Did the pandemic prove Bitcoin as a store of value?
Amid the varied, turbulent, and unpredictable fallout from the COVID-19 pandemic, a truly unexpected gem of insight has fallen in the cryptocurrency community's lap.
For years, Bitcoiners have posited that — hypothetically — Bitcoin is a store of value akin to gold. Never before had this theory been tested, mind you, until the pandemic rolled into town.
In March 2020, as the COVID-19 virus swept across entire continents, stock markets
plummeted in what is now known as Black Monday — the day global assets tanked in excess of -25%.
While Bitcoin had been sliding prior to Black Monday, it sustained heavy losses to the tune of -15% in complicity with stock and oil markets.
However, in a turn of events that crypto investors surely hail as glorious, Bitcoin corrected itself in an about-face heard ‘round the world. Three months after the unhappy depths of Black Monday, Bitcoin had more than doubled in value and looked prepared to break the $10,000 mark.
Between March 12th and May 9th, Bitcoin surged more than 100%. Suddenly, the Bitcoin-is-a-store-of-value argument doesn't seem so far-fetched.
Staring down its first true test as a global asset during troubled times, Bitcoin responded with profit-generating assurance and panache.
By this point, you might be wondering what all the noise about BTC being a store of value is, or what SoV means for digital assets in the first place.
In the next section we will introduce you to the store of value concept, before making the case that Bitcoin is an island for investors amidst turbulent waters.
Bitcoin Store of Value Argument Explained
A store of value is what it sounds like — an asset where value is stored.
However, if a store of value loses value but keeps some of it, then it's still a store of value, even if 99% of what you started with is gone.
That's why any discussion about store of value assets revolves around the ability to be safe and, if possible, profit-generating.
Some stores of value, such as high-yield savings accounts, let you literally store your fiat currency to create a return over time (known as APY). These are relatively safe in that deposits are insured, guaranteed by the bank, and have a predictable return vouched for by the bank.
Asset-based stores of value, such as Bitcoin or gold, operate differently. There are no guarantees about yield-generation or preservation of your starting capital. In this sense, you assume lots of risk when holding asset-based stores of value.
However, by assuming risk, you assume upside potential if the asset performs strongly.
So, why would you buy a risk-carrying asset when markets are looking choppy at best and dire at worst?
Given certain conditions, store of value assets will thrive as hedges against traditional assets that perform poorly when going through tough times.
If, to bail out a sinking economy, a nation's central bank begins emitting large amounts of currency, the circulating supply's value is diluted when the economic conditions also mean people are earning and spending less.
As such, that currency will lose value, making it a poor store of value.
In contrast, a global asset like Bitcoin, beholden to neither government nor special interests, begins accruing value as a hedge against the declining fiat currency.
Therefore, a store of value asset has two principal roles.
Maintain value over time
Provide liquidity between assets
Number two on the list is especially pertinent, less obvious, and highly useful.
Often, a store of value isn't the destination — it's only the means. An SoV won't achieve its highest utility if, once bought, it doesn't provide liquidity between itself and the originating asset.
That's why a beneficial store of value will save or increase your purchasing power and make it possible to return that value to your chosen asset.
Why Bitcoin Is the Right Asset for the Pandemic Era
The COVID-19 pandemic has exposed fault lines left, right, and center in regional economies across the world.
As a result, national currencies, such as the USD, GBP, EUR, and YEN are accorded the role of assuaging the pain by circulating in ever-greater amounts.
In the United States, the Federal Reserve's decision to provide unlimited liquidity to markets means that an overall dilution of the US dollar is underway, diminishing its ability to retain today's purchasing power tomorrow.
Bitcoin is a decentralized digital asset using a pre-programmed algorithmic protocol to determine monetary policy. What is that monetary policy, exactly?
To be a deflationary, rather than inflationary asset via a cut to coin minting that happens about every four years (known as the halving).
While government money becomes a politicized vehicle for attempts to stave off economic despair, Bitcoin's agnosticism and singularity as a global currency make it the ultimate safe haven for anyone on earth with a smartphone and access to the internet.
In putting aside the interests of people and instead focusing on those of corporations, banks, and other harbingers of profits, heads of national monetary policy erode your financial security to assure it elsewhere.
Bitcoin possesses no such agenda, impartial as it is, and thereby guarantees that purely economic forces decide its direction — and, hopefully — fortunes.
This year, the pandemic has shown what assets are made of, forcing investors to make difficult decisions about where to seek safety.
It appears more of them than ever are choosing Bitcoin.