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Is the Bitcoin a good store of value?

To understand and decide whether bitcoin is a good store of value, consider real estate, commodities and other asset classes.

Real estate

About twenty years ago, I remember hearing folks talk about property being a good 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 able to preserve capital (albeit somewhat illiquid) but is also an instrument that has proven to deliver returns through steady capital appreciation and/or rental income.


Within Asia, real estate has not only demonstrated resilience through the ups and downs, but also a beneficiary of domestic consumption and growth, buoyed partly by the prosperity of its regional economic titans: China, Japan, Korea, as well as Southeast Asia. A rising tide lifts all boats.


That still holds true to a certain extent today, although the returns are not as attractive. However, property is still pretty much the go-to choice for many investors flushed with cash and those in search of a relatively safe-haven especially during a recession.


Property - especially residential - survives particularly well during times of turbulence and economic downturn (at least in Asia). Rain or shine, the brick and mortar 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 based on Maslow's hierarchy of needs.


Residential property is also somewhat a good proxy to the overall global economic cycle. The more resilient the economy, the higher the value of the property.


Although the initial investment outlay can be high, it is also relatively liquid. And liquidity in valuation, is a metric that tends to be overlooked. In layman terms, this loosely translates to how easy it is for an asset to change hands. For example: You can list your second-hand car for a million 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 share in a company is only as real as how much others are willing to pay for it, not how much you want to sell it for.


Furthermore, liquidity is also driven by the availability of buyers and sellers, and also shaped by the perception of the broader market.


Lab grown diamonds.

Consider:

A diamond is valuable only 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 this website:

"If you buy a lab-created diamond, you’d have a beautiful stone, yet no jeweler will buy it back."
 
So is Bitcoin a good store of value?

There's much talk of late 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 in the appreciation in value of bitcoin i.e.:

Investors buy bitcoin and other cryptocurrencies because they have lost faith in fiat currency.

And to take it to an extreme: They believe that the guy over the McDonald's counter will one day accept only a bitcoin-equivalent and reject cash as we know it today. Is that even imaginably possible?


While this may sounds absurd, for a billionaire or any large investor sitting on heaps of cash (a commodity that is increasingly being "devalued" due to the US government committed to printing even more money over the next few years), this implies an erosion of their financial position. Based on this, it seems:


Cash as we know it, 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 sizeable market i.e. a significantly large pool of investors willing to seed the initiative and make the market.


This is similar to early stock exchanges. They 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 where they can, and at some point of time in the future, re-distribute (by selling) them to other asset classes. Everyone else in the 0.001% of the liquidity pool makes the market — smaller funds, family offices, retail investors, sheep, etc.



Driving a paradigm shift in financial markets is big inertia.

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: Benchmarking (or rigging) interest rates, opaque currency controls, money laundering, fraud, etc. But the reality is that the 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 using bitcoin or any crypto-alternative would simply take too much work, several generations of change and monetary reforms, or even require a "reset" on an astronomical scale resulting in the total lost of faith in fiat currency, sending us all back to the barter economy.


Just as how asset values move in cycle with the economy, bitcoin will probably follow the same trajectory.


However little we belittle 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". Bitcoin is only but just one of them.

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