What Is a Store of Value? Bitcoin vs Dollars
If you want to learn exactly what a store of value is, you’re in the right place. With the growth of bitcoin, the concept of a store of value is being explored more and more.
This is in large part thanks to Satoshi Nakamoto, who specifically designed bitcoin to emulate gold’s store of value properties. Already, bitcoin is considered ‘digital gold’ by millions. But is bitcoin better than dollars?
In this beginners guide, we cover the store of value definition, how to evaluate a store of value, and then explore whether fiat currencies, gold and bitcoin are good stores of value. Ultimately, we’ll see whether bitcoin or dollars are best.
Definition of a store of value
A store of value is a currency, commodity or asset that holds its value over a long period of time. A store of value can appreciate in value, but must not depreciate.
What makes something a great store of value?
There are several factors that make something a store of value. It’s important to note that something can still be a good store of value even though it doesn’t meet all factors.
- Widely accepted - Accessible to everyone
It should be widely recognised as a store of value by a large percentage of the market. The more people that consider it a store of value, the better a store of value it actually is.
- Durable over time - It doesn’t depreciate
Whether it’s a year, a decade, or even a century, a store of value should hold its value over long periods. For example, gold and silver have been successful stores of value for thousands of years.
- Liquid - Easy to buy and sell
You should be easily able to swap the money / asset for cash quickly and easily. Essentially, there needs to be a strong market of people perpetually wanting to buy a store of value.
- Scarce - Limited supply
Creating more of something will dilute the value of the existing stock, which makes scarcity a valuable feature of a store of value. For example, fiat currencies are not very scarce, as governments frequently print much more of them, while bitcoin has a fixed supply of only 21 million bitcoins. One way to measure the scarcity of something is with the stock-to-flow model.
- Divisible - Buy and sell portions, not the whole thing
The easier it is to divide something into parts, the better a store of value it becomes, then you don’t have to sell the whole thing. For example, while gold can be divided, it isn’t as easy to divide as bitcoin. Each bitcoin is divisible into 100 million satoshis.
- Portable - Take it away
Store of values are more valuable when you can easily take them with you. While real estate is a generally stable store of value, you obviously can’t take it anywhere. On the other hand, fine art is far easier to transport globally. Even better, you take all your bitcoin with you on a small hardware device or with a password in your head.
Fiat currencies as a store of value - Dollars
Fiat currencies like the Australian dollar (AUD) and US dollar (USD) typically have been poor stores of value as they have been steadily losing their purchasing power. These currencies only remain in use because they perform other functions of money so well, including being a medium of exchange and unit of account.
Here’s a quick overview of fiat currencies against the factors of a store of value:
- Widely accepted - The US Dollar is the most widely accepted store of value on the planet as hundreds of nations use it as a medium of exchange, especially for international payments. Other fiat currencies are generally widely accepted within their own nation, but not across the world.
- Durable over time - No, fiat currencies lose their purchasing power over time as central banks expand the monetary supply.
- Liquid - Yes, fiat currencies are easily exchanged at banks and accepted as payment throughout society.
- Scarce - Fiat currencies are not scarce as central banks across the globe have been lowering interest rates and printing new currency at a record pace.
- Divisible - Now that we can transact with fiat currencies digitally, they are easily divisible.
- Portable - You can generally take your fiat currency with you, but need to rely on banks and payment networks.
Given that fiat currencies are not scarce or durable over time, it’s clear why even the US dollar was backed by gold until 1971.
Gold as a store of value
Gold has arguably been the dominant store of value over the past three thousand years. It has all of the features of a great store of value and has only been surpassed by new digital currencies, which are considered to be even better. Moreover, throughout history, gold has not only been a consistent store of value, it has been the primary form of money.
Here’s a quick overview of gold as a store of value:
- Widely accepted - Gold is accepted across the globe as a form of money.
- Durable over time - Yes, gold is the most durable of all stores of value, having consistently held its value for thousands of years.
- Liquid - There is an active global market for gold, making it easy to buy and sell both gold securities and the physical metal.
- Scarce - Gold is the most scarce precious metal, with an inflation rate of only around 1%, far lower than fiat currencies.
- Divisible - You can divide gold into smaller portions, although it's not easily divided into an amount small enough to purchase things like a cup of coffee.
- Portable - You can take gold with you wherever you go, however, you cannot send it across the internet like you can with cryptocurrencies.
The most distinctive feature of gold is its scarcity, separating it from other precious metals like silver. In fact, it was this scarcity that inspired bitcoin’s monetary policy.
Bitcoin as a store of value - “Digital Gold”
Bitcoin is considered by many as ‘digital gold’, offering the benefits of both a digital currency and the precious metal. While it is a far newer store of value, it meets all the requirements of a store of value.
Here’s a quick overview of bitcoin as a store of value:
- Widely accepted - Bitcoin is widely used across the globe, especially in Australia, the USA, Africa, and Europe.
- Durable over time - Bitcoin is a much younger asset than other stores of value, but has proven itself as a successful store of value over its 12+ year history.
- Liquid - You can buy and sell bitcoin 24/7, 365 days of the year. There is an incredibly liquid market for bitcoin, with the world’s largest financial institutions trading it daily.
- Scarce - With a limit of only 21 million coins, bitcoin is the most scarce of all the stores of values we’ve listed here.
- Divisible - Every bitcoin can be divided into 100 million satoshis making it easy to pay for everyday transactions like a cup of coffee when used with the Lightning Network.
- Portable - You can take bitcoin with you anywhere in the world. As you can custody the coins for yourself, you don’t need to rely on any banking or payment networks to access it.
As you can see, bitcoin has many advantages over fiat currencies, but is it the best store of value?
Is bitcoin the best store of value? Bitcoin vs dollars
Many investors see bitcoin as the best store of value because it has the best aspects of both gold and digital currencies: it’s widely accepted, liquid, scarce, divisible and portable. The only thing that it is lacking is durability over time. While it has proven itself over a decade time span, it hasn’t had time to prove itself over centuries as gold has.
While fiat currencies are still proving an overall more popular medium of exchange and unit of account, even in crypto with the strong demand for stablecoins, bitcoin is beginning to challenge that with the growth of the Lighting Network which makes bitcoin transactions affordable and seamless. Regardless, it's clear that bitcoin is eating away at the store of value aspects of both gold and fiat currencies.
Only time will tell whether this trend will continue, but for now, we can see that bitcoin is gaining traction over fiat currencies as a global store of value.