Bitcoin as a Store of Value

Bitcoin as a Store of Value

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Introduction

Bitcoin is seen a store of value due to its potential to become a valuable asset that maintains or increases its value over time. This potential upside is believed to be substantial if bitcoin is widely adopted by both retail and institutional investors as a store of value. However, bitcoin is still relatively new and has a narrow demand base compared to other global stores of wealth like gold. Therefore, there is no guarantee that bitcoin will mature into a long-term store of value, and investing in it can result in a loss.

One of the main criticisms against bitcoin as a store of value is its high volatility, which can make it a speculative investment that involves a high degree of risk. Supply and demand for bitcoin can change rapidly and are affected by various factors, including regulation and economic trends. Predicting market movements of bitcoin can be difficult due to its historical volatility when priced in dollars or other currencies. However, supporters of bitcoin argue that the trajectory of a new asset from negligible awareness and adoption to a global store of value is unlikely to be linear. Moreover, some argue that bitcoin’s volatility can attract more people to conduct research and shift their focus to its long-term value proposition.

Bitcoin’s volatility may remain high due to its inelastic supply and intervention-free market, which means any changes in demand result in price changes. This volatility is fundamental to bitcoin’s fixed supply and value proposition. However, over time, volatility may decrease as narratives converge, demand rises, and institutional platforms and products become more sophisticated. Bitcoin’s potential as a store of value depends on whether investors find its benefits outweigh the costs of storing value in other mediums. The following sections discuss the leading factors investors consider when investing in bitcoin.

What is Bitcoin?

Bitcoin is a decentralized digital currency that operates on a peer-to-peer network. It was created in 2009 by an unknown person or group using the pseudonym Satoshi Nakamoto. Transactions are recorded on a public ledger called the blockchain, which is maintained by a network of computers around the world.

Store of Value: Definition and Characteristics

A store of value is an asset that maintains its purchasing power over time. It is a way to preserve wealth and protect against inflation. To qualify as a store of value, an asset must have certain characteristics, including scarcity, durability, portability, divisibility, and fungibility.

Why Bitcoin Could Be a Store of Value

Bitcoin is a digital currency that boasts several unique properties that make it a potential store of value. Unlike traditional assets, its scarcity and the increasing difficulty of mining for new coins make it more valuable over time. This is a direct result of Bitcoin’s design, which created digital scarcity – a system where no one can create more of something.

The finite supply of Bitcoin is set at 21 million, and this cannot be changed. The rate of new coin issuance decreases over time, creating an increasing scarcity that drives up demand. As more people become aware of Bitcoin’s properties, its value as an asset increases. The self-fulfilling cycle of increasing demand and decreasing supply issuance means that Bitcoin’s value is likely to continue to appreciate over time.

Bitcoin’s design has made it a unique asset in the global landscape. It is not subject to the same physical constraints as traditional stores of value like gold, which has a steady 2% annual supply growth due to global mining efforts. In contrast, Bitcoin’s supply growth rate decreases by half every four years, from 3.6% annual supply growth in 2016 to 0.45% in 2028.

One such feature is its digital scarcity, which is ensured by the fact that every bitcoin follows the same rules and expenditure of computing power. This makes it impossible for anyone to fake a bitcoin or create more out of thin air.

Bitcoin’s monetary policy is also established and enforced through decentralization and proof-of-work mining. The network consists of decentralized full nodes, which independently store and verify transactions. The redundancy of the system means there is no central point of failure.

Proof-of-work mining also makes it prohibitively difficult and expensive for a malicious actor to rewrite or reverse transactions, ensuring their immutability. This is important for establishing trust in the system and preventing fraud.

Bitcoin’s digital nature also means that it can be easily transferred and stored. Unlike physical assets that can be lost or destroyed, Bitcoin can be held in a secure digital wallet that is accessible from anywhere in the world. This makes it a particularly attractive asset for those who value mobility and accessibility..

If you divide 21 million by 8 billion, the result is 0.002625, which means that if every person on Earth wanted to own an equal share of the 21 million total supply of Bitcoin, they would each have approximately 0.002625 Bitcoin.

Bitcoin, being a digital asset, increases the likelihood of investors misplacing or forgetting their purchases. In fact, research shows that up until 2022, around 4 million Bitcoins have been lost due to various reasons such as forgotten passwords and discarded devices.

If there are only 17 million bitcoins available and the world population is roughly 8 billion, that would mean that each person could own only a fraction of a bitcoin. To calculate the exact amount, we would divide 17 million by 8 billion:

17,000,000 / 8,000,000,000 = 0.002125

So, each person could own approximately 0.002125 bitcoin, or about 212,500 satoshis (the smallest unit of bitcoin).

There is no excuse for not buying $100 worth of Bitcoin (0.005 BTC) and securing it, just in case. You spend that much on insurance for an unlikely event, so why not spend it on a likely event?

In the end, you will come to understand that Bitcoin is not simply a means of becoming wealthy. Rather, Bitcoin represents the opportunity to bestow upon future generations a monetary system that will perpetually lower the cost of prosperity.

However, most people won’t do it because understanding Bitcoin means accepting many uncomfortable truths.

Bitcoin vs. Traditional Stores of Value

Bitcoin is often compared to traditional stores of value such as gold, fiat currency, and real estate. While these assets have been used as stores of value for centuries, they also have their limitations. For example gold, global mining efforts contribute approximately 2% annually to the above-ground supply. This consistent 2% growth has remained true for the past century, as new technology has allowed access to previously unreachable deposits. With a total above-ground value of around $12 trillion, the market must absorb approximately $240 billion in new supply every year just to maintain gold’s current price. This continuous supply growth exerts a gravitational force on gold’s valuation, constraining it within the realities of supply and demand. However, it should be noted that paper gold market manipulation by central banks also plays a role.

What sets Bitcoin apart as a potential store-of-value asset and commodity is its unique supply dynamics. Every four years, the amount of new supply added through “mining” is halved, resulting in a decrease in annual supply growth. In 2016, the annual supply growth rate was 3.6%, which has since decreased to 1.8% in 2021. By 2024, this will drop to 0.9%, and in 2028, it will be just 0.45%. This unalterable reduction in supply growth is what makes Bitcoin so different and valuable as a potential store of value asset.

Unlike gold, Bitcoin’s supply growth is pre-determined by its protocol and cannot be altered by any individual or institution. This means that the market must absorb a smaller and smaller amount of new supply every year, leading to a potentially increasing valuation for Bitcoin over time. Additionally, Bitcoin’s supply is not subject to mining and exploration in the same way that gold’s supply is. Instead, Bitcoin’s mining process requires a large amount of energy consumption, which limits the amount of new supply that can be added to the market.

Summary

In summary, Bitcoin’s design of increasing scarcity makes it a unique asset that grows in value over time. While gold is good at storing purchasing power, Bitcoin actually increases purchasing power. The design of the dollar, on the other hand, leads to exponential purchasing power decay due to the continuous printing of money. This makes Bitcoin an excellent savings technology for those seeking to preserve and grow their value over time. As more people become aware of Bitcoin’s properties, demand for it is likely to increase, leading to further appreciation in value. It remains to be seen how much value will be attracted to Bitcoin as a result of its unique properties.

Disclaimer:

Cryptoetf.in is an informational and educational platform for Bitcoin and Blockchain. The information provided on this website is intended for general knowledge purposes only and should not be considered as financial advice. Any opinions expressed on this platform are solely those of the authors and do not reflect the views of any other entities. Investing in cryptocurrencies, blockchain and related technologies carries a high degree of risk and may result in significant financial loss. It is crucial to conduct thorough research and seek advice from a financial professional before making any investment decisions. cryptoetf.in will not be held liable for any losses or damages arising from the use of information provided on this platform. Additionally, while cryptoetf.in strives to provide accurate and up-to-date information, it cannot guarantee the accuracy of information obtained from external sources. cryptoetf.in will not be held responsible for any errors or inaccuracies in the information presented on this platform.

sources

Gold Demand Trends

How Many Bitcoins Have Been Lost?


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