Terminology
The term “store of value” has changed drastically over time. Currently, its definition can only be determined after you understand the terms “value” and “inflation” and how they apply to your earnings.
So, what do these two terms mean? Well, the value of cash refers to the purchasing power (how much you can buy a currency) that it has at a given time, while inflation is the gradual decrease in the purchasing power of cash due to the increasing supply of cash. Simply put, there is no limit to the number of banknotes or coins a country can issue. and with the simple principle of economics, when the supply of something increases, its value decreases.
This brings us to the term ‘Store of Value’. For value to be stored, an asset must have a growth rate higher than or equal to the inflation rate (the amount of new money generated). It must also be easily transported over time (it does not deteriorate), otherwise it will not really store the value.
Store of Value: For example
In the years following the First World War, Germany’s response to its financial crisis was to issue an additional 496.5 million tokens for its economy. The result? The price of a loaf of bread in January 1923 cost 250 marks, by November of the same year, the same loaf cost 200,000,000,000 (200 trillion) marks.
The insatiable issuance of money had caused the value of every token to fall until almost nothing could be bought.
What’s interesting is that, if you used your cash savings to buy gold, inflation in Germany would have little to no effect on your wealth. The rarity of gold is well known, and its supply cannot be increased. Thus, gold is a way of preserving the value of the money used to buy it.
The exchange system
Before the concept of money was introduced, people relied on the exchange system. Back then, animals were the currency: people used them in exchange for goods and services. However, they could get sick or die in a short time, and they were difficult to transport.
The perfect solution to this seemed to be commodities, agricultural, materials, metals and services. But even these did not have a definite value, which caused problems in determining their exchange value.
The birth of money
It was then that people invented the concept of coins. Initially, the supply of coins was limited by the supply of the metal itself, which meant that they had a real value. Then, when banknotes were introduced, the banking services ensured that they, too, had real value, backing them up with gold. Because gold itself is scarce, paper money acted as a decent store of value.
Flooded the money
However, in 1971, the golden rule of money was abolished. In this new system, banknotes and coins simply had their value because everyone thought they had but there was nothing of intrinsic value to support them. In addition, governments could print these banknotes and add them to the total existing supply as and when they saw fit.
Like Germany, this results in an underestimation of the purchasing power of your banknotes. Currently, the average annual inflation in the US over the past five years has exceeded 1.86%. If we talk about developing countries, the case is worse, since the same can range from 5% to over a thousand percent.
However, some people still use savings accounts, where they store cash in the bank for a small percentage of the interest that banks earn by lending it. But with interest rates always in competition with inflation, the rewards for using this type of service are constantly decreasing.
Other popular commodities
Commodities such as gold and silver are a relatively effective hedge against inflation. However, physically storing or transporting gold or silver is difficult. In addition, these assets are also difficult to divide into smaller parts for regular purchases.
The same arguments apply to real estate. And besides it is impossible to divide into practical amounts, investing in real estate also requires a huge one-time capital, which prevents most from acquiring it at first.
Thus, gold and silver retain their value effectively, but they are simply not practical enough to be an everyday store of value, as they are difficult to transport and cannot be easily preserved in large pieces. Quantities.
And this brings us to the most popular means of storing the value of the current era such as stocks and bonds. They are easily transportable and can be maintained in the long term. But their returns often fail to beat inflation rates. Also, you rely on a third party to own and store these assets, which puts the safety of your funds at risk.
These challenges combined lead us to what cryptocurrencies are very likely to be a key future storage location.
Cryptocurrencies as a storage medium
There are several reasons why cryptocurrencies are considered effective as a store of value.
They are against inflation in the long run
Bitcoin laid the foundation for cryptocurrencies. Although it started as a new way for people to make payments, it has now become one of the most reliable value stores. The reason for this is that Bitcoin’s total supply is encoded in its architecture, and only 21 million coins can ever be put into circulation (availability). This well-known and proven rarity of Bitcoin places it far above other storage media that exist. This is probably why its current market capitalization has surpassed that of most large companies.
Ethereum vs inflation
The native currency of Ethereum Ether (ETH) has also shown remarkable growth, despite not having a stable supply. It has left its imprint across the DeFi landscape, and its growing use cases on Web3 reflect its enormous potential for expansion into a wider population. This intrinsic value, along with the infamous deflationary EIP1559, gives the push for ETH to potentially become a great store of value.
Easy divisibility
A dollar can be divided into 100 cents but did you know that a Bitcoin can be divided into 100 million Satoshi? Correspondingly one Ether can be divided into one billion Gwei and each Gwei is further divided into one billion Wei.
That, in terms of small payments, cryptocurrencies have gotten your back.
Global capability
Fiat currencies are limited by geographical boundaries. Crypto knows no borders. Currencies are based on global, decentralized networks called blockchains. So, whether you want to use it in a grocery store two blocks away or take it to a family member who lives on the other side of the world, you can do it in minutes or even seconds.
This feature enhances the cryptocurrency’s profile as a store of value.
Actual ownership
People have lost their economies time and time again due to failure of central systems. This is because, even though a sheet of paper assigns you as the owner of a particular property or asset, it is still ultimately controlled by a centralized entity.
In contrast, cryptocurrencies are decentralized currencies that no one controls. When you are a cryptocurrency holder, you are the real owner of the assets, and they cannot be influenced by anything except the market itself. And thanks to the growing acceptance of cryptocurrency, you may not even have to convert your coins back into money.