To understand and decide whether bitcoin is a good store of value, consider first: real estate, commodities and other asset classes.
The real estate market.
About twenty years ago, I remember hearing folks talk about property being a store of value, something that has that ability to stand the test of time. In some ways that is true — real estate has not only been a good store of value but an instrument that has proven ability to deliver steady returns through capital appreciation and the accumulation of rental income.
Within Asia, the real estate market has not only demonstrated resilience through the ups and downs, but also a beneficiary of strong and steady economic growth, buoyed from the prosperity of its regional titans: China, Japan, Korea, as well as Southeast Asia. A rising tide lifts all boats.
Today, that thesis still holds to a certain extent. The returns are not as attractive but property is still pretty much the go-to choice for investors in search of a relatively safe-haven, even during a recessionary phase.
Property — especially in the residential segment — is an asset class that survives relatively well during times of turbulence and economic downturn. Rain or shine, the brick and mortar asset stands. People continue to ‘trade’ and invest in real estate because fundamentally, they know that a roof over the head is a basic foundation of life (at least based on Maslow’s hierarchy of needs).
It is also a good proxy to the overall global economic cycle i.e. the more resilient the economy, the higher the value of the property.
Although the initial investment outlay can be high, real estate is a relatively liquid asset in a manner of speaking. And liquidity is an attribute in valuation that tends to be severely overlooked.
In layman terms, this refers to how frequently and easy it is for an asset to change hands. You can list your second-hand Toyota for a few hundred thousand dollars on Carousell but at the end of the day, it’s still worth nothing if it can’t be sold. The price of a company’s share is only as true and realistic based on what it trades for, not the bid/ask price.
Liquidity, furthermore is also driven by the concentration of buyers and sellers, as well as how the perception of the asset is shaped by the broader market.
Consider for a moment:
A diamond is only valuable because people say it is, not because of its clarity or cut.
Jewelers and advertising companies around the world have done an extremely successful job in positioning the diamond at the apex of all precious stones. But the raw material for diamond is carbon — one of the most commonly available elements found on earth, ranked many times above gold, silver and platinum. Yet despite being available in relatively large quantities, consumers continue to pay absurd amounts of money for a small rock mounted on a ring or co-joined in a necklace.
To add to the paradox, lab-grown diamonds are significantly cheaper than their natural counterparts, even though they share the exact same properties and make. In fact, according to some websites:
“If you buy a lab-created diamond, you’d have a beautiful stone, yet no jeweler will buy it back.”
Bitcoin as a store of value
There’s much talk lately about bitcoin being a store of value. I know very little about the world of bitcoin and cryptocurrencies — only limited to the banter that I read on Twitter and the news.
Is bitcoin a good store of value? Only time will tell.
Just like property, gold and other precious stones, it is considered a safe haven only as much as others see it. In this case, the devaluation (or eventual demise) of the dollar is one of the key catalysts of the appreciation in value of bitcoin i.e. investors are buying bitcoin and other cryptocurrencies largely because they have lost faith in fiat currency. And taking it to a certain extreme, they believe that the guy over the McDonald’s counter will take only a bitcoin-equivalent and reject cash as you know it today.
While this may not mean much to most people, for a billionaire or any large institutional investor sitting on heaps of cash — a commodity that the US government has committed to producing even more over the next few years — this implies an erosion of their financially advantageous position.
Cash is no longer king.
I think that crypto-exchanges were created largely because of this phenomenon.
These platforms are only viable and commercial if there is a critical functioning market i.e. a significantly large pool of investors willing to seed this initiative and make the market. Create supply and demand, let the intermediaries and agencies (regulator, banks and exchanges) do the rest of the work.
This is no different from stock exchanges in the early days — they not only serve to provide an avenue for companies to raise capital, but also functions as an alternative route for investors looking to ‘diversify’ or park their money somewhere, and possibly at some point of time in the future, re-allocate them to other asset classes. Everyone else in the 0.001% of the liquidity makes the market — smaller funds, family offices, retail investors, sheep, etc.
If you have written code before, you’ll understand how painful and tedious is it to do software development.
There’s a reason why successive versions of Microsoft Windows in its early days were so slow and buggy. One can of course attribute it to processor speed and memory space (software blaming hardware), but the reality is that it’s simply too lengthy and costly to eliminate the bugs by re-writing and building an entire operating system from scratch. Why demolish and re-build something when customers are willing to settle for a product with some occasional bugs and flaws? Far easier it is to patch the errors than to re-invent the wheel.
So our financial system is not perfect: Traders benchmarking (or rigging) interest rates, opaque currency controls, money laundering, fraud, etc. But the undeniable truth is that paper currency (since its inception a thousand years ago) still works as a medium for the exchange of goods and services. To revamp today’s highly complex financial system with bitcoin would take several generations of change and reforms; or a “grand reset” involving the total collapse of fiat currency (and breach of trust on a global scale), sending us all back to the barter trade economy.
Just like how asset values move in cycle with the economy, bitcoin will probably follow the same trajectory. However little we think about the value of cash, there are many commodities and asset classes out there which serve as good alternatives to what we define as a “store of value” and Bitcoin is only one of them.
Originally published at https://www.kennyng.com on January 6, 2021.