If you’ve spent any amount of time in the crypto space, it’s probably no secret to you that Bitcoin is the original gangster of cryptocurrencies- the very first and most well known. In a previous post, I outlined that there are seven or so different categories of cryptocurrencies. Have you ever wondered which category Bitcoin falls into? For an example of a store of value crypto, look no further than the original crypto, Bitcoin. Bitcoin has the best chance out of all cryptos of surviving any sort of regulatory storm or coordinated hacking event. Bitcoin is not the only store of value cryptocurrency. Ethereum in its current 1.0 phase is also a store of value cryptocurrency too since it is proof of work, but it will be changing to proof of stake with Ethereum 2.0. By definition, almost all cryptocurrencies are stores of value, some better than others, based on their tokenomics.
All cryptos can act as value stores, some better than others
On Investopedia, a “store of value” is defined as the following: “an asset that maintains its value, rather than depreciating.” That’s it. There’s no mention that it must be a precious metal or a government fiat currency or a piece of art. Only something that does not depreciate. What defines a currency is something that transfers value across time and space. Precious metals are attractive to investors because they have a perpetual shelf life. Gold has been sitting in the Earth’s crust for billions of years until it was mined, and now most of it sits on shelves behind bank vaults. Art has appreciated and held its value incredibly well, but does require upkeep. Both the upkeep of art and the storage of gold carry expenses, sometimes steep expenses. Government fiat currencies around the globe depreciate over time due to inflation targets set by governments and central banks.
Although cryptocurrencies are volatile and have huge depreciation events (sometimes very rapidly), with a long enough time horizon most all of them can be seen as stores of value.
Time horizon matters
After Bitcoin falls 30% in a matter of 48 hours, all of the cryptocurrency bears come out en force on Twitter saying things like “this event should prove once and for all that Bitcoin is not a reliable store of value” and similar negative sentiments. If you look back at the price histories of metals like gold and silver, each had plenty of volatile moments. The reason Bitcoin is still so volatile relative to precious metals is because the market capitalization, or total worth of all Bitcoin, is so much smaller than gold and silver. As of this writing Bitcoin’s market cap is right around $1 trillion while Gold’s cap is north of $10 trillion. In the long run, Bitcoin has never had a three-year period that it hasn’t appreciated in value, with some periods seeing Bitcoin double or triple or more. So if the investor “zooms out” and looks at the big picture, Bitcoin shows itself to be a damn good store of value.
Stock to flow and store of value cryptos
I’ve already forgotten 90% of what I learned during my MBA, but part of the 10% I remember is that when the supply of something decreases, the price of that something increases. Wait, I think I knew that before my MBA? Anyway, what’s important is relative scarcity. An excellent tool that analysts use to predict what the price of a scare asset “should” be is the stock-to-flow model. Store-of-value cryptos can be viewed as scarce assets. The ‘stock’ component is the total amount of something that’s in circulation- be it gold, NBA players, Bitcoin, airplanes, or Chilean Sea Bass. The ‘flow’ component is the rate at which new stock is coming online- the amount of gold physically mined, bitcoin mined, NBA-level players coming out of college, airplanes manufactured or Chilean Sea Bass caught and harvested.
Stock to flow ratio
The total amount of stock to the new stock coming online each year is the stock to flow ratio, and this ratio contributes to the asset’s price in the model. For gold, this ratio is 54- i.e. it will take 54 years of mining at the current rate to double the supply of gold. For bitcoin, the ratio is at a very similar ratio- in the low 50s. When Bitcoin halves in 2024, this figure will double. In 2028, it will halve and double again. Bitcoin’s stock-to-flow ratio will approach infinity as the last few coins are mined- so any spikes in demand after that will likely cause huge spikes in price. When this argument is made, it’s hard to not be bullish on Bitcoin as an asset given there are 8 billion people in the world and there will only ever be 21 million Bitcoin.
If stock to flow holds true, Bitcoin is going to go parabolic
What are those halving events, though? What’s unique about Bitcoin are the halving events that happen once every four years that Satoshi planned at Bitcoin’s inception. What has happened with past halving events? As it turns out, the 4 year ‘market cycle’ that so many crypto YouTubers allude to is based on these halving events. In Bitcoin’s short history, what this has meant is that once a halving event occurs, an 18-month bull market happens followed by a 30-month ‘crypto winter’ or accumulation phase. As you can see in the chart below, the price of Bitcoin and its halving events has followed the stock to flow model pretty closely. Impressive!
The gold-lover’s argument against Bitcoin and why it’s BS
A lot of gold investors have a strong aversion to Bitcoin and crypto- most notably Peter Schiff. Given that Bitcoin more or less directly competes with gold for investor’s attention, this is understandable. Recent trends have shown that increases in Bitcoin’s market cap have been tied to decreases in gold’s market cap, at least a little. Gold advocates argue the ‘historical precedence’ of gold being an object of value throughout history- however, gold has only been valued by humans for around just 5,000 years. Given the human race is over one million years old, that’s not that long. All we really are left with is that we’re social animals and we value whatever we decide to value, regardless of how many people label it “worthless” or “a Ponzi scheme.” The internet is extremely new in the frame of human history. Bitcoin is unique in that it is the first-ever scarce digital object. Everything else on the internet can be multiplied and scaled up massively- i.e. once software is designed, it can be replicated infinitely. But Bitcoin, other cryptos, and NFTs share this same property of being digitally scarce.
Other store of value cryptocurrencies
While we mentioned that Ethereum in its 1.0 form is strictly a store of value cryptocurrency, there are still many others whose primary purpose is to preserve or appreciate the coin’s value with its tokenomics. Bitcoin’s siblings Bitcoin SV and Bitcoin Cash are also SoV cryptos. Other large[r] cap SoV cryptos include Terra, Decred, Maker, and Nano.
Adoption & the future of store of value cryptos
The market has made it clear that there’s an appetite for digital assets, especially Bitcoin. The most important thing about stores of value is that everyone agrees they are stores of value, and Bitcoin, Ethereum & co. have only grown more popular throughout their histories. Currently, nation-states like El Salvador are experimenting with using these coins as legal tender, and only time will tell if they prove useful for that purpose. Nearly everyone agrees that government fiat currencies lose their value over time, so there will always be appetite in the market for cryptos like Bitcoin. Given that only 2% of the world’s population owns or transacts in crypto, I feel lucky given the level of adoption that cryptocurrencies and especially Bitcoin will achieve. The future looks bright!