Is Bitcoin a Good Store of Value?
Is Bitcoin a good store of value? According to some, Bitcoin is an incredible asset that allows you to channel energy through time and space with no loss; it will not depreciate or erode. Sounds like something out of science fiction.
#Bitcoin is the most efficient system in the history of mankind for channeling energy through time and space.
— Michael Saylor (@michael_saylor) October 1, 2020
If it can cross time and space (distances) with the highest efficiency then it is the best store of value. Before we accept this at face value lets dig in a little further and see if we come to the same conclusion.
Outline for today:
What Exactly is a Store of Value
Let’s get a couple things straight so we know what a store of value is and the attributes that separate them from other types of assets. Because, while in theory any asset can be used as stores of value, there is a subclass of assets that are seen first as stores of value and secondarily as assets used for investment returns. You don’t typically invest in stocks to store value, but rather to appreciate, grow, and generate maximum returns. Whereas with a store of value, our primary concern is preserving purchasing power over long periods of time; say 3-10 years, maybe more. Let’s see what makes a great store of value.
Convertible
A good store of value can easily convert your time, effort and skills into a tradeable, portable security. You can transact into and out of the asset quickly, easily, and with very little or no transaction fees. Think of this as taking your daily wage that you earn, and you easily store it and save it for later consumption and convert it into anything priced in your same currency.
Universally Valued by Others
It must be also valued by others. The wider the population that values this same asset the better. This increases liquidity, lowers transaction fees, and increases confidence of all holders of this same asset. Having an asset that is valued by few others will present a real problem when it comes time to sell it. We want full value on the sale without having to give a discount.
Used for Trade
You should be able to transact and trade the asset in exchange for a good or service. It should be a preferred medium of trade between two parties so you can easily and confidently participate in the economy today and in the future. If the asset cannot be traded easily, it must be divisible or able to be quickly converted into another medium of trade. The harder it is to use for trade, the less desirable it will be as a store of value.
Easily Saved, Stored, or Stacked
We must be able to store a day, week, month, or year’s worth of this asset in a portable format. The ability to hoard the asset is a critical attribute because it can be set aside for an emergency, time of scarcity, or political instability. The more cumbersome it is to store the asset and keep it secure the less desirable it will be as a store of value.
Durable and Long Lasting
Holders of the asset must be confident it will last a very long time. It cannot erode, perish or dwindle over time. Otherwise it will be perceived to be a depreciating asset and treated as such, and not held as a store of value. It needs to last well beyond the term we intend to hold it so the next person will value it just as high as we do.
Stable Pricing
The price of the asset should be stable and not have a history of declining over time. It’s not necessary that it grows in value or appreciates; though that is a nice to have and we would definitely take it. Who doesn’t want some appreciation? But more than that, it cannot go down in value. Wild instable assets do not make for a good store of value because the future value is unpredictable. Remember, our primary concern is preserving and storing value, not creating wealth. There are other assets for that goal.
Scarcity
It cannot be abundant or easy to replicate. In fact the more scarce, or rare the asset, the higher the price it will fetch and therefore “store” more value in it. Gold beats silver because it is simply more rare and more difficult to obtain; therefore it is able to store and carry more value in each and every ounce.
Replacement Cost
As an extension of scarcity, the more energy each unit of the asset embodies the higher the value. The more time and energy required to mine the next unit of the asset the more value it will store. If the replacement cost is gradually rising then so too will be the value that is stored. The cost to rebuild homes increases over time, the cost to mine the next kilogram of gold is higher than the last, and the number of hashes required to find the next Bitcoin increases continually. This increasing replacement cost is a terrific attribute for a store of value.
Not all attributes are embodied equally across all stores of value and not all stores of value assets even pretend to meet all of these attributes. However, the more attributes it contains and the degree to which they meet them the better.
Attribute Summary:
The Dollar: The Primary Store of Value
As controversial as this may sound, the global, primary store of value is the US Dollar, followed by the Euro, Yen and British Pound. Governments and large corporations will hold one, two or all of these in reserve. Citizens will first and foremost hold these in savings accounts for short, medium and even long periods of time. If you look at the list above it checks off almost the entire list. You can easily convert your time into it, save it, spend it with anyone in the world, it lasts years and the price and value it carries is relatively stable over time.
Inflation
I know, you’re thinking, “But what about inflation, that erodes the value over time and its not durable!” True, but typically speaking the value of a dollar, yen or pound will stay relatively stable over time periods of less than 10 years. Yes it slips by 1-3% a year, but a dollar saved today will essentially buy the same amount of goods next year and the year after that. Over longer periods of time it will slip and so it will require assistance to hedge out inflation.
Government Bonds Hedge Out Inflation
If someone is storing value into fiat currency, you can easily mitigate the eroding effects of inflation by buying government bonds. Now the risk of inflation is taken out and holders of government bonds can very easily convert the bond into cash and spend it. In fact there are specific bonds that are tied to inflation so as inflation rises so does the value of the bond.
You’re Not Convincing Me
I know, there’s no shifting your mind away from the belief that the dollar is a horrible store of value, but just let me state that globally, across the world, this is THE reserve currency held by most democratic governments and the largest corporations. At least let me state that this is the barometer against which all other stores are measured against. Yes, its not perfect, and this where the other stores of value enter and flex their unique attribute against the dollar. However today, the gold standard of storing value isn’t gold — its the dollar.
Enter Dollar Distrust
Today, the popular view on the dollar is that we earn it through our employment or business activity and we should spend it, invest it, or buy something of value and not save it. With interest rates so low it makes little sense to save it in a bank account or even buy a 10 year note.
Negative Real Interest
The disdain for the dollar is best understood with the following view: even if you buy a government bond, after 10 years, your real purchasing power will have decreased. It’s also possible this decrease in value could be substantial. Therefore the ability for the dollar to store value is being heavily questioned. Because of this, investors are looking for anything but cash, skipping over government bonds, and looking for alternatives.
Here is the current popular view summed up nicely by Robert Kiyosaki, Author of Rich Dad, Poor Dad:
SAVERS ARE LOSERS. CASH IS TRASH. TREASURIES ARE THIEVES working for the Fed. GOT THE MESSAGE? Central Banks have an avowed goal of decreasing the value of cash by 2% per year. Please don’t be a loser. Open your mind and get smarter about your money. Got gold, silver & Bitcoin?
— therealkiyosaki (@theRealKiyosaki) August 12, 2020
Upfront Transaction Fees Give Cash a Head Start
Before we go further, please also be aware of upfront transaction costs to convert from Cash into another store of value. These transaction fees can be seen as giving cash a head start. If we assume an inflation rate of 1.5 to 2%, buying Bitcoin can surrender a 1-2 year head start to cash right out of the gate. Don’t believe me?
This screen shows you how much Bitcoin I would receive for $100 Canadian dollars, and then what would I get back if I sold the same amount of BTC immediately. After fees and the spread I’m looking at a 2.91% decrease in purchasing power. This is like 1-2 years of inflation paid upfront! Check your favorite Bitcoin Exchange and do the same exercise. Also note, this is not unique to Bitcoin either. Precious metals can be even worse.
Other Stores of Value
Here are the popular stores of value that investors and savers are purchasing that are not directly tied to cash or government bonds:
Gold
Gold is a terrific store of value that has stood the test of time. No other object has captured the imagination and adoration of humankind since the dawn of civilization and right through all the ages. Wars have been fought over it, people gone to jail for it, and everyone is getting married with it.
PRO: Durable, incredible long term confidence, it will always hold value even after the dollar and all other currencies have been destroyed.
CON: Can be difficult to store, easily stolen if not secured, transaction fees can be high, not easily divisible, usually not able to be used for trade, difficult to walk around with $20,000 of gold in your pocket but could be done with a bag or carrying case.
Silver
Silver is a good store of value that will always be in Gold’s shadow. Every attribute of gold holds true for silver but to a lesser or bigger degree in every aspect. Because it is more abundant and not as scarce as gold it will always have a lower price. It is bulkier, stores less value, and tarnishes over time if not properly stored. It’s harder to store and less desirable for jewelry. It does however have some industrial uses so it is consumed in the manufacturing of some products such as mirrors and conductors.
PRO: Durable, great long term confidence, it will hold value even after the dollar and all other currencies have fallen. It has been used throughout time as a form of money and coinage. It is cheaper so it can be bought in smaller increments.
CON: Much bulkier than gold so it requires more cost to store, secure and hold. Transaction fees are higher with wider spreads between the bid and ask prices when transacting with the physical bullion. It is impossible to walk around with $20,000 of silver in your pocket or carrying case.
Real Estate
Real Estate is a favorite store of value for the super wealthy. A lot of wealth can be stored into one property, and if you’re bearish on the dollar, the leverage achieved through borrowing against the property can serve to enhance returns and provide immediate liquidity without having to sell.
PRO: The play on Real Estate is four-fold:
First – Property is valued by everyone as we all need a shelter over our read. If the property is located on a great piece of land it will always be sought after and easy to sell.
Second – The cost to replace the structure on the property will go up with inflation as most input costs rise over time.
Third – Enjoyment of the property. If this is a vacation property you can visit and enjoy the property while you literally sit on your money.
Four – You could rent the property or list it on Airbnb and generate some income from the property.
CON: maintenance costs, property tax, not liquid, potential for “real problems”, is not at all divisible and very high transaction costs with agent commissions and legal fees.
Farm Land
Arable farm land is another terrific albeit illiquid store of value. You can safely park a tremendous amount of money in farm land and know it will be safe over the next 10 to 20 years. Humankind will always need food. The difference between this and real estate is you’re skipping the structure so ongoing maintenance costs are much lower (if any) and usually have lower or no property taxes. Rent the land to a neighboring farmer for some income and avoid having to farm it yourself.
PRO: Guaranteed to hold onto its value over time as the need for food is required by all. Income can be earned by renting out the land. Stores a tremendous amount of wealth at one go.
CON: Illiquid and can be difficult to sell as the market for farm land is narrow. Not many can buy farm land even if they wanted to as the prices are so high.
Masterpieces of Art & Collectibles
Certain objects and works of art have tremendous value and are very expensive. They are incredibly rare and some are completely irreplaceable. In fact some are priceless. The Hope Diamond is one such example as would be the Mona Lisa. That being said the market for prized pieces of art is surprisingly liquid and a deal can be made in a matter of days if you can get a hold of a broker. Certain sports memorabilia which commemorate a certain player or event can also be collected and sold for high prices. Any of these things can be used as a store of value.
PRO: An absolute fortune can be stored into a piece of art. Some pieces of art and some rookie cards will only go up over time because they cannot be replaced and there is a ready liquid market to trade them.
CON: Takes skill to know what to buy and what a good price for particular art piece or rookie card should be. Many of these will be irreplaceable and if damaged, torn, or lost the value will drop precipitously.
Bitcoin
Bitcoin is the new kid on the block that promises incredible properties that make it the best store of value. Let’s look at each attribute we listed above and compare each against this promising digital asset.
Convertible
Bitcoin is extremely convertible. You can buy Bitcoin with any fiat currency across the globe in a matter of seconds, or minutes if you need to wait for confirmations. The incredible part is that it can take any amount of money and store any amount into a nominal amount of Bitcoin. It can take 10, 1000, 1,000,000 or even billions of any currency unit and convert it into a nominal unit fraction of Bitcoin. Transactions are guaranteed and completed in a matter of minutes.
Universally Valued by Others
Bitcoin is not universally valued by others. Some say its worthless, it’s rat poison, and a speculative asset at best. Many holders of Bitcoin will argue and tout the benefits but the fact remains that the acceptance of Bitcoin is still in its infancy. Yes, much commercial and end-user adoption has taken place but we still need to see more acceptance.
Used for Trade
Bitcoin’s primary purpose was to be a digital currency that can be used for buying and selling goods. True, it can be used for that, but the adoption of this use case still needs a wider audience of spenders and more merchants who accept payment in this form. With PayPal’s recent adoption this could change but at the current state most holders of Bitcoin will find buying a good or service a real challenge. Most likely, you will convert the BTC into USD and buy the good. In addition, Bitcoin has a very slow transaction speed.
These Slow Transactions
All transactions, big or small take minutes to confirm. When we have Visa accepting 3,000 transactions a second, we begin to see a bottleneck here. These confirmations are essential to complete because without confirmation the money could be spent twice. You can see here how long it is currently taking to complete one Bitcoin transaction. At the time of this article, a single BTC transaction needs 15.09 minutes to complete. Do you wait to wait another 15 minutes at your favorite vendor waiting? While completely unacceptable, a creative solution could change this. And herein lies some uncertainty – what if the update or change drastically alters Bitcoin fundamentally?
Easily Saved, Stored, or Stacked
In addition to Bitcoin’s ability to transact any sum of money, you can easily stack and add to your position. A single hard wallet can hold any amount and you can add to this wallet at any moment. As Bitcoin is traded 24×7 around the world you can easily add to your position (or liquidate) at any time – week nights and weekends are all game.
As you can load it onto a cold wallet, you can literally walk around with billions worth of Bitcoin in your pocket and still have room for your car keys.
Durable and Long Lasting
This is one of the strong points for Bitcoin. If I currently have 1.018482 BTC on a private hard wallet, 10 years from now I will still have 1.018482 BTC. There are no fees for storing Bitcoin, and if I have it on a private hard wallet it is safely in my possession, nobody can do anything about it. If I’m storing my BTC on an exchange and the exchange gets hacked, then I may lose all of my BTC. But held on a cold, private hard wallet, it is safe, sound and will not deteriorate or erode. This makes storing it a snap. Just don’t lose it.
Read about creating your own private wallet here for free.
If you would like something more, here is one you can buy online by ledger.
Stable Pricing
If there is one attribute Bitcoin does not have it is stable pricing. This makes it difficult to be confident you are getting a fair price, and getting good value for your dollar. Consider the following annual returns for Bitcoin, USD 3 month T-bills, and Gold since 2015:
Bitcoin is completely unstable and that makes it very difficult to deposit large sums of money into it at once. What if it drops by 50% over the next 12 months? That story of dollar being exposed to inflation seems completely insignificant next to having your money exposed to a standard deviation of 79.88% In fact the standard deviation of Bitcoin is approaching the statistics of Blackjack, Roulette and Poker.
Scarcity
This attribute is arguably the biggest thing going for Bitcoin and the single reason I personally invest in Bitcoin. Currently, everyday 900 Bitcoins are mined into circulation. In 2024 this rate will be cut in half to 450 a day. In 2028 again, cut in half to 225, and so on until 2140 when the last Bitcoin will be mined. This scarcity is programmed right into the Bitcoin protocol and cannot be changed to meet economic conditions or other reasons of convenience. This rigidness is very attractive to investors who can stomach the volatility.
Below shows the number of BTC in circulation. It was taken back in November when I published my article, Four Reasons You Should Invest In Bitcoin. Click the image to view the site and see the updated numbers!
Replacement Cost
Another superpower of Bitcoin is the ever increasing cost to mine the next Bitcoin. At recent estimates, it takes 205,166 kWh of electricity to mine one BTC. Using one of the most efficient S9 Antminers available today, it would cost $8,206.64 to mine. This is also assuming $0.04 per kWh which is extremely low. What’s more, the cost to mine a new coin increases each day by 0.45%.
The Next Coin Costs More to Mine
So it “costs” more by requiring more computations, or hashes, each day. Miners are incentivized to refresh their hardware with ever increasingly efficient machines to keep mining, but in the end more electricity will ultimately be required for the next coin. This means the embodied energy in each coin increases each day. This applies to all coins in circulation, not just the new coins mined. If you bought a coin in 2013 the embodied energy it carries is the same as the new coins mined tomorrow. This is a terrific property of Bitcoin.
Conclusion: Bitcoin as Store of Value
Bitcoin is an incredible form of money and investible asset. It has some incredible properties that are not found elsewhere. At the same time, it has some glaring flaws that makes one hesitate to buy more.
Despite the glowing positives and incredible attributes, I’m hesitant to say its a good store of value, let alone the best. Those weaknesses make it a speculative investment or bet and not at all a store of value.
Only One Economic Environment
Consider the point that it has only known one economic environment. That being of low to negative real interest rates and constant stimulus to spur economic growth. It has yet to know a period of healthy, reasonable interest rates with an overheated growing economy. It’s just too new, erratic, and inexperienced to have complete confidence in.
Binary Asset
In my mind Bitcoin is a binary asset which will be worth everything or nothing in 10-20 years. This makes it a speculative bet and less of an investment; and even less of a store of value. Stores of value require confidence, a solid track record of value, and stable pricing.
Could Bitcoin be worthless in 10 years? You bet it could. Could it be worth $250,000 a coin in 10 years? Yes, this is a real possibility. But buying it for this possible outcome is a speculative bet, not as a store of value. We should not confuse the two goals.
Recommended Store of Value
So in the end, if Bitcoin is NOT a good store of value, then what is? First and foremost I would recommend Gold. Where Bitcoin falls short, Gold stands tall.
Universal Acceptance
I can take gold anywhere in the world and it will be desired, wanted, and highly valued. Rich, poor, young or old everyone would like to have it. A starving beggar on the side of the road would trade his scarce meal for a gram of it. I can trade it for anything so long as I have enough ounces. It always carries intrinsic and subjective value.
Incomparable History
Nothing, and I mean nothing, compares to gold in terms of having a history of being highly valued by humankind. Not only has it seen more than one economic condition, it has seen ALL economic conditions and still comes through highly valued. It has seen all American Presidents, not just the last 2 (3 if you count Biden) as Bitcoin has only seen. It has been traded and prized by the Egyptians, Chinese, Babylonians, Romans, and today, the Globe.
Durable, long lasting and stable price
While its true the price of gold does fluctuate it seems to keep within a reasonable standard deviation. If the volatility is too high for an investor then they should consider buying TIPS bonds so they have built in inflation protection along with dollar priced stability. Gold’s history points to its durability and also how long it will last. Keep it safely stored and you can pass it down to your next generation and the next after that. It predates all things and it will be the last to be destroyed in the end.
So What of Bitcoin Then?
I firmly believe Bitcoin represents an opportunity of a lifetime, but I also believe it is a speculative bet with the odds in my favor. I just wouldn’t want to drop significant money into it with the purpose of saving or storing my value for 10 years. The Bitcoin rhetoric on social media is about a meteoric rise to $250,000 USD within the next 5 years. While this is fantastic, and why wouldn’t we want to capture that rocket, let’s be sensible and see that its also possible that it craters to zero. Under the weight of government regulation, or new laws, they could make it illegal for citizens to own and hold. Would you trade your freedom for Bitcoin? Judging by the fanaticism online, some would be willing to do just this. But most rational citizens will surrender their BTC for continued freedom.
Closing Thoughts and Actionable Advice
I hold and own Bitcoin as of writing this blog post. But I’m keeping it at no more than 2% of my assets. A small allocation I could stomach seeing drop to zero. If it does crater I will live another day to continue investing and getting returns in my portfolio from my other assets.
It’s also possible that Bitcoin will continue to mature and become that new desirable form of gold and store of value. This will mean it achieves wider range of adoption by spenders and merchants alike and the price stabilizes to a narrow range. Ironically, if and when this happens, many early hodlers of the cryptocurrency will not like this and will exit their position. For Bitcoin to have a lasting future as a decentralized currency, it needs to settle down, stabilize and stop threatening the global monetary system. Governments went to war for gold, they will not easily surrender their right to own and print their own currency.
Bitcoin has an interesting short history with a wonderful and colorful future despite being cold, binary and completely digital.
So I say yes to Bitcoin as a measured speculative bet or investment, but no to its use case as a store of value. Gold or the US Dollar is a better vehicle for this use case.
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