A store of value is any commodity or asset that normally retains purchasing power into the future and is the function of the asset that can be saved, retrieved, and exchanged at a later time and be predictably useful when retrieved. The purpose of any store of value is to manage risk by ensuring a consistent demand for the underlying asset. Money, currency, or a commodity such as a precious metal or financial capital have been the most common stores of value in modern times. Money is one of the best stores of value due to its liquidity, or the ease with which it can be exchanged for other goods and services. The total of all stores of value, including both monetary and nonmonetary assets, constitutes an individual’s wealth.

Traditionally, as an investor, you would hold a portion of your portfolio in precious metals such as gold. This protects against the losses that stocks can sustain during a downturn in the economy. This has proven to be effective and continues to be so—but a new alternative is posing a threat to this time-honored method of capital preservation. Bitcoin is proving to be an intriguing asset for investors because it has been around long enough to gain recognition and support—it is even exhibiting some trends.

Satoshi Nakamoto, whose true identity is unknown, founded Bitcoin in 2009. According to Satoshi’s Whitepaper, Bitcoin will be the first purely peer-to-peer electronic cash system that does not rely on any financial intermediary. Bitcoin, like gold, has a finite supply. There is a limit of 21 million tokens programmed into the source code, as well as halving events, which reduce the supply of Bitcoin by 50%, ensuring that the final Bitcoin will not be issued until around the year 2140. Through an innovative incentive structure, so-called “miners” compete to solve a math problem and are rewarded in Bitcoin, thereby securing the network and verifying transactions. Both gold and bitcoin are frequently regarded as a means of diversifying a portfolio as well as a hedge against inflation and fiat currency depreciation.

According to the US government, the dollar is backed by “the good faith and credit of the American worker.” That appears to be a meaningful statement—but here’s the catch: The United States has a massive trade deficit. Bitcoin on the other hand is a capped commodity that is determined solely by supply and demand. (This is the same mechanism that drives the price of gold and dollars, but in the case of Bitcoin, the supply is well known and the mechanism cannot be gamed.) Bitcoin replaces trust in a fleeting government with trust in an immutable, transparent, and auditable mechanism. No one needs to rely on a centralized authority or on one another. Instead, we all put our faith in a mathematical process.

During the Covid-19 pandemic, not all investors turned to Bitcoin; many opted for more traditional strategies, such as gold. As a result, the price of gold has risen from just under $1,300 in late 2019 to nearly $2,100 in mid-2020. Its price fell through 2021 as economies gradually recovered, but it remained higher than pre-pandemic recession levels.

The US dollar does not have a redemption guarantee. Politicians in control of the printing press are transitory and lack fiscal prudence.

References

• https://www.investopedia.com/news/should-you-buy-gold-or-bitcoin/
• https://time.com/nextadvisor/investing/cryptocurrency/types-of-cryptocurrency/
• https://www.buybitcoinworldwide.com/bitcoin-price-in-gold/