Bitcoin As a Store of Value vs Medium of Exchange

Bitcoin was first created as a peer-to-peer network that answered the need for a decentralized digital financial system that did not need a third party. Over time, these assets have grown and their role as digital currencies has begun to be seen as a store of value like gold. In this article, Tokenomy will discuss the relationship between this asset as a store of value and its role as a medium of exchange. The purpose is to explore how Bitcoin has evolved from its role as a medium of exchange to becoming a store of value.

Devices as a Store of Value vs Instruments of Payment

To build a digital asset that truly functions as a medium of payment over the long term, it must also be a store of value. Thus many people are interested in using it. In this respect, Bitcoin has been built with a good concept initially. These assets have become known as digital gold and provide a decentralized system with good audit capabilities. So far, no other network can compete with the Bitcoin network.  In addition, the lightning network project, which is being worked on as a complementarynetwork layer on the Bitcoin network, will make it capable of everyday payments so that it becomes an asset more parties can easily use.

The Bitcoin network introduces a new payment system faster than fiat currency. Also Bitcoin has a higher stock-to-flow ratio than gold and can be used autonomously through a decentralized network. Even so, this asset is still relatively new and has a volatile nature, not easy to predict and has some risk. With that in mind, Bitcoin is often criticized as an asset that is too volatile. Meanwhile, to be called a means of payment, the value of an asset should tend to be more stable.

Blockchain Trade-Offs

Some cryptocurrencies brand themselves as a faster network than Bitcoin, to be seen as a better means of exchange. If we leave aside platforms with smart contracts and a proof of stakes mechanism, we can clearly see which network is better.

Let’s look at the case of Litecoin as an example. This cryptocurrency, created in 2011, was designed to be similar to Bitcoin; the differences are in it’s mining and the speed of blocks on its network. Litecoin even advertises as digital silver compared to Bitcoin, called digital gold. Technically, Litecoin’s blockchain speed is 2.5 minutes faster than Bitcoin. This coin reached its highest value in 2017 but until now hascontinued to decline.  Like other cryptocurrencies, it failed to become a good store of value and outperform Bitcoin.

If most cryptocurrencies rely on speed, there are still some things toconsider when we assess the network’s effectiveness through this factor. The biggest problem with the speed of blockchain networks is the network activity is too heavy, which creates problems in terms of stability. We can see how other cryptocurrencies adopted Bitcoin’s pattern and failed.  Many crypto projects try to build a broad medium of exchange from something that is not a good store of value from the outset, especially under the shadow of Bitcoin’s market domination.  Some of these projects even sacrifice decentralized systems and network auditing capabilities to achieve their goal of becoming a medium of exchange. This is inversely proportional to Bitcoin. The Bitcoin network maintains its decentralized system and audit capabilities making it a good store of value. Losing these two things will lead to failure and make other crypto assets irrelevant.

In other words, to construct a decentralized peer-to-peer system like the Visa network, one has to create a decentralized peer-to-peer Fedwire type network (settlement layer). And provide the reason for why the underlying unit should be owned for the long term compared to other assets ( digital gold).

The Long Road to Monetization

Many people have their own theories about which money is better than the other. But in the long term, it is the market that decides. Even fiat money, regulated by the government, is determined by the international market.. Any existing cryptocurrency can have short term success, but the real test is how it stays in the market and grows in structural adoption over the long term. So far, Bitcoin has managed to do so while gaining an increase in the number of users and its value as a cryptocurrency. Most other cryptocurrencies experience a drastic rise in their early days on the market, but then crash.

Stores of Value Predate Mass Exchange Tools

For the Bitcoin network, use as a censorship-resistant medium of exchange is paramount. This followed its adoption as a broader store of value, making its use even greater. And, the more Bitcoin is used as a store of value, the better the scaling solution becomes. In addition, it increasingly makes Bitcoin widely used as a medium of mass exchange.

Prior to the launch of the lightning network, if you were a person with easy access to banking services, why would you spend Bitcoins on something? If the dollar amount keeps increasing every year, but Bitcoin has a limited supply cap of 21 million coins, why would you give your Bitcoins to someone else? Unless you have held Bitcoin so long that it becomes part of your net worth. Then if you’re actively working in the industry and potentially getting paid in Bitcoins, you probably won’t.

This transaction problem is compounded by the fact that every cryptocurrency transaction is a taxable event. Governments don’t want other money competing with theirs, so they view your Bitcoin as a commodity. If you exchange it for something, you have now locked in a taxable capital gain. Assuming you don’t want to violate tax laws, you technically need to track every Bitcoin or other crypto asset transaction you make to do your tax reporting.

The Point Where Most Cryptocurrencies Fail

As explained earlier, the few cases of failed cryptocurrencies usually sacrifice some level of their stability, decentralization, or auditing capabilities to self-optimize as a higher medium of exchange, even though almost nobody uses them as a store of value. Thus they basically just built a fintech payments company with a small team, and hoped to compete with Visa, despite having a much worse user experience, much slower speeds, and a much smaller number of transactions.

Bitcoins vs Dollars

There are over 100 million people in the world who are estimated to own Bitcoins in the last year. The figure is only 1-2% of the global population depending on the exact number, because it depends on the exchange of data, surveys and other opaque judgments. However, in some countries, adoption rates appear to be in the low double digits. We can measure the scale of adoption both broadly and deeply. Breadth refers to how many people own a non-zero amount of Bitcoins. Depth refers to how much liquid money they have in Bitcoins. For example, if someone has Bitcoin worth US $264.34, the amount cannot be judged as “adopting” Bitcoin to an economically significant degree. As an experiment, imagine a world where people hold Bitcoins or dollars as liquid funds.

Many people want to spend Bitcoins they may have bought some time ago. They’ve also taken the time to learn how to stock up on their own rather than holding it in an exchange. After years of rising Bitcoin prices, this will become a decent part of their liquid monetary value.

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