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Understanding store of value and why crypto is considered as one?

Understanding store of value and why crypto is considered as one?

Understanding store of value and why crypto is considered as one?
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By CNBCTV18.com Jul 25, 2022 10:48:48 PM IST (Published)

A store of value can be any asset or commodity that does not depreciate over time. This item should be worth the same or more, even after several years.

Inflation is a major cause of concern the world over. It can put a serious dent in the value of your savings, even if it is safely tucked away in a fixed deposit. Therefore, it is essential to look for investments that protect your money from the devaluing effect of inflation, and this is where a ‘store of value’ comes in.

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What is a store of value?
A store of value can be any asset or commodity that does not depreciate over time. This item should be worth the same or more, even after several years. Historically, there have been many reliable stores of value, such as precious metals, that often beat inflation, sometimes even increasing in value, despite the worst market conditions.
This has led ordinary people, as well as leading monetary institutions, to put their faith in such stores of value. For example, central banks hold about 35,000 metric tons of gold worldwide, which is one-fifth of the total gold ever mined. Over time, people have discovered many other stores of value, such as diamonds, stocks, and rare art pieces.
The case of cryptos as stores of value
A new asset class that has gained prominence as a store of value is cryptocurrency. The most popular cryptocurrency — Bitcoin — appeared on the monetary scene in 2009. Currently, the value of Bitcoin is hovering around the $23,000-mark, 70 percent lower than its all-time high of $69,000 in November last year.
Despite its volatile nature, Bitcoin is believed to be an unparalleled investment tool and a store of value. Several governments and top corporations have invested in Bitcoin and maintained them on their balance sheet.
And it’s not just Bitcoin. The digital asset class, in general, is being seen as a store of value and a hedge against inflation. Despite the recent tumble in prices, crypto protagonists believe Bitcoin and other altcoins will rebound and offer a high return on their investments.
But what makes these virtual digital assets a store of value? Let’s find out!
Underlying value: Bitcoin and other cryptocurrencies are built on and work through dedicated blockchain networks. These networks are emerging as quite a valuable infrastructure, capable of reimagining and redeploying financial concepts for a new global monetary system. Besides finance, they are also finding use cases in supply chain management, healthcare, real estate, voting and several other industry sectors. Considering their future scope, their future value also seems promising.
Scarcity: Some cryptocurrencies have a limited supply. For instance, the circulating supply of Bitcoin is capped at 21 million coins. This makes it rare and creates growing value. Moreover, cryptocurrencies have divisibility of up to 8 decimal places, as opposed to the 2 of fiat currencies. This makes them easier to use and complements their limited availability.
Fungibility: Fungibility refers to an asset’s interchangeability. Bitcoin and other cryptocurrencies are highly fungible. One bitcoin is identical in value to another bitcoin, making it highly interchangeable. Gold is also relatively fungible, but there is always a chance of impurity, which is hard to test or measure. The same goes for oil and diamonds.
Portability: Cryptocurrencies are highly portable, unlike precious metals like gold. They can be stored in a digital wallet that can be accessed from any part of the world. You can also carry them around in an offline device that’s no larger than a thumb drive. This is not the case for other stores of value, such as diamonds or works of art (unless they are in the form of an NFT).
Security: The entire concept of cryptocurrencies is based on security. Blockchains maintain a high degree of security through robust encryption technology and distributed transaction validation processes. This ensures that, once a transaction is recorded on the blockchain, it cannot be tampered with. Moreover, it ensures that cryptocurrencies cannot be counterfeited — a significant requirement for any store of value.
In conclusion
Cryptocurrencies are relatively very young as an asset class or store of value. Yet, they have shown great promise in retaining value and increasing it for their investors. The early adopters of leading coins such as BTC and ETH have gained thousands of times of return on their investments. Now, some economies and corporations are treating cryptocurrencies as a hedge against inflation and hostile government policies. They all indicate cryptocurrencies as stores of value have come to stay.
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