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By comparing bitcoin, gold, and legal currency, we find that bitcoin has great potential as a good value reserve, and further analyze the value range of bitcoin by means of the valuation approach based on the Store of Value.
What is the Store of Value?
The Store of Value is one of the main functions of currency. According to the definition at Wikipedia, it refers to the function that assets can be saved and used for future exchanges. Anything which can maintain purchasing power in the future can become the Store of Value and the most common ones include currency, precious metals, etc.
According to the definition of Store of Value, the main features of an ideal Store of Value should include universal acceptance, durability, stability (scarcity), and liquidity.
Gold: excellent means of value store. Different value stores have different advantages and disadvantages. Gold is regarded as the relatively ideal value store, and it plays an important role in both international and private reserve assets.
Bitcoin has the potential to be developed into a good value store. Based on the main features of the value store, we have made a comparison between bitcoin, gold, and legal currency. In general, bitcoin has significant advantages in terms of scarcity, portability, severability, verifiability, etc., as well as good durability. Although bitcoin is relatively inferior in general acceptance and stability now, the public acceptance keeps growing rapidly with the gradual maturity of the bitcoin market and its price volatility is also gradually decreasing.
The approach of bitcoin Store of Value
As the changes of bitcoin price, the share of bitcoin market value in value reserve gold or offshore assets is also changing accordingly. Therefore, by means of the expectation on bitcoin to obtain the market share of value reserve gold or offshore assets, we can make the prediction on the fluctuation range of bitcoin price.
An optimistic investor may think that the market value of bitcoin can account for 50% of the sum of the estimated reserve gold market value/offshore asset value/value reserve gold and offshore asset value by the year 2029 and before. So according to him, the price ceiling of bitcoin should be about US$100,000 / US$260,000 / US$360,000 in the year 2029 and before.
Feature of Store of Value
- Universal acceptance: Being universally recognized and accepted, the assets can be exchanged with other items in the future.
- Durability: Assets can be stored forever.
- Stability (scarcity): The purchasing power of assets can remain relatively stable, and scarcity is the valuable source of assets as the Store of Value.
- Portability: Easy to transport and storage
- Severability: Easy to segment.
- verifiability: Easy to quickly identify and verify its authenticity, is not required for an asset to be a valuable reserve.
Can Bitcoin be used as the Store of Value?
Gold: excellent means of value store. Gold is recognized as a relatively ideal value store, which plays an important role in both international and private reserve assets.
According to the data from the World Gold Council, the global central banks hold nearly 34,000 tons of gold. The five countries with top gold reserves include the United States, Germany, Italy, France, and Russia. In US foreign exchange reserves, gold accounts for as high as 73.8%.
In 2018, the gold demand increased by 4% worldwide, which was mainly driven by central bank purchases. In 2018, the total net gold purchase by central banks reached 651.5 tons, a year-on-year increase of 74%, which hit a record high since the dollar exchange of gold was stopped in 1971.
Bitcoin and gold share many similarities, such as the limited total amount and long-term preservation. The “mining” mechanism makes it easier for people to associate bitcoin with gold. Therefore, some people also refer to bitcoin as “digital gold”. Gold is a recognized perfect value store, so can bitcoin be used as a Store of Value?
Based on the main features of the value store, we have compared bitcoin, gold, and legal currency.
bitcoin has significant advantages in terms of scarcity, portability, severability, verifiability, etc., as well as good durability. Although bitcoin is relatively inferior in general acceptance and stability now, the public acceptance keeps growing rapidly with the gradual maturity of the bitcoin market and its price volatility is also gradually decreasing. Bitcoin has the potential to be developed into a good value store.
Ⅰ. Universal Acceptance
According to the Lindy effect, the vitality of something valuable will become stronger and stronger. The longer bitcoin exists, the more confidence people will have in it.
The Lindy effect is a theory that the future life expectancy of some non-perishable things like a technology or an idea is proportional to their current age, so that every additional period of survival implies a longer remaining life expectancy.
It’s also the case. After ten years of development, more and more countries have started to recognize and accept bitcoin. More and more people have started to know about bitcoin. More and more merchants have started to accept bitcoin payments.
Ⅱ. Durability
Bitcoin is the most durable in theory which requires time to be tested. The durability of legal currency does not depend on the durability of the legal currency itself, but on whether the issuing government can maintain its purchasing power for a long time.
Therefore, so long as the system supporting bitcoin has always existed, bitcoin will be the most durable. However, in comparison, gold has been tested for a long period of time while the history of bitcoin is relatively short, so its “durability” needs to be further tested.
Ⅲ. Stability
Bitcoin stability is gradually increasing with the trend increase of the bitcoin market value scale, the bitcoin market has become more and more mature with higher public acceptance and more participating professional organizations. The compliance operation has become mainstream and the bitcoin is gradually becoming more stable.
Ⅳ. Scarcity
Bitcoin is the most advantageous in terms of scarcity. The total amount of bitcoin is constantly at 21 million just like the limited total amount of gold on the earth. The recoverable amount is even lower. However, the amount of gold stock on the earth now is still growing every year and the gold supply is still possibly increasing due to seabed or asteroid mining. As for the legal currency, there is almost nothing about its scarcity.
Ⅴ. Portability
Bitcoin portability is incomparable to legal currency and gold since it’s extremely convenient for storage and transportation. The legal currency exists in different forms and the storage and transportation cost of cash is relatively high. The digital legal currency is also very portable, but it’s difficult to achieve large-scale value transfer due to government regulation and other reasons. Compared with gold and bitcoin, gold is even far from being portable because of its physical form and weight.
Ⅵ. Severability
It’s the easiest to realize the severability of bitcoin. The smallest unit of bitcoin is satoshi (sat) representing 0.00000001 bitcoins, which provides the possibility of small payments. The legal currency can usually be split into small changes with very low purchasing power. The split degree of gold is the most limited among the three.
Ⅶ. Verifiability
Bitcoin verification is very convenient and reliable. There are various means of counterfeiting legal currency and gold cannot become an exception, the decentralized, tamper-resistance, and transparency of the blockchain make bitcoin verification more convenient and reliable.
In a contract between Bitcoin, Gold, and Legal Currency
With a long history of development, gold has been used as a deep-rooted symbol of wealth in public minds. Bitcoin is inferior to gold and legal currency.
The history of legal currency is much shorter, but its purchase power is guaranteed by the national law and it’s forced to be used, so it’s a generally accepted means of payment and reserve to make the exchanges with other items more convenient unless severe inflation appears. In certain periods, the legal currency of some countries can be universally accepted worldwide.
Bitcoin has the shortest history and the development of blockchain is still in its early stages. Under the current legal currency system, bitcoin has not yet established extensive contact with the real world.
How is Bitcoin valuation approach based on the Store of Value?
