Store of Value Definition

What Is Store of Value?

A store of value is any form of wealth that maintains its value without depreciating over time. In other words, a store of value is an asset that can preserve its purchasing power in the long run. Some examples of traditional stores of value are gold, silver, land, art, and collectibles.

What's the Relationship between Fiat Currencies and Store of Value?

Fiat currencies are legal tender that are issued and backed by governments or central banks. They have no intrinsic value; their value is based on trust and acceptance by the public. Fiat currencies can be used as a medium of exchange, a unit of account, and a store of value.

However, fiat currencies are not perfect stores of value, because they are subject to inflation and devaluation. Inflation is the general increase in the prices of goods and services over time, which reduces the purchasing power of money. Devaluation is the deliberate reduction in the value of a currency relative to other currencies, usually to boost exports or reduce debt.

Some examples of fiat currencies that have lost their value due to inflation or devaluation are:

• The Zimbabwean dollar: The Zimbabwean dollar was introduced in 1980 after the country gained independence from Britain. However, due to hyperinflation caused by economic mismanagement and political instability, the currency became worthless. At its peak in 2008, the inflation rate was estimated at 79.6 billion percent per month, and the largest denomination was 100 trillion dollars.
• The Venezuelan bolivar: The Venezuelan bolivar was introduced in 1879 as the official currency of Venezuela. However, due to hyperinflation caused by economic collapse and social unrest, the currency has lost most of its value. In 2018, the government launched a new bolivar soberano (sovereign bolivar) that replaced the old bolivar at a rate of 100,000 to one. However, the new currency has also suffered from inflation and devaluation.
• The Turkish lira: The Turkish lira was introduced in 1923 as the official currency of Turkey. However, due to inflation and devaluation caused by political turmoil and economic challenges, the currency has lost its value over time. In 2005, the government launched a new Turkish lira that replaced the old lira at a rate of one million to one. However, the new currency has also depreciated significantly against other currencies.

Therefore, fiat currencies are not very effective as stores of value because they are subject to the whims and policies of governments and central banks, which may erode their value over time. They are also vulnerable to external shocks and crises that may affect their stability and confidence.

How Crypto Assets Work As a Good Store of Value?

In the digital age, a new type of store of value has emerged: crypto assets. Crypto assets are digital tokens that are secured by cryptography and run on decentralized networks. They have some unique features that make them attractive as potential stores of value, such as:

• Scarcity: Some crypto assets have a fixed or limited supply, which means they cannot be inflated or diluted by central authorities. For example, Bitcoin has a maximum supply of 21 million coins, and Ethereum has a decreasing annual issuance rate.
• Durability: Crypto assets are immune to physical deterioration, unlike metals or paper money. They can also be stored and transferred electronically, without the need for intermediaries or custodians.
• Divisibility: Crypto assets can be divided into smaller units, which makes them more flexible and accessible than other forms of wealth. For example, one Bitcoin can be divided into 100 million satoshis, and one Ether can be divided into 18 decimal places.
• Fungibility: Crypto assets are interchangeable and indistinguishable from each other, as long as they belong to the same network and protocol. This means that one unit of a crypto asset can be easily exchanged for another unit of the same asset, without affecting its value.
• Verifiability: Crypto assets are transparent and auditable, thanks to the public ledger that records all transactions on the network. Anyone can verify the authenticity and ownership of a crypto asset, without relying on third parties or intermediaries.

However, crypto assets also face some challenges and risks that may affect their ability to serve as reliable stores of value, such as:

• Volatility: Crypto assets are subject to high price fluctuations, due to factors such as supply and demand, market sentiment, regulation, innovation, competition, and speculation. This makes them unpredictable and risky for investors who seek stability and certainty.
• Security: Crypto assets are vulnerable to cyberattacks, hacking, theft, fraud, and human error. Users need to take precautions to protect their private keys and wallets from unauthorized access or loss. Moreover, some crypto networks may suffer from technical issues or failures that may compromise their functionality or integrity.
• Regulation: Crypto assets are subject to varying degrees of regulation and legal uncertainty in different jurisdictions. Some governments may impose restrictions or bans on the use or trade of crypto assets, while others may adopt more favorable or supportive policies. This creates challenges and opportunities for crypto investors and users.

Therefore, crypto assets are not a homogeneous category of stores of value. They have different characteristics, advantages, disadvantages, and trade-offs that may appeal to different types of investors and users. Some of the most popular crypto assets that are considered as potential stores of value are:

• Bitcoin: Bitcoin is the first and most widely adopted crypto asset in the world. It was created in 2009 by an anonymous person or group known as Satoshi Nakamoto. Bitcoin aims to be a peer-to-peer electronic cash system that is independent of any central authority or intermediary. Bitcoin is often referred to as "digital gold" because of its scarcity, durability, divisibility, fungibility, and verifiability.
• Ethereum: Ethereum is the second-largest crypto asset by market capitalization. It was launched in 2015 by a group of developers led by Vitalik Buterin. Ethereum is more than just a currency; it is a platform that enables the creation and execution of smart contracts and decentralized applications (DApps) that run on a global network of computers. Ethereum is often referred to as "digital oil" because of its versatility, innovation, and utility.
• Litecoin: Litecoin is one of the oldest and most established crypto assets in the market. It was created in 2011 by Charlie Lee as a fork of Bitcoin. Litecoin aims to be a faster and cheaper version of Bitcoin, with some technical improvements such as a shorter block time (2.5 minutes vs 10 minutes), a larger supply (84 million vs 21 million), and a different hashing algorithm (Scrypt vs SHA-256). Litecoin is often referred to as "digital silver" because of its speed, efficiency and affordability.

Closing Thought

In summary, store of value is an important concept for investors and users who want to preserve their wealth and hedge against inflation and devaluation. However, not all assets are equally suitable as stores of value, as they have different characteristics, advantages, disadvantages, and trade-offs. Fiat currencies are the most common and widely accepted form of money, but they are not very effective as stores of value because they are subject to the whims and policies of governments and central banks, which may erode their value over time. Crypto assets are a new and innovative form of digital wealth, but they are not perfect stores of value either, as they face challenges and risks such as volatility, security, and regulation. Therefore, investors and users need to be aware of the benefits and drawbacks of each asset class and make informed decisions based on their own goals, preferences, and risk tolerance.

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