Store of Value for Newbies: A Complete Beginner’s Guide

February 5, 2020

We live in a world of ongoing uncertainty. Life, death, illness, relationships, nature, all have aspects of uncertainty. When it comes to wealth, our jobs and sources of income are also uncertain. One thing that can be overlooked is the value of our savings over a long period of time. In other words, the store of value of our wealth.

This debate has been going on for some time. Fiat currency, real estate, bonds, collectibles, precious metals, and gemstones among others have been considered to be stores of value.

Over the years, the emergence of cryptocurrencies, particularly Bitcoin, has taken the debate one level up. Bitcoin enthusiasts have maintained that the digital asset is a store of value while critics have pointed out its volatility to dismiss the ‘store of value’ claims.

What is a store of value?

The phrase ‘store of value’ refers to the ability of an asset or commodity to retain its value over time and avoid depreciation. In order for an asset or commodity to be considered a store of value, its value should be stable or appreciate over a long period of time.

What does this mean? Let’s say you sell your house today for $1 million. The USD can only be a good store of value if you can still repurchase the same house for $1 million in the future. However, in the real world, this is not always the case due to variations in housing prices and inflation that affects the purchasing power of money. As long as the difference is not too great, then fiat currency is considered to be a decent store of value.

Over the years, people have relied on fiat currencies as stores of values despite their history of losing their purchasing power through inflation. Even then, considering money to be a good store of value is a contentious claim because money slowly depreciates over time. However, it is mainly in use because it is a liquid financial instrument, meaning we can buy stuff with it.

There are several other stores of value apart from money. And we will look at a few of them.

What is money?

We touch and use money almost every day but few people can define what money is. Maybe it’s because it has become a part of our lives that we don’t need to know what it is.

Anything can be money, as long as it has three main functions: medium of exchange, stable store of value, and unit of account.

Money as a store of value

People will no longer rely on money as a store of value if it loses its purchasing power over time at an unacceptable rate. If inflation rises too quickly, the value of money is eroded and it can come to a point where it‘s worthless.

Workers living in a country where inflation is too high are forced to spend their money quickly or convert it into other currencies, financial instruments or assets. The prime examples of the effects of inflation are Venezuela and Zimbabwe.

Inflation is caused by a number of factors such as adding more money into circulation (economically known as quantitative easing (QE) or simply money printing) or poor government policies.

Money as a medium of exchange

Money is a medium of exchange that allows people and businesses to exchange goods, services, and labor. Barter trade used to be the medium of exchange before the monetary system was introduced. The barter trade system was inefficient and did not always result in fair trade.

For example, an orange farmer would have difficulties finding beads. He would first have to trade his oranges for apples. And then trade those apples for beads. The hassle was just too much.

Money has eliminated these unnecessary stages. People keep money at home or in banks and use it whenever they need to buy something or anything. At the end of it all, it all comes down to money being accepted as a stable store of value.

Money is a unit of account

The acceptance of money in the economy easily makes it a unit of account which people use to write their contracts. This only makes sense if money can hold its value over a longer period of time.

Store of value: the Bitcoin case

The subject of the store of value was re-ignited after the emergence of Bitcoin just over a decade ago.

When bitcoin was created, its value was almost zero. Its value grew with time and many people started paying attention. In late 2017, the price of Bitcoin rocketed to nearly $20,000; prompting others to buy while some made huge profits on the ‘unbelievable’ price.

Neutrals and critics argued that this was a bubble and ready to burst. The value of Bitcoin sank throughout 2018 and resurged again in 2019.

We can only know the value of Bitcoin if we understand how its value is derived. Value is the measure of the usefulness of something, be it money or relationships. Instrumental goods are important because they give us access to other goods. Intrinsic goods such as gold have value in them.

How then do we determine the value of Bitcoin and conclude if it’s a ‘store of value’ or not?

Professor Nouriel Roubini, a bitcoin critic sarcastically claimed that in order to see that Bitcoin is not a store of value, give Bitcoin holders a month and the value of their holdings will plummet. He has argued over time that Bitcoin is not a stable store of value and should not be treated as such.

Paul Krugman, a noted American economist previously said it is “unclear why Bitcoin should be considered to be a stable store of value.”

Where does Bitcoin, which acts as a currency, get its value from? It gets its value from the network effect. The more people use and accept it, the more widely used it is and the more its value stabilizes. Bitcoin has many users and has stabilized as a medium of exchange.

While many may argue that it has no intrinsic value, the same can be said about fiat currencies such as the USD. The USD was previously backed by gold until the U.S. government abandoned this system in the early 1970s.

What is left now is a currency dependent on people’s trust in the U.S. government? But for Bitcoin to be a universally accepted means of payment, it has to be a better medium of exchange than the available mediums of exchange.

Bitcoin is a finite source

There is no limit to the money supply in an economic system. Governments can increase the money supply in an economy to stimulate it. This mechanism leads to inflation. In poorer countries, its consequences are dire because it leads to hyperinflation. People’s savings and pension funds are eroded quickly.

Bitcoin has a limited supply capped at 21 million. The number of bitcoins produced per day is controlled through an algorithm that halves the supply roughly every four years.

At this point, Bitcoin acts like precious metals because its scarcity is supposed to increase its value. Bitcoin has been called digital gold and a safe-haven asset. At some point, its price has increased in times of global instability.

Is it then a stable store of value? Maybe not stable. But it looks like a better store of value than the majority of fiat currencies because its value has increased over time despite some notable occasions of nosediving. Being such a new asset, bitcoin needs time to find its true value and stabilize more.

You can learn more about Bitcoins monetary system in our interview with Jimmy Song, “The Complete Case For Bitcoin”.

Gold as a stable store of value

Gold is a precious metal that has captivated the human race for more than 5,000 years due to its scarcity, malleability, luster, and density. Gold has been used throughout history as a currency. Its value comes from its intrinsic properties.

Firstly, gold is not easy to get or mine. The more difficult something is to get, the more valuable it is. Mining is a lucrative industry and countries with vast deposits of gold base their economies on this industry.

The jewelry industry also has a high demand for gold.

But the value of gold could potentially come from investors who hoard the precious metals during downturns. Gold is a safe haven asset, and its price surges whenever investors feel that fiat currencies will be worthless or when global tensions escalate.

The price of gold is based on principles of supply and demand. The higher the demand, the higher the price of gold. It has proven to be a store of value over thousands of years.

Silver as a store of value

Silver plays second fiddle to gold. At some point, governments held reserves of the precious metal as a store of wealth. The US monetary system was initially based on silver before it was moved to the gold standard.

The number of silver reserves held by governments for monetary purposes has significantly dropped. Even investors’ interest in hoarding silver has decreased due to the preferential treatment that gold gets. Silver still remains a stable store of value.

Real estate

One of the greatest achievements you can be proud of as a human is owning a house. Homeownership is a store of value because your house will likely maintain or increase its value over time. This can change if there is a housing bubble or economic depression. However, the housing market, particularly in developed or emerging economies tends to trend higher over a long period of time. Although, a large part of this is due to inflation of fiat currencies.

Fine art

Some people have always wondered why rich people buy expensive art and keep it hidden in their vaults and basements. The value of fine art rises with time. Art collectors with a large collection can either open their own galleries or loan their artwork to galleries.

Conclusion

The term store of value refers to properties that prevent an asset or commodity from losing its value over time. In some cases, the value increases with time. Money is accepted by many to be a stable store of value despite inflation. This is likely due to its use as a medium of exchange. Precious metals and fine art can also be used as a store of value. The big debate is on Bitcoin. Should it be considered to be a stable store of value? Just look at the numbers over time.


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