Understanding store of value and why crypto is considered one?

Inflation is a major cause of concern worldwide. It can put a serious dent in the value of your savings, even if it’s safely tucked away in a fixed deposit. That’s why it’s important to look for investments that protect your money from the devaluing effects of inflation, and that’s where a “store of value” comes in.

What is a value store?

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 to ordinary people, as well as leading financial institutions, putting their trust in such stores of value. For example, central banks hold around 35,000 tons of gold worldwide, which is a fifth of the total gold ever mined. Over time, people have discovered many other stores of value, such as diamonds, stocks and rare works of art.

The case of crypto as a store 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 hovers around the $23,000 mark, 70 percent lower than its all-time high of $69,000 last November.

Despite its volatile nature, Bitcoin is believed to be an outstanding investment tool and store of value. Several governments and top companies have invested in Bitcoin and maintained them on the balance sheet.

And it’s not just Bitcoin. The digital asset class is generally seen as a store of value and a hedge against inflation. Despite the recent price drop, crypto majors believe that Bitcoin and other altcoins will bounce back and provide high returns 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 operate through dedicated blockchain networks. These networks appear as quite a valuable infrastructure, capable of reimagining and redistributing economic concepts for a new global monetary system. In addition to finance, they also find 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 example, the circulating supply of Bitcoin is limited to 21 million coins. This makes it rare and creates increasing value. Also, cryptocurrencies have divisibility of up to 8 decimal places, as opposed to 2 of fiat currencies. This makes them easier to use and complements their limited availability.

Swingability: Fungibility refers to the replaceability of an asset. Bitcoin and other cryptocurrencies are highly fungible. A bitcoin is identical in value to another bitcoin, making it highly fungible. Gold is also relatively fungible, but there is always a chance of impurities, which is difficult to test or measure. The same applies to oil and diamonds.

Portability: Cryptocurrencies are highly portable, unlike precious metals such as 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 on an offline device no bigger than a memory stick. This is not the case for other stores of value, such as diamonds or artwork (unless they are in the form of an NFT).

Safety: The whole 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.

To conclude

Cryptocurrencies are relatively young as an asset class or store of value. Nevertheless, they have shown great promise when it comes to retaining value and increasing it for their investors. The early adopters of leading coins like BTC and ETH have seen thousands of times the return on their investments. Now, some economies and companies treat cryptocurrencies as a hedge against inflation and hostile government policies. They indicate all cryptocurrencies as stores of value are here to stay.