As the block size debate has raged on I’ve noticed more and more bitcoiners (usually on the small block side), argue that Bitcoin should first and foremost be a store of value with all other use cases being secondary at best. In this view, being able to use Bitcoin as money ― that is, exchanging it for goods and services ― is a nice-to-have feature but not a necessity. If we fast-forward 30 years into the future and find that Bitcoin is only used as a store of value, and nothing else, it will still be a success. This view seems to be, if only implicitly, guiding some of Bitcoin’s development efforts.
In this post I’m going to argue that Bitcoin cannot exist as a pure store of value with no other form of utility. Indeed I’m going to argue that there is no such thing a pure store of value ― an asset whose only demand stems from people looking to “store” value. And should Bitcoin go down the road where much of it’s useful attributes are either deprecated, limited in usefulness, or just too expensive for most use cases, then Bitcoin cannot function as a store of value and indeed will lose most of it’s value.
A Thought Experiment
Suppose you have $1 million in cash but you need to save it for a decade. That is, you plan on spending the money on something a decade from now and need to find some way to “store” this value until then. You could save cash, but since the Fed can be expected to debase the dollar pretty substantially over the next decade, you probably don’t want to hold dollars. Instead you’ll want to find some asset to hold that you think has a pretty good chance of holding it’s value over the next decade (among other qualities).
Let’s say you decide it might be a good idea to purchase art work to store your value. Upon hearing of your decision I make you an offer, I will sell you some of my “art”, which consists of boxes of rotting garbage, for $1 million. Let’s also presume that my “art” is not reproducible. It has a fixed supply. Do we have a deal? Why not? Art is a “store of value” after all.
It should be obvious that the reason is because my “art” is basically worthless. It offers no aesthetic beauty nor would it serve to convey any kind of social status to the owner. In other words, my art has no utility.
But wait a minute? You would be buying it as a “store of value” after all. A decade from now, couldn’t you just sell it to the next guy looking for a store a value? And couldn’t that guy just sell it to someone else looking for a store of value? Why can’t my “art” just go on maintaining its $1 million value forever? The supply is “fixed” after all.
The answer again is that my art has no utility. Anyone acquiring it in some kind of attempt to “store” value, would almost certainly expect to have to sell it someone who actually wants to use it as art. And since there are precisely zero people willing to do so, you wont find anyone looking to buy it as a “store of value” either.
Continuing The Thought Experiment
So we can see why worthless assets are not going to be demanded as a store of value, but what about assets that already have a value? A bitcoin, after all is worth close to $900. Can’t this just continue on forever without anyone actually using it in exchange or for any smart contract uses? Let’s change the thought experiment a little bit.
Suppose I have a bunch of widgets for sale. These widgets are basically as worthless as my “art” in the previous example. However, the difference in this case is that there is a 50% chance that my widgets will become all the rage among young kids in the year 2030. If you buy my widgets today, there’s a 50% chance you’ll be buying worthless garbage, but also a 50% chance they will explode in value and you’ll become very rich. Surely under these circumstances, someone will be willing buy them for a price. Suppose that given the probability, these widgets command a current market price of $900.
Now as these widgets change hands as they trade on the open market, I suppose some people might acquire them for the purpose of temporarily storing value (as opposed to straight speculation).
Now suppose that 2030 comes and goes and the widgets do not catch on with young kids, what do you think will happen to the price of widgets? If you have spent any time in the real world, you would correctly conclude that the price of widgets will drop down to zero. But, not so according to r/bitcoin! The fact that the widgets have no underlying utility doesn’t mean they can’t keep functioning as a store of value. According to this view, widgets should be expected to continue on at $900 per widget, if not even increase as more people realize how good of a store of value they are.
Of course this is flat out nonsense. Value just doesn’t work like this. Nobody is willing to pay for a worthless asset on the off chance they can flip it to some other sucker down the road. Or at least when this happens, it’s usually in the context of a massive bubble.
But What About Gold?
But doesn’t gold work this way? Today the demand for gold is well above the demand derived from gold’s industrial use cases. Isn’t all that excess demand just people people using it as a store of value? No!
That excess demand comes from speculators who are speculating that gold will take on new use cases at some point in the future. For example, if the dollar collapses it’s reasonable to think that gold might play a role in whatever monetary system emerges from the ashes. If some nations switch to a gold standard, or if central banks start buying gold for their reserves, or even if people are bartering directly with gold coins, then gold will be demanded for those purposes. If the collapse never happens, if world governments suddenly learn fiscal responsibility, if central banks suddenly reverse course on their loose monetary policy, then I’d expect the price of gold to trend downwards as it becomes clear those new use cases are not materializing.
All of this talk about Bitcoin as a pure store of value seems to be ignoring the basic concept of liquidity preference. Suppose a hypothetical money where the central bank manages to maintain a stable value. In such a scenario, you would just save your $1 million (from the previous example) in cash. Why? Because cash is the most liquid of all assets ― dramatically more liquid than Bitcoin. If something were to come up where you needed that money before the decade is out, say an emergency medical bill, all other things equal you’d prefer to be holding a liquid asset to an illiquid one. If you were to make the decision to hold some other asset than cash, that asset would need to offer you at least enough of a return to compensate you for your loss of liquidity over that period. (Today, of course, the dollar declines in value yoy but there are plenty of assets that don’t do so and are much more liquid than Bitcoin.)
So in other words, for any asset, including bitcoin, to serve as a store of value, it’s value must be expected to increase relative to more liquid assets of similar risk. But how can a pure store of value continually increase in value? Only by having a perpetually increasing number of people storing it. Which, of course, is impossible. And if it doesn’t increase in value, people would just pick some more liquid alternative as a store of value.
The Future of Bitcoin?
Hopefully you can see where I’m going with all of this. Today, very little of the demand for Bitcoin is derived from people actually using it. Most of the demand is speculative. Investors are speculating that, at some point in the future, Bitcoin will be much more widely used in monetary exchange, for remittances, for various colored coin applications, for smart contracts, etc. If that usage never materializes, I’d expect it to be the equivalent to widgets never becoming in vogue and the price will come crashing down accordingly.
Ironically, the pursuit of a “strong store of value” would make it worthless.
Thankfully, it’s only a small subset of the Bitcoin community are dismissive towards use cases other than a store of value. Most people are still hard at work trying to make payments work in one form other another. But I wanted to write this post to point out the dangers of complacency and hopefully prevent this toxic, “use cases don’t matter” mentality from spreading.
@brg444, who has a very loud voice in the bitcoin community, in the comments below says:
> Demand increase when inflation expectations increase because gold has a predictable supply curve. The utility you describe is a completely made up concept.
These are the type of knuckle-dragging economic views that this post is about. In fact, it’s quite scary that people who hold such defective economic views are in a position to shape community opinion and influence bitcoin economic policy.