Economic transactions are carried out with the help of currencies as they act as reserves of value. This implies that money or legal tender, also called fiat currency, can be relied on to maintain its relative value without much depreciation. In pre-modern societies, certain commodities or precious metals were used as payment methods as they were considered to have a stable value.
Currencies gradually came to be used as stores of value as they were made out of long-lasting metals with little depreciation value. With the age of digital currencies, cryptocurrencies have emerged as an important mode of payment. Questions have often been raised about whether cryptocurrencies like Bitcoin can act as a store of value as Bitcoin also has a number of characteristics of a good reserve of value.
Features of a Good Store of Value
Before we look at these characteristics of Bitcoin, let us look at the features of a good store of value. Currency serves as a medium of exchange as a recognized legal tender for transactions, and its value is maintained by scarcity. The supply of any currency cannot be extremely large or too small as both would lead to economic collapse as monetarism plays an important role in an economy. Money is printed by governments in a controlled way, often with a predetermined inflation value, which keeps a check on the supply. The value may differ for different currencies, although most function in a similar way. Another important feature is divisibility, which implies currencies can be divided into smaller units, which helps it as a medium of exchange for goods and services. This allows flexibility and reflects the value of all kinds of commodities within the economy.
The utility is one of the chief characteristics of any currency, which makes it a good store of value. The utility should be such that individuals can use it to exchange all goods and services and would not have to depend on other commodities. This eliminates any chance of barter, and currencies can also be moved from one location to another. This is not possible for commodities and metals; besides, currencies should have transferability to become a good reserve of value. This helps in transferring its units within the economy and different nations through the exchange. Currencies must feature durability and counterfeit ability, which means they should be made in a way that they do not get mutilated, damaged, or degraded easily. To prevent the circulation of fake currency, counterfeit ability is essential, or else the currency value will fall and become ineffective.
Whether Bitcoin Can Act as a Good Store of Value
Bitcoin has certain features that make it a good reserve of value, like fiat currency, but not yet a perfect one. Bitcoin mining ensures its supply, which has a set limit but is more abundant than money. Although the last Bitcoin is scheduled to be mined in 2140, it is not scarce enough. In terms of divisibility, however, Bitcoins are highly divisible, and they can grow more in price with greater scarcity. “While the US dollar can be divided into cents or 1/100 of 1 USD, one ‘Satoshi’ is just 1/100000000 of 1 BTC.” Greater divisibility helps in the ease of everyday transactions. Bitcoin also has high utility, as it is driven by blockchain technology, whose decentralized distributed ledger system makes it highly reliable.
Bitcoin can be easily transferred among different parties through cryptocurrency exchanges, wallets, or other means at low costs. Any currency needs transferability, which is easy with Bitcoin, although the cost of mining is quite high. Bitcoin is a better reserve of value than currency or gold in terms of durability, as digital currencies cannot be torn, damaged, or made unusable. Bitcoin cannot be destroyed as it will exist on records even if the owner loses the cryptographic key of the wallet. It is also difficult to counterfeit because of a complex decentralized ledger system, and the only way is through a “double-spend”, in which the owner transfers the same bitcoin in different settings. This, however, is not possible with physical currency though the latter is highly vulnerable to counterfeiting. If you are looking to make an investment in Bitcoin. You can check the latest news and updates about the world economy, coin prices, exchange rates, and much more at BTC news today. The platforms called Bitcoin Robots are also available in the market which focuses on making a good profit from it. One of them is the Bitcoin code which is the most trusted Bitcoin Robots in the market.
A Long Way To Go
Despite its advantages, Bitcoin has a long way to go before it becomes an actual reserve of value like gold. Bitcoin is a young asset and has not yet been widely adopted or even recognized, as it is still associated with high risks and vulnerability. In the current pandemic situation, a widely recognized asset like gold has not been able to maintain its hold, which shows far less possibility for a new asset like Bitcoin. Moreover, Bitcoin does not have a ‘perceived value’ which is crucial to sustaining any currency system. This makes it highly susceptible to market conditions and the perception of economic dangers. Most of the Bitcoins being exchanged now were sold off almost a year back at the anticipation of a loss. Thus albeit Bitcoins have some features which can make them a good store of value, yet it is difficult to compete with conventional assets like gold.