Store of Value, Explained

Have you ever collected coins, art, gems, or even held on to a family heirloom for their value in the future? If yes, you might already be familiar with this concept. A store of value is a term used to describe an asset that can retain its purchasing power as time passes. Unlike certain investments that are subject to depreciation, an asset that is considered a store of value maintains or increases its value overtime. Traditionally, items such as gold, precious metals, and national currencies have been considered the most common stores of value because they are always in demand and can be easily converted. Although, an increasing number of investors are turning towards cryptocurrencies as a store of value because they share these features and more.

What makes a good store of value?

Simply put, a good store of value is any asset or commodity that can be easily retrieved at a later date and converted for the same value or a for a profit. Many assets can be used as a store of value, but there are certain features that make some more practical than others. Ideally, a good store of value should have the following characteristics:

• Scarcity: People place more value on items that are rare and that not many others have. If a certain asset was easily accessible to everyone, it would not hold any value. This is why good stores of value tend to be assets or commodities that are limited. As time goes on, their demand remains stable, or even increases, because the quantity available is always the same. Many cryptocurrencies have a maximum supply, which helps stabilize and increase their value.

• Durability: If you are looking to hold on to the value of an asset in the long run, it must be able to sustain itself during this time. Items that are perishable or that fall apart with age are subject to depreciation and progressively lose their value. Cryptocurrencies can sustain repeated use and maintain their original state over time. The more durable the asset, the longer it can be held as a store of value.

• Fungibility: For an asset to retain its purchasing power, it must be interchangeable against another unit of the same worth. Otherwise, there is a lack of double coincidence of wants, and the asset cannot be exchanged. For example, each unit of ETH can be exchanged for any other unit of ETH.

• Divisibility: A good store of value does not lose its value once divided into smaller units. This allows it to be exchanged for different goods of varying amounts. In other words, divisibility gives an asset broader use within the economy. Fully digital assets like cryptocurrencies are infinitely divisible.

• Portability: In terms of practicality, the asset should be easy to transport and easy to exchange. In this way, it can be adopted more widely and facilitate trade across long distances. Hot wallets can be accessed anywhere by simply connecting to the internet. Though, even if you choose to store your crypto offline, cold wallets are small and light to keep your crypto easily portable.

Is crypto too volatile to be a good store of value?

The short answer is no, not necessarily. Although, this myth is quite common when it comes to cryptocurrency. In fact, most of the world’s Bitcoin is being held by institutions and individual investors as a long-term investment. This strategy is called “hodling” and it is popular among crypto investors that are more concerned with their returns to the future rather than day-to-day volatility. Bitcoin is undeniably volatile, but its history has shown a decline in volatility over the years. Bitcoin’s average 30-day volatility rate decreased from 8.26% in 2011, down to 5.17% in 2020, and 4.56% as of 2021.

Cryptocurrencies are still in the early stages of global adoption, which makes their value more sensitive to external factors. However, the scarcity, growth, utility, and sentiment around cryptocurrencies can be indicators of their success in the future.

Why is Bitcoin considered a store of value?

As the first and most popular cryptocurrency, Bitcoin has been making headlines for its use as a store of value. Often referred to as a “digital gold,” both individual and corporate investors are holding significant amounts of Bitcoin for the long term. Notably, American software company MicroStrategy is currently holding more than $5 billion worth of Bitcoin in reserve for their corporate treasury.

What makes Bitcoin so attractive as a store of value can be condensed into a few factors. Bitcoin’s market cap of 21 million has made it a very scarce resource, and it has only increased in desirability over time. Because it operates on a decentralized network, this supply cannot be inflated, and its value is only driven by factors of supply and demand. Bitcoin is also fungible and can be divided into 100,000,000 Satoshis. It is easily stored and transferred with a stable internet connection, and the past 12 years or so of its existence have proven its durability. All in all, it has all the characteristics of a good store of value.

To see how Bitcoin compares to gold as a store of value, check out our article here.

What other cryptocurrencies can be used as a store of value?

There are thousands of cryptocurrencies on the market that exist for different purposes and have different utilities. With this in mind, there are certainly other cryptocurrencies than Bitcoin that have merit as a store of value dependent on your resources, knowledge, and risk tolerance. More recently, stablecoins like USDC which have their value tied to external assets like currencies or gold, are becoming common stores of value to stabilize portfolios or even hedge against inflation. But as always, it’s important to do your own research and to proceed with caution whenever looking to make an investment.

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