Wednesday, July 11, 2012

Is Store of Value enough?

I'm still deep down the Bitcoin rabbit hole, and I've been thinking about its "store of value" and "means of exchange" properties.

I wonder: if Bitcoin is used as just a store of value and nothing more, could that be enough?

Imagine it is years in the future, when the generation of new bitcoins has slowed to a trickle.

As a pure store of value, bitcoins would function as I-owe-you tokens. People who wanted to store value would buy bitcoins from people who were done using them to store value and needed some cash to buy something.

The value of a bitcoin would be a function of how many people wanted to store versus spend. If everybody decided at once they wanted to spend their money instead of saving it they would find no buyers and the price would drop to zero.

If lots of people had lots of extra money that they wanted to store (and they decided bitcoins were a good place to store it) the price of bitcoin would go up.

I'm not an economist, but I would guess that the desire for a good place to store value is pretty steady. I base that on the recent behavior of US Treasuries; people want a safe place to park their money so much that they have actually driven the inflation-adjusted interest rate on many Treasuries negative ("investors" are paying the US government to hold their money for them).

Bitcoins are a pretty darn good store of value; they don't take up any space, you can back them up, you can protect them with a password, you can split them up and store them in a lot of different places, and when you want to spend them you can do it from the comfort of your barcalounger using your cell phone.

You can even store them in your brain if you want (my brain is too flaky, I try not to store valuable things in there).

I can imagine that once they grow up bitcoins could have a lot of value purely as a store of value, even if they never take off as a currency used for everyday purchases.

I'm sure the overall demand for "store of value" goes up and down, but it looks to me like it is counter-cyclical-- when the economy is bad, people take money out of things like the stock market and put it into things like T-Bills or gold.

If bitcoins are used only as a store of value in the future, then we should see their value going up during recessions and down during boom times.

If they're used only as a means of exchange then we should see the opposite.

I hope they'll be used for both so they'll have a mostly steady value regardless of what the economy is doing.

DISCLAIMER: I've been saying this for a couple of years now, but it is still mostly true:  Bitcoin is an experiment-- only invest time or money in it that you can afford to lose!

7 comments:

Anonymous said...

Please let us know when you come back from the bitcoin rabbit hole, because you're no fun to read while you're down there.

Anton Starikov said...

It is nice to read a well though out though (no pun intended).

I agree with "If Bitcoin is used as just a store of value ... we should see their value going up during recessions and down during boom times" on the condition that bitcoin economy is a smaller part of the whole economy and most prefer "cash out" to more useful currency during boom times.

However I can not agree with "If they're used only as a means of exchange then we should see the opposite."

Because when it is boom time and bitcoin is the major part of economy and (value does not leave it presuming big always grow bigger) we will see a relatively steady price (hopefully not in fiat, but in hamburgers) and high turnaround.

Anton Starikov said...

It is nice to read a well though out though (no pun intended).

I agree with "If Bitcoin is used as just a store of value ... we should see their value going up during recessions and down during boom times" on the condition that bitcoin economy is a smaller part of the whole economy and most prefer "cash out" to more useful currency during boom times.

However I can not agree with "If they're used only as a means of exchange then we should see the opposite."

Because when it is boom time and bitcoin is the major part of economy and (value does not leave it presuming big always grow bigger) we will see a relatively steady price (hopefully not in fiat, but in hamburgers) and high turnaround.

Anonymous said...

We want our free-thinking Gavin back.

Bitcoin has ruined you.

Rube7x said...

Didn't realize there was someone in WMA who is so prominent in the bitcoin community. It can gain traction for either a means of storage, debt payment, lending, or whatever you like. I just think people are more interested in long term holding. This is an experiment and people want to do just that. I just think in the end they either fade out or hold for the long term.

Anonymous said...

Please let us know when Bitcoin is no longer an experiment and we can put there more money that we can afford to lose.

shelby said...

Some thoughts about the current asymptotic money supply model of BitCoin being a ponzi model.