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Bitcoin changed the world when it launched in 2009. Its introduction as a digital asset opened the floodgates for many other innovative blockchain technologies that have long defined the crypto ecosystem.
Phrases like “digital gold” and “store of value” are very much associated with the latest Bitcoin price, a function of it being a very reliable store. Bitcoin is often seen as a collector of value, which it has shown over time, giving out a return of 230% on average in the last ten years.
But what exactly sets Bitcoin apart from all the other conventional assets? Here, we discuss the unique characteristics that make Bitcoin a sound store of value. In doing so, we can be better positioned to assess its long-term prospects in a rapidly evolving financial landscape.
Brief History of Bitcoin
To understand why Bitcoin is considered “digital gold,” we need to take a look at what it was intended for when being created. The idea and technology for Bitcoin was created by an anonymous individual or group using the pseudonym ‘Satoshi Nakamoto’ in 2008.
It is claimed that this digital currency was developed in reaction to the worldwide financial crisis of that time, which revealed weaknesses in the conventional banking system, including high-risk behavior, insufficient transparency, and centralization of power.
Satoshi saw Bitcoin as a line of resistance against centralized fiat currency and the institutional influence therein. They suggested an innovative system that utilized blockchain technology to facilitate secure, trustless transactions without intermediaries.
With a fixed supply of 21 million coins, Bitcoin was designed to imitate real gold, ensuring its scarcity and protecting it against inflation which meant that unlike the unlimited printing of fiat currencies, Bitcoin would actually steadily get valuable.
What does a Store of Value Mean?
For assets in general, a store of value means that a particular commodity or currency has the ability to retain its value after being purchased, and this value can be used in exchange for another asset at a later date.
This means that to be a good store of value, an asset over time must remain the same or even appreciate over time. Fiat currency for example is a bad store of value as it is subject to inflation and does not have the necessary scarcity to maintain a steady value long-term.
Bitcoin’s Scarcity
Scarcity is the most important trait of an asset, which is to be regarded as a store of value. Why should a store of value be scarce? That’s simple: for a commodity to store value effectively, it shouldn’t be easy to get or be produced in unlimited quantities.
This is because the supply of an asset is inherently tied to its demand. If the supply of an asset is more than the demand for it, its price falls making it a poor store of value.
Bitcoin has effectively made itself a scarce resource having a fixed supply of 21 million coins, combined with its periodic halving event, the token has been able to limit supply and drive an increase in price anytime there is an equivalent increase in demand.
Fungibility
Cryptocurrency is one of (if not the most) fungible assets available on the market today. For an asset to be fungible, it can be traded or exchanged with other identical goods without any change in value.
This is important for a good store of value to create a stable flow of trade and simplify exchange processes. Diamonds, for example, are not fungible; this is because they come in varying shapes, sizes, and quality, meaning all diamonds are not of the same value.
Because Bitcoin is fungible, holders of the asset can acquire them safely knowing that one Bitcoin will always be exactly the same as another Bitcoin meaning they can easily sell the good in the future to a wide range of buyers.
Storable
The whole essence of a store of value is that it is intended to be held long-term, which means that there has to be a secure way to keep these assets safely. Physical assets like gold and diamonds are harder to safeguard, while they can be stored in vaults of private banks and storage firms; the cost of keeping this valuable is usually quite high and can diminish the future value of your assets.
Bitcoin is far more superior compared to other traditional assets. It is a digital asset, meaning it does not require a vault to lock it away. Anyone can easily create a digital wallet and within a few minutes, purchase and store as much Bitcoin as possible.
Decentralization
The decentralized nature of Bitcoin negates the involvement of intermediaries like banks and governments, and it does provide for direct transactions among its users. Many traditional assets suffer because they are usually held at the mercy of a central authority, even to the point where assets could be forcefully seized.
Rather than depending on central authorities, Bitcoin employs a trust model based on technology. Transactions are validated via the proof-of-work consensus method, guaranteeing precision and deterring fraud. The transparency of the blockchain also enables anyone to review the system.
Decentralization also renders Bitcoin immune to censorship. No individual authority can prevent transactions or halt accounts, allowing users to maintain complete control over their funds, even in unpredictable situations.
Bitcoin as The Future Hedge for Value
Similar to gold, Bitcoin has consistently been perceived positively as a safeguard against the inflation of fiat currency, which will ultimately devalue assets over time. As global challenges such as economic uncertainty, inflation, and changing financial systems arise, Bitcoin has surfaced as an attractive substitute for conventional stores of value.
Although Bitcoin’s fluctuating nature may spark concerns for certain individuals, its rising acceptance, technological underpinnings, and enhanced recognition in worldwide markets highlight its capacity to retain value over time.
As increasing numbers of people, organizations, and governments acknowledge its significance, Bitcoin persists in bolstering its position as a trustworthy store of value and a safeguard against future economic uncertainty.