What Is a Store of Value (SoV)?
Store of value refers to an asset that can retain its worth or purchasing power over time.
A store of value item can be a physical asset like real estate, commodities, currencies, and fine art, or digital assets like certain cryptocurrencies. These items preserve their wealth and are considerably immune to inflation.
Store of Value Explained: Beating Inflation
In order to understand the definition of a store of value, we need to understand what is inflation.
Inflation is the loss of purchasing power of an asset due to the gradual increase in prices of goods and services. It is measured by calculating the rate of change in prices of goods and services over one period to another, typically on a month-on-month basis and on a year-on-year basis. The inflation rate is expressed in percentage terms.
For example, when the price of milk increases from $10 in 2022 to $15 in 2023, the annual inflation rate of milk is said to be 50%. Not only does this mean that the price of milk has increased by 50%, but it also indicates that the purchasing power of the fiat currency has reduced. In this case, a $100 bill can only afford 6.66 bottles of milk in 2023 compared to 10 bottles of milk in 2022.
Governments and agencies generally measure the inflation rate in a country by taking into account a broad range of consumers’ expenditures, including food, fuel, healthcare, cars, entertainment, and more.
The value of an asset must appreciate more than or equal to the inflation rate over time in order to be considered a store of value.
Old and New Stores of Value
Gold is synonymous with a store of value. The precious metal has been used in jewelry and as a medium of exchange for centuries. Gold’s limited supply, universal acceptability, liquidity, portability, and historical symbolism have culminated in its status as a store of value.
Gold has maintained its rate of exchange with other goods and services over decades. Even though the price of gold fluctuates depending on macroeconomic conditions, the precious metal has retained its historic purchasing power with other commodities and products in the long run.
Bockchain technology has given birth to a new asset that is considered by many as a store of value. Bitcoin is a cryptocurrency that is often referred to as “digital gold” due to the similar properties it shares with the precious metal.
- Bitcoin is limited in supply. Only 21 million bitcoins can ever exist.
- Bitcoin is portable. A user only needs an internet connection to access their bitcoins send and receive bitcoins.
- Bitcoin is a liquid asset. The 24-hour trading volume of bitcoin stood at over $13.5 billion at the time of writing, according to CoinMarketCap.
- Bitcoin is becoming more acceptable with time. A survey by Morning Consult showed that nearly a third of the U.S. population plans to buy, sell, or trade cryptocurrency in 2023.
Flaws in the Fiat System
Of all the properties mentioned above, Bitcoin’s limited supply has been highlighted time and time again to advocate its store of value status.
In contrast, fiat currencies like the US dollar, Euro, and Yen have unlimited supply. These currencies are issued by government-controlled central banks with the ability to print as much money as required. The amount of fiat currency printed depends on numerous factors, including the fiscal budget, government policies, and more.
With governments practically having a free hand at printing money, an oversupply of fiat currency is not rare, leading to a decrease in its value. After all, the basic principles of economics suggest that scarce items are more valuable than abundant ones.
Thus the purchasing power or the value of fiat currencies like the US dollar has decreased drastically over the last century. As more paper currency was added to the economy, the demand for products and services increased, and as demand grew, so did the prices.
According to Visual Capitalist, a dollar could get you a ticket to a drive-in movie theatre in 1964. By 2008, the purchasing power of a dollar was reduced to two lemons.
Bitcoin Mining, Halving, and Hard Cap
- Bitcoin is designed by default to support its value over time. Let’s first talk about bitcoin’s hard cap, which refers to bitcoin’s limited supply of 21 million coins. Unlike fiat currencies, bitcoins cannot be produced according to the will of governments and individuals.
- New bitcoins are only minted when a crypto miner creates a new block. The mining industry is a highly competitive one where miners expend electricity and invest in expensive hardware to win the chance to create new blocks for which they are rewarded newly minted bitcoins.
- Lastly, bitcoin’s inflation rate is kept in check by a mechanism known as halving. Roughly every four years, the bitcoin network undergoes an event where the number of newly minted bitcoins is reduced by half.
- At the time of writing, 6.25 new bitcoins are minted with every block. This figure is expected to be halved to 3.125 bitcoins in 2024 during the next halving event.
- Halving events will continue until the number of bitcoins created is reduced to zero. This anti-inflationary mechanism is the key reason why Bitcoin is considered to be a store of value.
The concept of bitcoin as a store of value is a fairly new one. While bitcoin’s in-built mechanisms do support the declarations of it being a store of value, the digital asset still suffers from high market volatility that makes many nervous about depending on it for wealth preservation.
Bitcoin still remains a long way from challenging gold as the go-to store of value assets.