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Digital Assets 101
What is a ‘Store of Value’?
Table Of Contents
Store of value describes an asset, commodity, or currency that can be stored and retrieved at a later date, without depreciating. A store of value is commonly used as a hedge against inflation and hyperinflation. A store of value maintains its purchasing power over time.
Over the years, precious metals like gold and silver have been considered and used as stores of value. With the advent of cryptocurrencies such as Bitcoin, digital assets are increasingly becoming recognized as a great store of value.
The concept of store of value dates back to ancient civilizations. Before the advent of fiat, commodities such as ivory, silk, bead, shells, salt, and precious metals were accepted mediums of exchange and considered stores of value. When fiat started to gain prominence, the use of these commodities as mediums of exchange and stores of value was relegated; however, the use of hard commodities, like crude oil, and certain precious stones, such as gold and silver, as stores of value have been retained over the centuries to date.
For an asset, commodity, or currency to be considered a true store of value, there are some inherent characteristics that it must possess.
What Makes an Asset a Great Store of Value?
While the ability to be stored and retrieved at any time without depreciating is the paramount characteristic of a store of value, other important qualities that a store of value must possess are
- It is durable: a good store of value should be durable and not prone to damage. It should have an infinite shelf life. It does not expire.
- It is portable: a good store of value should be easy to transport and store.
- It is widely accepted: a store of value should be widely accepted as a medium of exchange.
- It has a limited supply: the supply of a store of value should be limited. When supply is limited, it increases value due to scarcity.
- It is somewhat stable: A good store of value should maintain its purchasing power over time, rather than fluctuating unpredictably in value.
- It is divisible: It should be easily divisible into smaller units, making it convenient to use in transactions.
- It is secure: A store of value should possess some inherent security features that make it resistant to fraud, theft, and duplicity.
- It is mostly fungible and liquid: A store of value should have the ability to be easily exchanged for legal tender (cash).
The above-mentioned characteristics give an asset the ability to maintain its monetary value for a long time.
Are Digital Assets a Great Store of Value?
Digital assets like Bitcoin are gaining recognition as a great way to store value. While digital assets are relatively new compared to other asset classes that are considered stores of value, they possess some core characteristics that make them great candidates for stores of value.
Bitcoin, the most popular digital asset, has been touted as a store of value for the past few years. Its consideration as a store of value resulted in its dubbed name “digital gold.” Bitcoin possesses all the above-mentioned characteristics of a store of value.
Bitcoin is Secure and Portable
As a digital asset class, Bitcoins do not necessarily require physical storage, except in some cases where a user decides to opt for offline storage of Bitcoin using a hardware wallet. As a product of mathematical computation and an intangible asset, there is no worry about physical damage or theft.
The portability of Bitcoin is second to none. A wallet holding hundreds of millions of dollars worth of Bitcoin would typically take just a fraction of disk space on the device on which it is stored.
Bitcoin possesses one of the best layers of security among all the assets of the modern day. Using sophisticated computation, encryption, cryptography, and hashing, Bitcoin achieves an impregnable network and ledger. Transactions on the Bitcoin network cannot be falsified. As a public ledger, assets are openly verifiable on the blockchain; this eliminates are chances of fraud.
Bitcoin is Scarce, Widely Used, and Readily Convertible
Bitcoin is gaining popularity and is now widely accepted around the world. Governments have raised funds using Bitcoin in times of crisis. Its ever-expanding use as a means to send and receive remittances around the globe has pushed its popularity. Beneficiaries can receive Bitcoin in a matter of seconds while enjoying very low transaction fees.
As mentioned above, the supply of a store of value should be limited. Bitcoin has a limited supply of 21 million; only this number of Bitcoins will ever be mined. More than 90% of the 21 million Bitcoins have been mined so far. The limited supply makes Bitcoin a scarce asset; this helps in maintaining its purchasing power and makes it a great hedge against inflation.
Though just a decade-old asset, Bitcoin has achieved the status of a highly liquid and convertible asset. The sale of Bitcoin and its conversion into other assets are carried out instantaneously on centralized (CEX) and decentralized (DEX) exchanges. Major cryptocurrency exchanges like Binance, Huobi, Kraken, and Kucoin have readily-available fiat channels to easily exchange Bitcoin and other major cryptocurrencies for fiat.
Bitcoin vs Other Assets
Some argue that Bitcoin and cryptocurrencies, in general, are not great stores of value because they are prone to price volatility. However, from a long-term perspective, digital assets like Bitcoin have outperformed all other asset classes in the past decade.
Investors have often drawn comparisons between Bitcoin (digital gold) and gold. Both Bitcoin and gold are considered by many experts as stores of value. Despite intermittent volatility, Bitcoin has risen by over 2,000,000,000% since its debut in 2009, outperforming any known asset class, while the spot price of gold has not changed much; an ounce (oz) of gold has traded between $1,000 and $2,000 in the past ten years. In the 2017 – 2018 cycle alone, Bitcoin gained up to 1,300% in price; in the same period gold gained a mere 6%.
The line chart above depicts the value, over time, of $1 invested in Bitcoin and gold. $1 invested in gold in October 2009, will be worth $1.75 today, an increase of 75%; while the same amount ($1) invested in Bitcoin would be worth about $21,000,000 today. Digital assets like Bitcoin possess all the qualities of a true store of value. Bitcoin possesses the paramount characteristic of a store of value – maintaining purchasing power – as well as the supplementary characteristics of a store value.
To learn more about Bitcoin, make sure to visit our Investing in Bitcoin guide.
Mandela has been a cryptocurrency enthusiast since 2017. He loves coding and writing about emerging technologies. He has an in-depth understanding of distributed ledger technology and the Web3 technology stack. He enjoys researching new cryptocurrency projects.
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