Storing Your Investments
As the markets take a beating from the bubble getting popped by the Covid-19 outbreak it can make one question to what is the best way to store your investments. With trillions of new fiat dollars being printed and put into circulation it is for certain there will be a backlash of higher inflation coming in the near future. Gold and silver have always been a popular way to store wealth but they have also taken a hit this year. So one could ask themselves if bitcoin is a good store of value. If you would have bought $100 worth of silver in 2009 it would be worth $100 today. If you would have taken that $100 and bought bitcoin, it would be worth an unbelievable $9,000,000 today. But what if you are just now looking into bitcoin as a possible safe haven. is it worth a look?
Bitcoin vs. Fiat
Paper fiat money can be endlessly printed and added into the economy which will boost things for a while but it devalues the dollar. Bitcoin has a limited supply so it cannot be watered down and deflated. It also has never needed a bailout to keep it from failing. It is backed by the people and has no central entity controlling it. Volatility has always been a thorn in the side for bitcoin. The large institutions have a hard time investing in something that can fluctuate in value on an average of 20% in one month.
Right now bitcoin still has a high but declining volatility. That volatility should tail off as it becomes more established and liquidity increases. The same thing happened to gold. Gold had to fight to establish itself as an independent store of wealth in 1971 when president Nixon took the US off the gold standard. It rose 73% until it fell back 24% in 1975. It then rose 121% before losing 1/3 of it’s value in 1981. It is now a mature asset and price swings are more predictable and less intense. As more investors get into the crypto scene bitcoin should follow the path as gold and become an even better place to store wealth.
As the millennials start saving and investing and the digital world becomes a more larger part of our lives, it’s not hard to see bitcoin going from storing around 2% of the wealth of gold to 10% the wealth. This would put the price of bitcoin at around $40,000. If bitcoin continues down the path it’s on at the moment it is easy to say that yes bitcoin is a good store of value.
Bitcoin Stock to Flow Model
The stock to flow model by PlanB treats Bitcoin as being comparable to commodities such as gold, silver, or platinum. These known ‘store of value’ commodities retain value over long timeframes due in part to their relative scarcity. It is hard to significantly increase the supply of these commodities because the process of searching for and then mining gold is costly and time-consuming. Bitcoin is similar in this regard because it is also scarce with a finite number of 21 million coins that will exist. Also, a lot of electricity and computing effort is required to mine the 3 million coins still to be mined. Due to this, the supply rate is consistently low. Stock-to-flow ratios are used to evaluate the current stock of a commodity (total amount currently available) against the flow of new production (amount mined that specific year).