Bitcoin Long-term: Store of Value
There are some who say that the biggest barrier to mass adoption of bitcoin long-term is price volatility because it limits use as a store of value. Does price volatility really affect bitcoin’s use as a store of value? Let’s look at some basic economics. Store of value is a bitcoin long-term perspective and while it does have an effect on it as a medium of exchange, if you are buying and investing as a store of value – that would be certainly more long-term than a year. How bitcoin has performed in the last year, up about 600%, makes it a very good store of value. Performance over the last three years also, but perhaps not over the last three months. However, that is not what “store of value” means.
Would-be investors have been kicking themselves for well over two years as the price of bitcoin soared to new all-time highs in late 2017, and continues to be a very lucrative investment – unless, of course, you bought in at all-time highs. Investors who bought $100 worth of bitcoin a year starting in July 2010 would have 1,185 BTC worth $2,760,379 today. An investment of $100 per month starting in July 2014 ($4,800) would amount to 9 BTC worth $61,002 today, and same amount starting in July 2016 would be worth $10,649 for a $2,400 investment. Of course, an investor that bought in at all-time highs in December 2017 would have lost money. That’s often the case when one invests without understanding the asset and “fear of missing out” is the driving force.
Getting back to the issue of price volatility, if bitcoin’s resistance to regulation is a feature and not a “bug”, will stability come from the absence of regulation or mass adoption? To answer this, it is important to understand volatility within capital markets and currency markets. Regulators do not control volatility in currency, if anything, regulated markets that do not have enough flexibility and liquidity are even more volatile. This indicates that the small size of bitcoin as a currency is probably the largest contributor to its volatility. Bitcoin is traded on a global scale – unlike most other national currencies in primarily domestic markets – and in a global market, bitcoin is really small at this point in time.
Even for a domestic currency, $100 billion is very small and especially on a global scale. As Bitcoin gets bigger and the market becomes more liquid as it is traded more and used for different purposes versus just speculation, that will reduce volatility. As for bitcoin long-term stability, the more it is used for purchasing or selling, the more companies depend upon it as input, use for payments, or hold inventory – the more the price volatility will be reduced. Currently, Bitcoin is mostly used for speculation on a short-term basis, traded globally in a wide open market. The result is quite volatile, but Bitcoin will become less volatile as it grows.
Bitcoin is not a debt instrument like other currencies or some other cryptocurrencies. When you hold bitcoin, nobody owes bitcoin to another entity or person – it is an asset. Most other systems we use for money are actually debt instruments created through credit. You have a dollar, somebody owes somebody else for that dollar, and is holding a debt. Bitcoin is a very different system than traditional currencies with which we are familiar.
Another huge difference is the lending done through fractional reserve banking with traditional currencies. In other words, the creation of money out of thin air by banks lending $10 for every dollar they hold in deposits that allows them to expand available credit, or inflate the economy by producing more credit. If properly invested, that credit might increase productivity and create returns. But if not, it creates bubbles and inflation in the underlying currency.
While it isn’t known how Bitcoin will change the role debt plays, we do know that it cannot be used for fractional reserve banking. Bitcoin that does not exist or held cannot be loaned. Debt cannot be issued in bitcoin directly. This is not true of other cryptocurrencies with different capability and feature claims. Most are not doing much more than creating another pool of currency being injected into the system, and just inflating the supply of money. Altcoins do not create inflation in Bitcoin’s supply because it is constrained by design – only in the other cryptocurrencies themselves.
There is an assumption that there will be one money, and that it will be mandatory money everyone worldwide must use. Bitcoin is an opt-in, voluntary system that no one has to use. The problem with monetary policies of nations is that you can’t opt-out of using the currency and the policies change at the whim of bureaucrats. There is no choice to pick any monetary policy or currency to use on a day-to-day basis, you can be locked out of a system, your assets can be held hostage, and you have no exit. Bitcoin’s monetary system is relatively unchangeable within Bitcoin – but you don’t have to use it. Bitcoin long-term and short-term is about “choice” and not about replacing central banks with a deflationary monetary system that is imposed on everyone or anyone. Whether or not you think it is a good long-term investment is also a choice.
“Once you have a choice, then your choice of monetary system is the right one for you because you chose it. If nobody else chooses it, that is their problem.” – Andreas Antonopoulos