Bitcoin: An Aspirational Store Of Value

—Many investors consider bitcoin to be an aspirational store of value in that it has the properties of a store of value but has yet to be widely accepted as such.

—The silver lining of bitcoin’s volatility, at least in the early days, is that it is a catalyst that attracts attention, development and innovation.

—Scarcity is the key characteristic cited in reference to a good store of value as it is essential for protecting against the depreciation of real value in the long run. One of bitcoin’s most novel innovations is its unforgeable digital scarcity.

—Bitcoin’s scarcity was coded into the protocol when it was created. The independence of the monetary policy is enforced by the decentralized network of computers supporting the network and proof-of-work.

—The unknown consequences of record low interest rates, unprecedented levels of global monetary and fiscal stimulus and deglobalization are all adding fuel to the fire of awareness and adoption.

—Longer-term drivers include “slow and steady” inflation and the great wealth transfer to a millennial demographic that has a favorable opinion on digital assets.

Bitcoin can be described as an aspirational store of value – creating value as it matures into a store of value. An analogy is that investing in bitcoin today is akin to investing in Facebook when it had 50 million users with the potential to grow to the more than 2 billion users it has today. This is driven by the idea that bitcoin offers asymmetric upside. If bitcoin is widely adopted by retail and institutional investors as a store of value, the upside may be substantial relative to the initial upfront investment. Today, bitcoin is relatively nascent and has narrow base demand compared to a global store of wealth such as gold. Stakeholder perception of its value and potential is also still evolving. However, the rationale of investors for establishing exposure now is that it will be a much larger market if it is widely used as a store of value in the future.

One of the key arguments against bitcoin as a store of value today is its volatility. Bitcoin holders counter with the idea that the trajectory of a new asset from negligible awareness and adoption to a global store of value is unlikely to be linear. A different perspective is that many participants initially learn about bitcoin because of its volatility. As new participants conduct further study, perceptions often shift to focus less on short-term performance and more on the long-term value proposition.

Upward volatility also attracts investment, development and innovation. Cycles in the industry start with an increase in the price of digital assets like bitcoin, leading to new attention through discussion in news and social media, leading to an inflow of talent culminating in new products, projects and infrastructure and a maturation of the industry relative to the previous cycle.

Bitcoin’s inherent properties have given rise to the perspective that bitcoin has the potential to be a store of value, with complementary and interdependent components – the decentralized settlement network (Bitcoin) and its digitally scarce native asset (bitcoin). Equally important is the consideration of demand for bitcoin’s unique features – there is no long-term value to create or store if there is no sustained demand for these properties.

External forces that are accelerating interest and investment in bitcoin include unprecedented levels and exotic forms of monetary and fiscal stimulus globally with unknown consequences. This is exacerbating the concerns that Bitcoin was designed to address and is leading more investors and users towards bitcoin as an “insurance policy” that may provide protection against the unknown consequences. Simultaneously, the massive transfer of wealth from the older generation to a younger demographic is a more gradual but important long-term tailwind, as younger people view bitcoin more favorably. This is an important catalyst for bitcoin adoption as they inherit and grow their wealth.

While bitcoin is not guaranteed to succeed as a store of value, should sustainable long-term demand for the use case not materialize, the tailwinds mentioned above should drive incremental demand or a novel asset with unique properties. Additionally, Bitcoin’s strength is that it has properties that allow it to serve multiple functions, further hardening the likelihood of its success as measured by growth in value.