The most compelling use case for Bitcoin today is as a store of value. But too often, people dismiss the idea because of Bitcoin’s volatility.
How can it be a store of value when its price moves 20% in a month?
It’s a refrain we’ve heard recently from J.P. Morgan, Goldman Sachs and Vanguard, among others. Typically, these people compare Bitcoin to gold and decide it falls short.
Gold is solid. Bitcoin is volatile. It’ll never work.
These statements are ignorant of gold’s history and devoid of imagination.
The 1970s are a dividing line for gold. Before 1971, the U.S. dollar was hard-backed by gold, and gold’s value was effectively vouchsafed by the full faith and credit of our government.
When Richard Nixon took the U.S. off of the gold standard in 1971, it set gold loose from its moorings. What followed was a period of huge volatility, as gold fought to establish itself as an independent store of wealth. In 1974, for instance, gold bullion prices rose 73%, before falling 24% in 1975. In 1981, gold lost 33% of its value, after being up 121% just two years prior.
You can almost hear the naysayers now: How can you call it a store of value when it loses one-third of its value in a single year?
This volatility is what you’d expect from a new store of value. Insisting that a new store of value emerge fully formed in its long-term steady state is asking too much. In fact, you would expect two things from any store of value as it established itself:
A Rapidly Appreciating Price At First, Slowing Over Time: The price of a new store of value would likely start out very low, as few would believe in it. As it became established, prices would rise exponentially. Over time, this price appreciation would slow as it reached a steady state.
High-But-Declining Volatility: Similarly, early volatility would be extreme, as its long-term sustainability would be in question. But over time, that volatility would tail off as the asset became more established.
That’s exactly what we saw in gold, and Bitcoin is following the same path. Bitcoin’s price rose exponentially in its earliest days, and that growth is slowing over time. Volatility—while still high—has declined markedly, and will likely fall further as derivatives and market-making activity increase.
The store-of-value argument is important because it answers the biggest question surrounding Bitcoin: What is it worth?
A store of value is worth what people will pay for it. While gold has some use as an industrial metal and in jewelry, it would not trade for $1,300 per ounce based on those uses alone. It’s worth $1,300 per ounce because people are willing to pay $1300 per ounce for it as a store of wealth.
If you accept Bitcoin as an emerging store of value, you can look at the current price and argue it’s cheap. The current market cap of Bitcoin—the value of all Bitcoin in existence—is $143 billion. The current market cap of gold is somewhere around $7.5 trillion. In other words, Bitcoin is storing around 2% of the wealth of gold.
Look out 10 years: As the digital world becomes an ever-larger part of our lives, and the millennial generation moves into its prime age range for saving, it’s not hard to imagine a world where Bitcoin holds 1/10th the value of gold. That would imply a 500% price increase, from current levels of around $8,000 to about $40,000.
Could Bitcoin’s value be equal to gold? That would suggest a shade under $400,000.
Could it be higher, because Bitcoin has more potential utility?
Don’t listen to the folks who say Bitcoin will never be a store of value. It’s actually right on track, following in the footsteps of every other significant store of value that’s come into the world. There’s no guarantee it will stay on that path, but if it does, the opportunities are significant.
How can it be a store of value when its price moves 20% in a month?
It’s a refrain we’ve heard recently from J.P. Morgan, Goldman Sachs and Vanguard, among others. Typically, these people compare Bitcoin to gold and decide it falls short.
Gold is solid. Bitcoin is volatile. It’ll never work.
These statements are ignorant of gold’s history and devoid of imagination.
The 1970s are a dividing line for gold. Before 1971, the U.S. dollar was hard-backed by gold, and gold’s value was effectively vouchsafed by the full faith and credit of our government.
When Richard Nixon took the U.S. off of the gold standard in 1971, it set gold loose from its moorings. What followed was a period of huge volatility, as gold fought to establish itself as an independent store of wealth. In 1974, for instance, gold bullion prices rose 73%, before falling 24% in 1975. In 1981, gold lost 33% of its value, after being up 121% just two years prior.
You can almost hear the naysayers now: How can you call it a store of value when it loses one-third of its value in a single year?
This volatility is what you’d expect from a new store of value. Insisting that a new store of value emerge fully formed in its long-term steady state is asking too much. In fact, you would expect two things from any store of value as it established itself:
A Rapidly Appreciating Price At First, Slowing Over Time: The price of a new store of value would likely start out very low, as few would believe in it. As it became established, prices would rise exponentially. Over time, this price appreciation would slow as it reached a steady state.
High-But-Declining Volatility: Similarly, early volatility would be extreme, as its long-term sustainability would be in question. But over time, that volatility would tail off as the asset became more established.
That’s exactly what we saw in gold, and Bitcoin is following the same path. Bitcoin’s price rose exponentially in its earliest days, and that growth is slowing over time. Volatility—while still high—has declined markedly, and will likely fall further as derivatives and market-making activity increase.
The store-of-value argument is important because it answers the biggest question surrounding Bitcoin: What is it worth?
A store of value is worth what people will pay for it. While gold has some use as an industrial metal and in jewelry, it would not trade for $1,300 per ounce based on those uses alone. It’s worth $1,300 per ounce because people are willing to pay $1300 per ounce for it as a store of wealth.
If you accept Bitcoin as an emerging store of value, you can look at the current price and argue it’s cheap. The current market cap of Bitcoin—the value of all Bitcoin in existence—is $143 billion. The current market cap of gold is somewhere around $7.5 trillion. In other words, Bitcoin is storing around 2% of the wealth of gold.
Look out 10 years: As the digital world becomes an ever-larger part of our lives, and the millennial generation moves into its prime age range for saving, it’s not hard to imagine a world where Bitcoin holds 1/10th the value of gold. That would imply a 500% price increase, from current levels of around $8,000 to about $40,000.
Could Bitcoin’s value be equal to gold? That would suggest a shade under $400,000.
Could it be higher, because Bitcoin has more potential utility?
Don’t listen to the folks who say Bitcoin will never be a store of value. It’s actually right on track, following in the footsteps of every other significant store of value that’s come into the world. There’s no guarantee it will stay on that path, but if it does, the opportunities are significant.