There’s an opinion that investing in precious metals and other valuables is the safest option possible. They say such investments won’t lose their value over time, and there’s even a pretty good chance they may even increase it. For this reason, people continue investing their money in silver or gold. And such steps do serve a purpose – precious metals actually insure money from crises in traditional markets.
Recently, a completely new type of finance – cryptocurrencies – has emerged. The first one of them became Bitcoin, or ‘digital gold’ as it is also called. After it appeared, people started to argue whether this tool was profitable enough for investments. And while some of them claim ‘yes’, other experts aren’t ready to get away from traditional beliefs. Let’s also get involved in this dispute to find out who is right.
A store of value is assets that may retain its price at a steadily high level for a long time. It’s perfect when it only rises in price over time. If the cost of the asset under consideration is falling, it is a bad choice to keep your savings in. In other words, despite the overall market situation, a store of value must remain as valuable as it was.
Reasoning what kind of asset to choose as a store of value, usually, gemstones, metals, and real estate are the things that spring to mind first. Nevertheless, they are still dependent on market fluctuations, although it’s not as noticeable in the long-term perspective. Bitcoin completely changed a way of thinking about investing, having skyrocketed its price a thousand times within several years. Now it’s no wonder that its alternative name is ‘digital gold’.
To understand how to choose a quality store of value, one should first find out what is going to be if it is chosen wrong. Believe us: you will surely not like the consequences of a failed decision.
People stored their valuables in shells before, and now many believe that the best store of value is some fiat currencies, such as dollars and euros. The main point is that these fiat currencies remain valuable for a long time. But think of the financial crises of previous years. How many people lost their funds due to insolvency of that or another currency. The thing is that the relative cost of money falls significantly when more units of some currency appear in the market. So even having collected large savings, it’s required to be ready that in the ten-year time one can, if not lose the purchasing power, then reduce it significantly. Of course, it refers not to all currencies, so specialists recommend making savings in different currencies. In this case, the critical situation in the market will not affect your assets that much.
If you don’t believe it, let’s draw a comparison. Imagine that you had 100’000 dollars in the year 2000. Using that money, you would be able to buy a house and a pretty good car as well as to live for some time. Today, a sum like that doesn’t seem that big. Well, at least, one cannot afford so many things for it. The reason is inflation in relation to prices on goods and services. Governments usually print more money than is actually needed; that’s why the cost of the money decreases over time.
Since there is more money in circulation compared to the moment of investment, your general purchasing power has dropped significantly even though the number of accumulated funds didn’t change. The production of fiat money isn’t expensive because it’s easy to overfill the market. And when it comes to overfilling the market, a good store of value differs in this regard: it is either impossible or too difficult to do it. An investor’s share isn’t diluted with extra infusions and doesn’t lose its purchasing power.
We can take the most actual option of a store of value – gold. Its amount is limited since gold mining is a demanding and labor-intensive process. Besides, the amount of it on Earth isn’t that immense. If the demand for gold increases dramatically for some reason, it will be way too difficult to meet it. That is why the cost of this metal is always high and will only grow in price. And it means that investing in it is profitable.
The second name of bitcoin is digital gold. A nickname like that was given right after its appearance in the market, and the name only proved its truthfulness over time. Today bitcoin is believed to be one of the most reliable assets. Supporters of digital currency claim that bitcoin has everything required to be considered a store of value, which will increase its cost instead of depreciating over time.
The critics say that the volatility of bitcoin is too high; for this reason, the asset, which can lose up to 20% of its cost within 24 hours and then bring it back, isn’t appropriate enough to store money. But as a long-term perspective has shown, bitcoin is a profitable asset, even considering such leaps. Let us find out in more detail why it is so successful.
The number of bitcoins is limited – only 21 million coins are available. Their number will not increase as the protocol doesn’t allow the creation of additional coins. It’s possible to get the coins by mining them. Mining is a process of solving cryptographic tasks with the use of complicated equipment. Thus, miners form the chains consisting of blocks and are rewarded with bitcoins – the blockchain currency – for these actions.
Initially, miners could mine bitcoin using a simple PC and receive a huge remuneration (25 BTC), but after having reached a specific value in the system, the halving took place. This term implies that the reward will be decreased twice. So, if after the first halving, miners received 12,5 BTC for the creation of a block, in 2020, the number is only 6.25 BTC. According to calculations, this process should stretch out for a hundred years and will end only when the last coin is mined. Mined coins are added to circulation, but the mining process is gradually becoming more demanding; that’s why the supply is always falling and will never exceed the specified limit of 21 million.
Let’s consider an example. If you have 20% out of all bitcoins that were or are to be released, you will have the same number of coins even in decades. Cryptocurrency isn’t controlled by any government that can complement the absolute maximum. For this reason, holders will not have such problems as it happens with fiat money, the amount of which is only rising.
The bitcoin software is open source: it can be copied, modified, and launched again. A node will start working, but it’s already invisible for a network, and the rest of the nodes are not connected to it. Thus, the launched program is a fork, not a part of the initial bitcoin network. In fact, that is a copy, which doesn’t have the value of the original. If we draw a comparison with photography of a well-known picture: it features the same object, but it’s not a work of art.
Cryptocurrency does not have a single management center. The bitcoin network consists of numerous users who launch the software on their devices. Computer hardware becomes a full-fledged participant of the network and takes part in its support. To change a protocol, it’s required to get the consent of the majority of users.
It becomes more and more difficult to amend changes to the protocol with each year since that is how new coins are mined, which entails the possible loss of value of old coins. So, to reach a consensus, more and more powerful equipment is required, and the tasks are becoming only harder.
The larger the network is, the more difficult it is to amend it. That is why the process of mining may take a hundred years or even longer. But due to this fact, one may not worry that the general supply will blow up and holders will lose their savings. Specialists claim that bitcoin acts not as a fiat currency but as a natural resource. That is where a pretty good comparison to digital gold comes from.
Bitcoin is the currency with the same characteristics as other currencies, which were in value in the market for ages, have. For example, the same gold. At the same time, bitcoin is a scarce resource, which is rapidly and steadily gaining value. So, there is no wonder it received a status of ‘good money’.
Since it is digital gold, bitcoin possesses almost all qualities of the described precious metal. The only difference is that one can’t hold it in hands and admire its shiny look because that is a virtual, not a physical resource. However, it’s long-lasting and scarce. Besides that, it has other significant features too: separability, portability, and fungibility. These are the qualities we are going to cover next.
This term means that all bitcoins are as like as two peas and may replace each other. Gold, stocks, and fiat funds have similar parameters. For example, if we take two stocks of the same holding, their price will be identical. Thus, if you want to sell stocks, you can take any of them, and it won’t be different from the ‘relative’ ones.
But in the case with bitcoins, everything is a bit more complicated. Surely, in most situations, 1 BTC is really equal to 1 BTC, but only if you don’t consider these monetary units in proportion to transactions. For instance, if coins are received illegally (as a result of criminal activity), they will not be taken in and will be added to a blacklist. And it doesn’t matter that these coins were received by a holder after the criminal-related actions.
It’s not easy for a regular person to understand all the difficulty of the situation if he dealt only with fiat money before. It’s almost impossible to track dollars, while you can easily do it with bitcoin. All the network is the full history of transactions, so if your bitcoin was engaged in illegal deals several transactions ago, there is a risk it will be blacklisted.
For this reason, bitcoins that have been in the market for a long time and have a long history of transactions may be sold cheaper. While recently mined coins will be valued better because they carry minimal risks. But that is only a possible option of how things can go, which may never come. Currently, bitcoins are equal to each other, and the number of cases when assets were frozen is low enough to cause any concerns.
Under the term portability, we imply how easy it is to transport an asset. If paper money can be easily moved from one place to another, oil transportation may be a real challenge. If a store of value could be used for keeping savings, it must have a convenient form to transfer.
‘Form factor’, or material representation of the store of value is vital, and gold does have a lot of advantages in this regard. Gold as a material is used to make coins, jewelry, works of art. A standard gold coin costs about 1,5 thousand dollars, but it’s unlikely that a regular person will spend such a sum within a day. It’s way more convenient to use smaller values for everyday purchases.
Of course, gold is an excellent means of money storage, but if we talk about portability, bitcoin markedly wins. The reason is in the virtuality of the asset under consideration. In short, to perform an operation with the use of bitcoin, you don’t need to interact with it physically. A wealth of billions of dollars may be saved at an ordinary flash drive or a cryptocurrency wallet. Even a safe is not necessary: it’s enough to come up with a complex password.
It won’t also be a problem to transfer bitcoins – transactions are made in a digital environment. And if anybody needs to relocate gold that costs billions of dollars, he will need to think about how to transport several tons of gold bullions. Even if the method is found, the procedure will cost a fortune, while you can transfer bitcoins at an extremely cheap price, yet with a high level of security.
That is one more quality of bitcoin. It is divided into small parts – Satoshi. One bitcoin contains 100 million Satoshi, so even though the price of bitcoin is immense, the price of one Satoshi is tiny. Such a division allows users to make transactions even for insignificant sums of money. And it will remain so for a long time, although bitcoins are significantly growing in price. The system supports transfers of sums having eight signs after the comma.
If you invest in bitcoin, such a division allows making small investments in Satoshi, even if you can’t afford to buy a whole bitcoin. And such a division does not always work with gold. Surely, one can cut the coin into several parts and even get pretty good money for them. But firstly, this work requires effort, and secondly, due to the fact the coin, in its essence, is an undivided element, its cost may drop as a result of such damage.
Today there’s a popular opinion that bitcoin is only a means to transfer money from one point to another. Before bitcoin receives a role of a complete payment currency, it needs to pass several important stages. Meantime, the first cryptocurrency cannot be used as a payment tool. The most common statement is that currently, the cryptocurrency is on the stage of collectible novelty.
Initially, this unit was accepted only by a small group of enthusiasts. But thanks to them, cryptocurrency started to be used as an asset with a high level of functionality and safety. Some time later, amateurs also joined crypto holders, and when the asset started demonstrating high volatility, even speculators began working with it.
Today are witnessing a transition stage between the described above and the next one – where the technology will be used as a store of value. To make it possible, there are several steps to be done:
But many users think that bitcoin can already be used for the storage of money. And that is even though Gresham’s law is applied to it. In other words, the least convenient, effective, and simple in use money displaces the best offers. If people are offered two options of the currency – a bad and a good one, then according to this law, the bad currency will be spent while the good currency will be accumulated. That is how it happened with bitcoin: the first currency is held by users because they believe it will not only save its cost but will also increase it.
In case of further growth of the bitcoin network, the number of users will grow too, which will lead to the growth of liquidity of this financial unit. It means that the system will become more stable. And when the system stabilizes, the need to hold the cryptocurrency will no longer be necessary, so the movements in the market will be more active. That is where bitcoin will transfer to the stage of being a means of exchange. And the coins will be more actively used in payment operations.
When the number of users increases even more, and they start actively using bitcoins in everyday operations, then this cryptocurrency will step into another important stage of life: it will become a full-fledged calculation unit. At this stage, it will be possible to assess the cost of other assets using bitcoins. If this scheme actually works out, bitcoin will likely be able to displace most modern currencies.
The previous section may seem both a look at the future and a completely fabulous course of events. To consider the situation fully, let us also review the criticism of the idea.
Satoshi Nakamoto developed bitcoin as a digital currency working in a peer-to-peer system. That is how everything is indicated in the whitepaper. This format implies that bitcoin gains its value from the use. Particularly, with the help of it, the purchases are executed, and exchange operations are made in a pair with bitcoin. For this reason, if you accumulate this crypto, you will only harm your savings. The main supply of bitcoin will be defined not by market conditions but by speculations of individuals.
Of course, the disputes between holders and active users of the network can be called ideological, but they were the reason the network experienced an actual split in 2017. The essence of the problem was that some users wanted to get a system with large blocks to further decrease the cost of transactions. The original network was heavily loaded, which increased the cost of transactions. As a result, small transactions stopped being profitable. What’s the reason to buy something for $2 if you have to pay all $10 for a transaction?
To solve the problem, Bitcoin Cash was created – a fork of the original system. But the original system also began a massive update – SegWit. Thanks to the update, the nominal bandwidth of the blocks has increased. In addition, the concept of the Lightning Network was developed, thanks to which transactions with low commissions moved to off-chain. However, currently, the Lightning Network is just a prototype that does not feature a perfect concept. Let’s start with the fact that it is much more difficult to use such a system because such methods of simplifying the process are only being discovered.
Since places in a block are popular, if you want your operation to be processed faster when the network is loaded, you will need to pay more. So, one more critical factor is the lack of a well-designed algorithm of the block growth when the system requires that. That is why the use of bitcoin as a currency for banking operations is now under serious doubt.
Gold lost some of its influence after the gold standard had been offset. But this metal still takes a leading place in the list of stores of value. It affected the formation of civilization; that is why many are annoyed by its comparison with bitcoin, which appeared only a few years ago. Moreover, bitcoin does not have any material support, and it also significantly belittles it against the main symbol of status and wealth.
Bitcoin is completely useless outside the limits of its network, while a gold bullion can be melted down into beautiful jewelry. Bitcoin emulates gold, but it cannot become one since it is exclusively a digital asset with a very dubious value. But the same refers to dollars and other paper money. In fact, these are beautifully drawn papers. But the government says they have value, and we believe that.
And of course, bitcoin is not such a popular asset. Many do not even know what it is, while everyone knows about gold or even dollars. Bitcoins are simply lost against the background of other values.
People who got bitcoins when this digital currency was just gaining momentum are happy to see how much it costs now. But what about people who invested in bitcoin when it was at the peak of the price, and sold it when the cryptocurrency began to fall in cost? Surely, they are not too happy about the losses. And considering that bitcoin had several such ups and downs, there are a lot of people who lost their money.
Bitcoin refers to highly volatile units. Its price can rise greatly and fall several times a day. If we compare it to gold and standard currencies, it’s similar to light waves and tsunamis. Such high volatility scares away potential investors because now you can invest a lot of money in bitcoin, and after some time, most of the invested sum will burn out. That’s why it’s still early to tell about bitcoin as a method to store money. However, there’s an opinion that fluctuations in the cryptocurrency market will still stabilize.
So, it’s early to make any conclusions as bitcoin hasn’t shown its relation to the traditional market. It will be possible to see how promising this digital currency will be only after all popular today saving units face crisis, and bitcoin will remain comparatively stable. And while cryptocurrencies remain in the phase of growth, we can’t make objective conclusions.
Both cases attracted many investors. People bought goods that were considered rare to further resell them and earn on the price difference. But the catch was that the purchased goods were simple to make and didn’t have much value. Just think to yourself, the thing is about tulips and soft toys!
It was a soap bubble, which had to pop sooner or later. It happened when investors realized they were greatly overpaying for products that no one would buy at an increased price. The market, where tulips and toys were sold, collapsed, so investors suffered losses.
But the price of bitcoin depends on users, and it’s impossible to increase the number of coins, which distinguishes it from both tulips and stuffed toys. Although, it may still become overvalued.
We truly can draw many comparisons between bitcoin and gold. For example, bitcoin emission is limited, the network is decentralized, holders are protected, and funds can be transmitted and used. But there is still no clear guarantee that bitcoin will become an asset-shelter. Probably, this cryptocurrency will be actively used, but it may also happen that it will remain exotic for individuals. Only time will show.