Bitcoin: Store of Value?
Bitcoin is useful as a medium of exchange, a game changer when it comes to international money transfer and arguably works better than any other asset as a store of value. As the Lightning network grows, an increasing number of payments, especially those for online purchases, are likely to be done with bitcoin. The expensive fees and delays associated with international bank transfers also mean that Bitcoin, with its insignificant fees and hassle-free transactions, is poised to become the medium of choice for cross-border transactions. There are other use cases of Bitcoin including its use as an investment instrument. I will, however, in this post, delve into the store of value use case and why bitcoin is perfectly suited for it.
Before Bitcoin, Nothing was Truly Limited in Supply
In his book, “The Bitcoin Standard: A Decentralized Alternative to Central Banking”, Saifedean Ammous, argued that with the exception the of time and effort expended by human resource, no resource has truly been scarce. This assertion was backed by the use of gold and oil as examples. The supply of these seemingly scarce resources has increased over time due to improved technology and more inputs in terms of human time and effort. As a result. prices of such resources have gotten lower over the last couple of decades. Basically, as humans invest more time and use technology to find more of such resources, their supply increases.
The fact that the supply of virtually every resource on earth can be increased when humans invest time to find more means that the supply of every resource chosen as a store of value will eventually be increased in a similar fashion. This has actually been the case with every metal used for this purpose. Ammous admitted that gold was okay as a store of value until governments took control and eventually replaced it with fiat currencies.
Bitcoin VS Other Stores of Value
Thanks to Satoshi Nakamoto, the advent of Bitcoin gave the world an asset that is truly limited in supply for the first time. The 21 million cap on bitcoin means there would never be more than 21 million units of bitcoin in existence. The miners who verify transactions on the network would be rewarded with fees in bitcoin instead of newly minted bitcoins after the 21 million cap is reached.
Other stores of value do not perform the function better than bitcoin due to similar reasons. As explained earlier, the supply of resources like gold continues to rise due to the use of improved technology in mining them. The slim possibility of scientists coming out with a cheap way of replicating the chemical composition of gold can also not be ruled out. The door to an entirely new supply of such precious metals could also be opened if they are found on other planets.
The finite supply of bitcoin is, however, expected to remain the same. The Cryptocurrency is even more scarce when coins lost for every due to missing private keys are taken into consideration.
An additional advantage is that, unlike gold, silver and copper bitcoins are easily divisible and transferable.
What if the 21 Million Cap is Removed in the Future?
This sounds like a matter of making changes to the bitcoin code. It is common for different groups in the bitcoin community to have different ideas with respect to the future of the technology. The idea of a group within the community opting for an increase or removal of the 21 million cap in the future is also not far-fetched. It is, however, not as easy as it sounds.
It would take a great deal of effort and consensus to change a key feature like the finite supply of bitcoin. Since the finite supply contributes greatly to the scarcity and the value of the currency, it is unlikely for users to support its removal because such a change in the protocol would be against their interests. This is an example of how the bitcoin incentive system motivates all stakeholders to desist from actions that are detrimental to the network.
Several forks of bitcoin were created in the latter part of 2017 due to disagreements as well as preferences for different features. If the poor performances of the various forks are anything to go by, it is safe to say that it is unlikely that any group of individuals would invest time and effort in creating another major split in the network.
Doesn’t the Existence of other Cryptocurrencies Defeat the Scarcity Argument?
It is true that the over 2000 existing cryptocurrencies and tokens reduce bitcoin’s dominance and percentage of the total cryptocurrency market cap. This, however, has nothing to do with the scarcity and finite supply of bitcoin. In a previous blog post titled, “Making a Bitcoin Maximalist”, I explained that bitcoin is the most trusted and secure cryptocurrency with multiple use cases. Bitcoin also has the potential to host applications that can perform functions most cryptocurrencies were created to perform. This could leave the majority of the cryptocurrencies without a unique use case and users since Bitcoin’s secure nature and network effect would make it the first choice for potential users.
As a matter of fact, most of the cryptocurrency projects are barely surviving in the current bear market with the majority having over 90% of their value and others virtually abandoned by users.
Regardless of the proliferation of cryptocurrencies, the fact that there would be no more than 21 million bitcoins, makes bitcoin a truly scarce asset. On the other hand, the supply of assets that can be used as stores of value can be increased whenever human resources put in the time to do so. The combination of these factors potentially makes bitcoin the best medium for storing wealth today.