Bitcoin has been considered a lot of things in its short history:
1) Magic Internet Money for Nerds and Gamers
2) Anonymous currency to buy drugs and weapons on the dark web
3) A speculative bubble and a get-rich-quick scheme
4) A potential future store of value (equivalent to some form of digital e-Gold) – This is mostly where we are today
Bitcoin today, on the verge of being recognized as a future store of global value, represents a tremendous development from what it was just 10 years ago. It has gone from a mysterious internet currency known only to a handful of gamers and cyberpunks to what it is today – an asset that companies like Tesla put on their balance sheets, and payment solutions companies. world famous like Visa, Mastercard and PayPal support. on their payment ecosystems.
Despite all this, the most common question among opponents still remains: How can something as volatile as Bitcoin be considered a store of value?
Bitcoin is undeniably volatile, but rejecting Bitcoin just because it is volatile makes the forest look like a tree. When comparing Bitcoin’s price action to other stores of value like gold (which is truly a recognized store of value today), the price history has been remarkably similar.
As an emerging store of value like Bitcoin, history tells us that we can expect two things:
- A price that appreciates quickly at the beginning, which slows down over time: The price of a new store of value would probably start very low, as few would believe it. As its establishment, prices would increase exponentially. Over time, this price appreciation would slow down as it reached a steady state.
- High but declining volatility: Likewise, early volatility would be extreme, as its long-term viability would be called into question. But over time, that volatility would subside as the asset becomes more established and its market capitalization increases.
Think about it – who is likely to be more volatile? A sampan or a cruise ship. As Bitcoin continues to grow, the volatility will decrease with it.
What we are seeing as the year progresses is that bitcoin’s volatility is decreasing over time.
If Bitcoin is slowly establishing itself as a store of value, what can we expect?
Every day, with increased institutional adoption and acceptance, Bitcoin is getting closer and closer to a recognized store of value. As understood from this fantastic series by Vijay Boyapati – The Bullish Case for Bitcoin, money always evolves according to the following four stages:
- Collect: In the very first stage of its evolution, money will be demanded solely on the basis of its particular properties, usually becoming a fancy of its owner. Seashells, pearls, and gold were all collectibles before moving on to the more familiar roles of silver later.
- Store of value: Once it is requested by enough people for its peculiarities, money will be recognized as a means of preserving and storing value over time. As an asset becomes more and more recognized as an appropriate store of value, its purchasing power will increase as more and more people demand it for this purpose. The purchasing power of a store of value will eventually level off when it is widely held and the influx of new people wanting it as a store of value diminishes. (We are now here)
- Medium of exchange: When the currency is fully established as a store of value, its purchasing power will stabilize. Once stabilized in purchasing power, the opportunity cost of using money to transact will decrease to a level where it can be used as a medium of exchange. In the early days of Bitcoin, many people did not appreciate the enormous opportunity cost of using bitcoin as a medium of exchange, rather than as a nascent store of value. The famous story of a man trading 10,000 bitcoins (worth around $ 94 million at the time of writing) for two pizzas illustrates this confusion.
- Account unit: When money is widely used as a medium of exchange, the prices of goods will be valued according to it. That is, the trade-to-money ratio will be available for most commodities. It is a common misconception that bitcoin prices are available for many commodities today. For example, while a cup of coffee may be available for purchase using bitcoin, the price listed is not a true bitcoin price; rather, it is the dollar price desired by the trader, translated into bitcoin terms at the current USD / BTC market exchange rate. If the price of bitcoin were to fall in dollars, the number of bitcoins requested by the trader would increase proportionately. It is only when traders are willing to accept bitcoin for payment regardless of the exchange rate of bitcoin against fiat currencies that we can truly think of Bitcoin as a unit of account.
Therefore, if you think you are late to invest in the next future store of value, you may not have completely missed the boat.
If you envision the potential for Bitcoin to ever arrive as a unit of account, then we are still remarkably earlier in this process. Of course, at this point the chances of it becoming a unit of account are lower than it succeeds, but with the rate of adoption we are seeing so far and the growing urgency to scale global for a new store of value, Bitcoin may not quite be done at the moment.
This article was originally published on Everything about Bitcoin and is republished here with permission.