Gold: Store of Value
To qualify as a store of value, an asset must maintain its value without depreciating. Traditionally, gold and other metals have served as good stores of value compared to other assets throughout history. A healthy economy depends on wealth preservation, particularly as related to a new currency or monetary unit. An individual or business’s accumulated labor worth is preserved and exchange is facilitated by money that holds its value. Without a credible currency that is a good store of value, the savings of an economy is compromised and the ability to trade is reduced. To encourage labor and trade, a credible currency must exist.
Throughout history, gold and other precious metals were used as currencies because of their ability to store value. Over time, difficulty transporting and exchanging metals into different currencies resulted in the adoption of the gold standard, in which one could redeem dollars for gold. The gold standard ended in 1971 and fiat currency has been used since. The government declares fiat currency as legal tender, but in reality, it is not backed by a physical commodity. In times of financial crisis, other stores of value like gold, silver, real estate, and fine art consistently hold value while excessively issued fiat currency depreciates.
Bitcoin: Digital Gold
Gold and Bitcoin have some things in common, and Bitcoin was specifically designed to copy some of gold’s unique properties. There is a limited supply of approximately 21 million bitcoins. Mining is becoming more difficult, coins are being hoarded by HODLers, and a Fort Knox-like bunker has been built by Xapo to store Bitcoin private keys.
While some think of Bitcoin is a rival to gold, it is actually an ally and many who do not have faith in paper fiat money are becoming more interested. Bitcoin mimics gold equity-based money versus debt-based money and challenges the fiat regime. More importantly, for the first time in decades Bitcoin is making people think about what fiat money really represents and why it may not be a good store of value in the future. Gold and Bitcoin are having the same influence on how we view money and determine what has value.
Future: Disruption or Disappearance
Bitcoin may be lacking as a form of currency, but it has been a good financial investment. Similar happened with gold, which was once ridiculed for being an unproductive asset by Warren Buffett but has risen in price over time. It is entirely possible we are in the early stages of a disruptive shift in financial technology similar to how the Internet affected many industries. Growing social awareness and increasing adoption of cryptocurrency by Millennials are sure to play a role as Bitcoin’s network effect that powers its growth was never applicable to gold.
Bitcoin and a few altcoins continue to emerge as a powerful innovation being embraced by individual and institutional investors. As the world begins to understand cryptocurrency it is becoming more certain there is room for cash, gold, and bitcoin in the world economy. As for staying power, if one were to measure Bitcoin by its dollar price, it has grown more than 82,000% in the last seven years. According to reports by the Bitcoinist, BTC returns have outperformed Amazon stock (AMZN) over the past seven years. The Bitcoin network has run 24/7 with 99.98% uptime for well over a decade, and its fundamentals are still intact. Ownership of bitcoin continues to increase around the world, and in the US counties and states are starting to accept bitcoin for tax payments.
Investors should feel bullish on bitcoin, because it is here to stay. Just as gold was originally found in a raw, crude form – upon its debut in Jan 2009 there were those who recognized its raw potential and started to mine it. There were also those who started to refine it and one could say that while gold was first mined and then refined – bitcoin is first refined and then mined. Bitcoin that is mined without the same purity standard as that of 99.99% gold is rejected.