Part I: Background
When considering if bitcoin is a store of value, please consider the following as background:
- Bitcoin is infinitely, instantly transportable anywhere on the planet in a matter of seconds
- By the end of 2014, there will be hundreds of thousands of merchants who will accept bitcoin for payment. Bitpay already has 15,000 merchants and through Gyft one can access a few thousand other retailers.
- There are exchanges that would convert bitcoins to a major currency of your choice.
In other words, there is a network. Hint: this will be important later.
Part II: "Features"
With that background, now let's work backwards to how it can be a store of value. I think there four main elements that drive bitcoin’s utility to someone in the short-term as a store of value.
(a) Non-confiscatable:
When properly handled, it is the least confiscatable asset known to man. With some digits printed on a tiny slip of paper, one can control and transfer hundreds of millions of dollars anywhere in the world. In an even more extreme example, one could actually memorize a passphrase and control one’s bitcoins with nothing more than one’s memory.
Bank accounts can be seized. And so can real property, gold bars and fine art. There is no realistic way to confiscate a fully secured bitcoin wallet short of torturing the owner to death for access to the private key. And, with a few minutes of warning, bitcoins can be moved anywhere in the world avoiding even that risk.
(b) Portable / Liquid / Fungible / Divisible
Not a single other asset classes outside of currency is as portable / liquid / fungible / divisible as bitcoin.
Stocks, bonds, VC investments, private equity investments, real estate, timber, commodities, diamonds, gold, silver, fine art and the whole pantheon of the investment world all are less liquid than bitcoin.
(c) Correlation
Bitcoin is an asset with limited correlation with other established asset classes. As everyone learned in their Intro to Finance class, non-correlated asset classes add value to a portfolio.
(d) Disaster insurance
Bitcoin would be particularly useful in the event of a localized or personalized financial disaster. If you are a rich Argentinean, it is likely that your local cash, real estate, stocks and business investments will tank at the same time. If you think someday the US/Euro-zone are headed for disaster (I don’t but some do), then you might want to have some digital currency that will likely appreciate in that scenario.
If somehow you have a personal financial disaster and have your financial assets frozen, it might not be bad to have a small pool of value that isn't blocked that can pay for your lunch the next day.
Part III: Users (as store of value)
Now, with those four characteristics, can we imagine some people who would want to keep some money in bitcoin?
(a) A corrupt oil minister taking bribes might consider having 30-50% of assets in bitcoin. If he has to make a run for it to Switzerland, it is the safest way to take his money with him
(b) A businessman in a volatile country where he faces political, personal or economic risk (of which there are dozens) might consider 10% of assets in bitcoin
(c) A wealthy individual in a developed country might consider 2%-3% in bitcoin or related assets as long-term ‘disaster’ insurance. If everything goes wrong (nationally or personally), it might not be bad to have some portable, hard-to-confiscate liquid assets
(d) A family office, endowment, pension fund or so might consider a <1% to 3% allocation to bitcoin (or a basket of digital currencies) for speculative or diversification purposes (noting that this is highly speculative).
A middle class individual in Indiana will probably be the last person to have any money in bitcoin-as-a-store-of-value. That is OK and appropriate. They almost certainly have better risk-reward bets they can make with their money like paying down their credit cards.
The current state (for context) is that there are ~$63T of investable assets in the world and ~$30T of M1 global currency money supply. Bitcoin represents 0.015% (1 / 6666th) of the former and 0.031% (1 / 3200th) of the the latter right now.
Part IV: Conclusions
This is the part that people will ask: "But what prevents it from going to zero if people stop using it?"
Well, nothing. If people stop using bitcoin, its intrinsic value is zero. Its value is 100% derived by the fact that it is a network (aka other people and other businesses will accept bitcoin) and once you have that network, then it generates the exciting "Features" mentioned earlier which will support some level of demand for it.
It is the same reason ebay, craigslist, twitter, and the fax machine have value. In a world of one fax machine, it would be a worthless piece of metal. In a world of 1 user, bitcoin would be worthless.
And as we previously discussed in the intrinsic value, the 'network' effect is also what supports the price of gold, stamps, mined diamonds and so on. All of them trade permanently far above their 'intrinsic value' as a product if they were not accepted as a form of wealth.
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