What Is Store of Value: Is Bitcoin A Good Store of Value?

It is the year 2022. With inflation at record-high levels, gas prices skyrocketing, a war in Ukraine, and stock prices plummeting, many investors and consumers are beginning to fear that a major economic recession may be coming. As a result, investors are quickly trying to shift their funds from more speculative investments into safe, recession-proof assets that can provide greater stability. One type of investment that is particularly popular during times of economic turmoil are assets known as Stores of Value (SoV).

What is store of value?

A store of value is an asset, commodity or currency that will hold its value over time without depreciating. Stores of value are typically stable and safe assets with low risk and slow but steady gains. It’s this stability and low risk that makes stores of value so popular during times of economic uncertainty or volatility.

In a recession, as most assets see major decreases in price, stores of value will often see much milder drops or even slight price increases. The most popular examples of stores of values are gold and government-backed bonds (like the US Treasury Bond).

What are the characteristics of a store of value?

Stability

A key aspect of a store of value is its stability. Store of value assets will likely not see much price volatility either upwards or downwards. Instead, they will typically experience a slow and steady price increase (with a few mild short-term price swings) in response to broader macroeconomic changes. It is important to note that the price of store of value assets can still decrease, especially in the face of major macroeconomic issues; however, this will most often be a smaller percentage of decrease as compared to risky assets.

Market decoupling 

Another key characteristic of a store of value is its decoupling from traditional financial markets (such as the stock exchange). Store of value assets typically need to be uncorrelated with other financial markets like the S&P 500, as they are often used as hedges against other economic markets and serve as “safe havens” for investors to flock to during times of economic volatility. Thus, it is important that stores of value do not track traditional markets, as this will also mean they will not crash when other assets see major corrections.

Maintenance of purchasing power

Another important characteristic of stores of values are their ability to maintain their purchasing power over time. This means that the value of the asset should remain similar or grow compared to other assets. For example, if one unit of a particular store of value can be exchanged for five units of bread today, this ratio of purchasing power should remain stable or increase over time; meaning, in 10 years the same unit should be able to be exchanged for at least five units of bread.

Durability

As previously mentioned, a key aspect of a store of value is its ability to maintain its value over a long period; thus, typically these assets need to be durable. Gold is a great store of value because its inherent value and characteristics do not change drastically over time. Gold can remain stable in storage for centuries, which is also why it is often passed down from generation to generation. Perishable goods, no matter how expensive and valuable, cannot be a successful store of value because they are unable to last the test of time.

Is gold a store of value?

Gold is viewed as the ultimate store of value. The price of gold is quite stable i.e. it does not experience wild, volatile swings, it is almost always appreciating in value, and it has centuries of history and institutional trust. Furthermore, the price of gold is fairly independent and uncorrelated to the rest of the financial market. Despite the recent turmoil in most stock markets, gold has held much of its value and has seen a much smaller price decrease compared to other assets. Gold is also a scarce asset with a limited supply; this deflationary quality allows it to avoid the devaluation that assets with unlimited supply, like fiat money, face.

Is money a store of value?

Whether fiat money is a store of value is a question that will solicit different answers from different groups. The biggest issue with money as a store of value, and something crypto supporters will frequently cite, is inflation.

Outside of the occasional deflationary cycle, inflation is impossible to avoid in the long term, which means that money will almost always lose value in the long run. This devaluation directly runs counter to a key criterion of a store of value–its ability to maintain its value and purchasing power.

Despite this, many economists will still say money is indeed a strong store of value. This largely due to the fact that although money’s value erodes over time, it happens much slower.

Is Bitcoin a store of value?

Bitcoin (BTC) is viewed by many in the world of crypto to be a prime example of a digital store of value and is frequently referred to as “digital gold.” While many pundits believe that Bitcoin meets the primary characteristic of a store of value, there is an equal number of critics who argue that it is not an effective store of value, at least not presently. Here are the factors to consider in assessing Bitcoin’s worthiness as a store of value:

• Scarcity

The primary reason Bitcoin is considered a store of value is its limited amount of 21 million, as well as an ever-decreasing fresh supply of Bitcoin as the mining rewards are designed to decrease over time during events known as “halvenings”. This finite supply and decreasing release of new Bitcoin gives it strong deflationary pressures similar to gold.

• Durability and portability

Bitcoin can never expire or perish, it has a virtually unlimited shelf life, and its storage fees are close to zero. All one needs is a digital wallet and they will be able to own and manage their Bitcoin for an incredibly long time. Furthermore, Bitcoin can be transported and sent around the world quickly and cheaply. This durability and portability allows Bitcoin to be an asset that investors can easily hold and accumulate over a long period of time–an important characteristic of a store of value.

• Volatility 

One of the biggest issues with Bitcoin as a store of value is its high volatility and massive price swings. Just this past week Bitcoin dropped 30.5%, which is a large swing for any asset, much less a store of value asset that is supposed to provide investors with stability. Gold by comparison only dropped 2.63% in that same time. As long as Bitcoin continues to face such volatility, it will have a hard time justifying its label as a store of value, as it won’t be able to provide investors with the stability and steady price appreciation they expect from an asset that is meant to serve as a store of value.

• Correlation with markets

As previously mentioned, another important quality of a store of value is its ability to decouple from the financial markets and maintain its price while other assets drop. Bitcoin has not yet seen this decoupling and in fact has a correlation coefficient of 0.6 with the S&P 500, which is quite high considering a coefficient of 1 means a perfect correlation.

Bitcoin has at times been less correlated, with a coefficient of -0.2 in 2019 and a coefficient of 0.1 in 2016; however, as Bitcoin has grown more mainstream and attracted more institutional investors, it has also become more correlated with the rest of the financial markets. Ironically, its success in attracting the big players has also affected its ability to serve as an effective store of value.

All in all, Bitcoin does have many characteristics that make it an excellent store of value; however, one needs to look at the price chart to see that Bitcoin may have some way to go before it can rightfully claim the status of a bona fide store of value.

Conclusion

Overall, a store of value is a stable asset that is likely to retain or gain in value in future. Gold is the most common example of such an asset. Bitcoin is the most popular store of value in crypto; however, despite possessing many characteristics of a successful store of value such as scarcity, there are still many issues, namely volatility and correlation with other financial markets, which render it an ineffective store of value at the moment. Should Bitcoin gain mass adoption, it may mature into a store of value, but this also a chicken-and-egg matter of sorts.