal capacity of the blocks, but that was not its main objective. It also laid the foundation for the Lightning Network, which aims to facilitate low-cost transactions by completing them off-chain.

In practice, however, the Lightning Network is far from perfect. Standard bitcoin transactions are considerably easier to understand, while managing Lightning Network channels and capacity comes with a steep learning curve. It remains to be seen whether this solution can be streamlined or whether the design of the solution is fundamentally too complex to be made easily usable.

Due to the growing demand for block space, on-chain transactions are no longer as cheap during busy times. As such, one could make the argument that failing to increase block sizes harms Bitcoin's usefulness as a currency.

No intrinsic value

For many, the comparison between gold and Bitcoin is absurd. The history of gold is essentially the history of civilization. The precious metal has been an integral part of societies for thousands of years. As a result, it has lost some of its dominance since the eradication of the gold standard, but nevertheless remains the quintessence of safe haven assets.

Indeed, it seems inappropriate to compare the network effects of the king of assets to a protocol that is only 11 years old. Gold has been considered both a status symbol and an industrial metal for millennia.

On the other hand, Bitcoin has no use outside its network. You can't use it as a conductor in the electronics field, nor can you turn it into a huge shiny string when you decide to launch your hip-hop career. It may emulate gold (mining, limited reserves, etc.), but that doesn't change the fact that it is a digital asset.

To some extent, all currency is a shared belief. The dollar only has value because the government says so and society accepts it. Gold only has value because everyone agrees on it. Bitcoin is no different, but those who give it value are still a small group among the population. You've probably had a lot of conversations in your personal life where you've had to explain what it is, because the vast majority of people don't know it.

Volatility and correlation

Those who got into Bitcoin certainly enjoyed their wealth increasing by several orders of magnitude. For them, it actually retained value, and even better than that. But those who purchased their first units at the highest did not have the same experience. Many suffered big losses by selling at any later time.

Bitcoin is incredibly volatile and its markets are unpredictable. Metals like gold and silver have insignificant fluctuations in comparison. You can argue that it is too early and that the price will eventually stabilize. But this, in itself, could indicate that Bitcoin is not currently a store of value.

There is also the relationship between Bitcoin and traditional markets to consider. Since its creation, Bitcoin has experienced a constant upward trend. Cryptocurrency has not really been tested as a safe haven asset, as all other asset classes also perform well. Enthusiasts may characterize Bitcoin as being “uncorrelated” from other assets, but there is no way to know if this will hold until other assets plunge and Bitcoin remains stable.

Tulip Mania et Beanie Babies

It wouldn't be a real critique of Bitcoin's store-of-value properties if we didn't bring up comparisons to Tulip Mania and Beanie Babies. These are poor analogies at best, but they serve to illustrate the dangers of a bubble bursting.

In both cases, investors flocked to buy items they deemed rare in hopes of reselling them for a profit. The items themselves were not very valuable, they were relatively easy to produce. The bubble burst when investors realized they had massively overvalued their investments, and the markets for tulips and Beanie babies subsequently collapsed.

Once again, these are analogies that do not hold water. Bitcoin's value arises from users' trust in it, but unlike tulips, more cannot be grown to satisfy demand. That said, there is no guarantee that investors won't view bitcoin as overvalued in the future, causing its own bubble to burst.

To conclude

Bitcoin certainly shares most of the features of a store of value like gold. The number of units is finite, the network is decentralized enough to provide security to holders, and it can be used to hold and transfer value.

Ultimately it still needs to prove its value as a safe haven asset, it is too early to validate this characteristic. Things could go either way: the world could take refuge in Bitcoin in times of economic crisis, or it could continue to be used only by a minority group.

The future will tell us.