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Is Bitcoin replacing gold, oil to become 'Store of Value' of the digital age?

Is Bitcoin replacing gold, oil to become 'Store of Value' of the digital age?

Historically, people have converted their fiat to gold and recently to oil to escape the woes of inflation. But the recent crisis between Russia and Ukraine hints that the world might be ready for a new "store of value".

Bitcoin, despite not having any practical applications like gold or oil, has intrinsically emerged as a store of value due to its durability and scarcity. Bitcoin, despite not having any practical applications like gold or oil, has intrinsically emerged as a store of value due to its durability and scarcity.

Store of value is an asset class that does not lose its value over time like fiat, which is relatively volatile. Fiat currency is convenient as a daily medium of exchange and a medium of preserving short-term liquidity but it does not retain its value well over time.

Fiat rapidly loses value during normal episodes of inflation. Episodes of hyperinflation across monetary systems worldwide, for example in Zimbabwe, Venezuela, erstwhile Yugoslavia, etc. are worst-case scenarios of fiat plummeting in value.

To counter the effect of inflation, people invest their money in assets like stocks, bonds, real estate, etc. that are expected to appreciate in value or maintain their worth over time.

Despite their superiority to cash, these investment vehicles have boom and bust cycles. To compound matters, their price movements are interrelated - meaning that market conditions affecting one would almost certainly affect the others.

As a result, an asset that is immune to market fluctuations is critical. Gold has been the world's major store of value for thousands of years because investors are convinced that their wealth will preserve its worth over time. Gold has preserved its worth throughout history as a hedge against uncertain times. Durability, rarity, mobility, and convertibility - as well as emotional appeal, are some of the reasons that have helped outlast several monetary systems and stand the test of time.

Moreover, the supply of gold is limited, consistent, and predictable. As a result, gold's correlation with other asset classes, such as equities and real estate, is very low.

(Credit: Mohsin Shaikh)

Not just individual investors, but even governments recognise the store of value of gold. Numerous countries throughout modern history had embraced the gold standard monetary system. The term "gold standard" refers to the monetary system in which the value of paper money is guaranteed by gold held by the government.

While this method is successful at combating inflation and deflation, it restricted the governments' capacity to generate cash freely. By 1973, the US government abandoned the gold standard and eventually, the US dollar became the world reserve currency, with many worldwide currencies tethered to it rather than to gold.

Oil has also emerged as a store of value. Its scarcity makes it an excellent store of value. Despite the slump in global markets caused by the ongoing war between Russia and Ukraine, oil prices have been on the rise hinting towards the fact that countries are swapping their fiat for oil to ensure that its value can be sustained over time.

Another asset has come up as a store of value in this digital age. Civilians from Ukraine as well as Russia have been swapping their domestic fiat for Bitcoin and other cryptocurrencies to hedge against the rapid inflation caused by the war. It seems like Bitcoin could dethrone gold and oil as the preeminent store of value. 

As per a recent report from Goldman Sachs, there is a distinct possibility of Bitcoin taking away the market share of gold by 2022 as digital assets become more widely adopted. Citing Bitcoin's $700 billion market capitalisation, compared to the around $2.6 trillion worth of gold owned as an investment, Goldman Sachs report argues that the cryptocurrency currently has a 20 per cent share of the "store of value" market.

In its list of predictions, the global investment giant pegs Bitcoin as an asset class "most likely" to become bigger over time.

In fact, despite equity markets plumetting due to the ongoing conflict between Russia and Europe, Bitcoin showed a rally of 25 per cent in the last month. 

But what is in Bitcoin that makes it so attractive?

Bitcoin, despite not having any practical applications like gold or oil, has intrinsically emerged as a store of value due to its durability and scarcity. Bitcoin's total supply is capped at 21 million, and it will never exceed that figure.
 
Additionally, Bitcoin is a decentralised digital asset that works independently of central banks or governments, owing to the existence of a global network of nodes and miners. This provides some measure of privacy to Bitcoin users while simultaneously increasing the currency's security.

A desirable store of value should also serve as a medium of trade, allowing it to be converted as needed. Bitcoin is exchangeable due to its fungibility, portability, divisibility, and widespread adoption.

Following are the arguments that prove Bitcoin is a better store of value than gold or oil.

Scarcity

Gold and Oil are significantly scarce. Their extraction is costly and labor-intensive. As a result, increasing their supply is not easy. 

However, Bitcoin is scarcer than gold and oil . There will never be more than 21,000,000 Bitcoins, and none will be mined after the year 2140. 

Fungibility

Fungibility is a term that refers to the property of being interchangeable and is a trait of a good store of value. Gold and oil are generally fungible but they may contain impurities that reduce their fungibility. It is not easy to test their purity by an individual without sophisticated tools.

In contrast, Bitcoin is always fungible. A single Bitcoin is identical to another and, more crucially, cannot be counterfeited. 

Divisibility

A store of value should be easily divided into smaller parts to facilitate more precise value transfer. Gold and oil significantly lack this property.

Bitcoin, on the other hand, is literally infinitely divisible. 

Storage 

When comparing Bitcoin to other stores of value like gold and oil, storage is an important factor. Storage of oil and gold requires a physical place, tight security, etc.

By comparison, Bitcoin has no such requirements. Bitcoin, regardless of its worth, can be saved on a flash drive or even online and accessed from anywhere in the globe with an Internet connection. 

Portability

Portability is also an important factor when it comes to a store of value. Transportation of gold and oil is a time and resource-consuming process whereas Bitcoin transfers are quick and affordable.

It seems like Bitcoin is emerging as the store of value of the new world but it is noteworthy to mention that many regulatory issues surround the acceptance of Bitcoin and only time will tell how this pans out.

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