Key Points
- Gold and digital assets like Bitcoin are increasingly seen as stores of value to counter inflation.
- Bitcoin’s potential as a store of value is being explored despite its volatility and speculative nature.
The practice of converting traditional money into commodities such as gold to combat inflation has been long-standing. However, in recent times, digital assets have gained popularity as stores of value, with many investors expressing increased confidence in these innovative commodities.
A store of value is an asset class that retains its value over time, though it may be more volatile than fiat money. While traditional currencies serve as effective mediums for daily transactions and short-term value preservation, they often fail to maintain value in the long term. This is particularly true during periods of high inflation, when fiat money can rapidly depreciate, leading to potential breakdowns in monetary systems.
Investments to Counter Inflation
Investors seeking to counteract inflation have identified assets such as gold, real estate, bonds, stocks, and blockchain-based commodities as ideal mediums. It is prudent to select an asset that has the potential to appreciate in value over time. These stores of value are superior to traditional currencies and experience boom-and-bust cycles. It’s crucial to understand that all these assets are influenced by market conditions and their values are interconnected.
Gold has long been a favored asset among investors due to its ability to maintain high value irrespective of global economic and political issues. Over the years, gold has proven its worth as a store of value, largely due to its convertibility, mobility, rarity, and durability. Even when various monetary systems have failed, gold has remained resilient.
The predictability of gold, its consistent price fluctuations, and limited supply make it an attractive asset. It also does not correlate with other stores of value such as real estate and equities. Institutional investors and governments recognize its value, and some countries have even adopted it as a standard monetary system, using their gold reserves to back the paper money in circulation.
Understanding Stores of Value
The term ‘store of value’ is often used in financial discussions, and those seeking to protect their finances may be particularly interested in it. While different investors may assign different meanings to the term, there is a general consensus that stores of value are assets that retain their value despite fluctuations in other assets.
Bitcoin has been gradually gaining recognition as a store of value, despite experiencing bear markets and price volatility. Experts believe that its decentralized nature lends it a certain degree of trustworthiness. While some investors dispute Bitcoin’s status as a store of value, many accept its volatility as a consequence of its speculative nature.
To ascertain if Bitcoin could be classified as a store of value, it’s important to consider the characteristics of such commodities:
- Public confidence in the asset’s reliability is essential. An asset can only achieve the status of a store of value if individuals and organizations accept it and include it in their investment portfolios.
- Stores of value should retain their value over time, as investors value durability and trustworthiness.
- Stores of value have a limited supply, which can enhance their value as they become scarcer. However, the supply should not be too limited, as this could result in prohibitively high prices and limit the asset’s accessibility.
- Stores of value should be transferable and divisible, allowing owners to exchange their assets and buy or sell smaller portions.
- All units of a store of value should have identical values and characteristics.
Bitcoin as a Store of Value
As the first currency based on blockchain technology, Bitcoin is scarce, globally available, and decentralized. This makes it an appealing alternative for investors seeking something different from traditional commodities. However, as a cryptocurrency, Bitcoin is subject to high volatility, which can make its value difficult to predict.
Here are some features that could potentially position Bitcoin among stores of value:
- Bitcoin is durable as a digital currency, immune to physical wear and tear and will exist as long as blockchain exists.
- As a digital asset, Bitcoin is portable, making it easier for holders to transport compared to physical gold.
- Bitcoin is divisible, with each Bitcoin being splittable into 1/100,000,000th satoshi. Each bitcoin can be exchanged for another as they are identical, making the cryptocurrency fungible.
- Bitcoin is scarce, with only 21 million coins ever to be produced, as designed by its creator, Satoshi Nakamoto.
Many investors view Bitcoin as digital gold and often use it as a store of value. The difference between Bitcoin and traditional commodities is that it provides holders with the benefits of digital currencies and the advantages of conventional assets. Whether Bitcoin will become the superior store of value remains to be seen.
