Investors rely on many different assets and commodities to make profits in the long term. Some invest in property, stocks, cryptocurrencies, blockchain, and precious metals. Investors usually look for assets that could be good stores of value, meaning that their assets do not lose their fundamental worth over time.
With the popularity and success of cryptocurrencies in recent years, investors want to determine whether cryptocurrencies like Bitcoin and Ethereum are a good store of value too.
There are many factors to consider like utility, the In The Money and Out Of The Money Indicator (ITM / OTM), and price stability.
What Is A Store Of Value?
It is any commodity, currency, or asset that can be purchased and exchanged in the future without decreasing in value. The currency or commodity should either grow in value or remain the same over time. Gold, silver, and other precious metals are stores of value because they do not decay.
Fiat currencies like the dollar and euro are also stores of value. A currency of a nation needs its currency to be stable so that its citizens can participate in the economy without being concerned about their savings depreciating. Of course, there are currencies of poorer nations that lose value due to hyperinflation. Accordingly, currencies are not always good stores of value.
Furthermore, cryptocurrencies with large market capitalization like Bitcoin and Ethereum are considered to be stores of value. These cryptocurrencies are scarce, have a decentralized security network, and are transferable as payment. Bitcoin and Ethereum holders can also exchange their assets for fiat currencies.
Different Cryptocurrencies To Consider
Before we can investigate if cryptocurrencies are good stores of value, we need to know the different types of cryptocurrencies currently available.
Most people are familiar with Bitcoin. Then there are altcoins, most of which are based on Bitcoin. And lastly, there are tokens, which have a variety of functions.
Bitcoin is a digital currency that works with blockchain technology. It is a peer-to-peer network where transactions do not have to go through an intermediary like a bank or other financial institution. That said, there are exchanges that handle Bitcoin trading and represent a sort of middleman due to managing their users’ assets on the exchange.
Next, there are altcoins. These are alternate cryptocurrencies to Bitcoin, and they serve many different purposes. The biggest altcoin is Ethereum. It runs on its own blockchain and employs new technologies on it.
For example, Ethereum offers smart contracts. These are self-executing conditions on the blockchain between two parties. This means that a user can create a smart contract with certain conditions that the other party must meet before a transaction can be completed.
Additionally, users can develop applications on the blockchain network by using smart contracts. App developers pay other users on the blockchain in Ethereum’s native coin called Ether.
That brings us to the final kind of cryptocurrency, tokens. Tokens do not have their own blockchain. Tokens are mostly used in decentralized apps (dApp) developed on Ethereum. Users can use tokens to pay for services on the dApp.
Another type of cryptocurrency – stablecoins, are a newer introduction to the market which have price stability due to being backed by a reserve asset like gold. They offer blockchain transactions that are secure and decentralized and the stability of fiat currencies.
Bitcoin is a volatile cryptocurrency because its price can fluctuate by more than 10% in a few hours. It can be unstable and unpredictable, for example, recently, the price of Bitcoin was close to reaching the $20,000 mark. However, it quickly fell below $18,000 in a few days.
Accordingly, this makes Bitcoin a poor candidate for money. A currency should be stable enough for consumers to trust that their money has the same purchasing power over many years.
A crypto coin needs to keep its purchasing power for more consumers to adopt it. It should also have low inflation like many fiat currencies. It needs to be low enough that it encourages coin owners to spend their crypto rather than just holding on to it.
Fiat currencies are stable because they are backed by a reserve asset like treasury bonds or gold. Institutions like central banks also control the supply of the currency. These currencies maintain their value because the reserve assets act as collateral.
Determining The Value Of Cryptocurrencies
Three Factors Of Crypto Value
Three major factors affect the value of cryptocurrencies. These factors also determine if a cryptocurrency is a good store of value.
The first factor is utility. A cryptocurrency should have a function that compels people to use it. Its utility could range from being a mode of payment, a platform for creating applications, or dividend payments for owning coins. For example, developers need to use Ether to pay for computing power on the Ethereum blockchain.
Cryptocurrencies without utility have no fundamental value. This means it has no practical reason to exist, so investors and trade would not buy into it.
The next factor is scarcity. This is when there is a fixed supply of a specific coin. Bitcoin has a hard cap of 21 million coins. The idea is that a finite supply of a coin with utility will incentivize investors to purchase more of the coin. This increases the coin’s value because demand is higher than supply.
The final factor is the perceived value of the cryptocurrency. A crypto project that continues to grow in value and meets all its development goals could be seen as a good investment by adopters. Also, if the coin’s utility gains in popularity, this would also push up the coin’s perceived value.
The In The Money and Out Of The Money Indicator
Now, these three factors do not include the volatility of crypto. Currencies need to maintain a stable value for many years. Many cryptocurrencies do not meet this requirement even though they have three factors of value.
One can look at the In The Money / Out Of The Money indicator. It is a calculation of every on-chain address with a coin balance and the average price of the bought tokens.
If the average price is lower than the current market price of the crypto, the addresses are In The Money. If it’s higher, the addresses are Out Of The Money. At The Money is when the average price is very close to the market price.
The point of the ITM / OTM indicator is to see if coin holders gain or lose value over a period of time. Bitcoin’s addresses are an almost equal split between ITM and OTM. This means that Bitcoin is a good store of value because a big proportion of Bitcoin holders have not lost but gained value on their assets.
In contrast, Ethereum has an OTM percentage of 82%. This means that most holders’ coins lost value over a period. This makes Ethereum a poor store of value. One reason for this could be that Ethereum launched with pre-mined coins. This is significant because the coins were distributed fairly across the blockchain.
Is Cryptocurrency A Good Store Of Value?
The answer is yes, and no. Bitcoin is the largest cryptocurrency in the world, is growing every day, and users can use it as a payment method with many vendors. It is a high-value asset that some investors believe will rival gold in the future. However, it is still prone to volatility in the market.
Moreover, Bitcoin exchanges that offer BTC to USD trading pairs usually take a few days. This means that an ordinary citizen would have to wait to use their Bitcoin when going to the supermarket. Perhaps soon, Bitcoin could be used in this situation, but it’s not there yet.
Also, Bitcoin is not entirely fungible. The fungibility of an asset refers to its ability to be broken down and used for a variety of purposes without losing its value. Bitcoin used in criminal activity becomes blacklisted. This means it cannot be used again, and this affects Bitcoin because of its finite supply.
On the other hand, Bitcoin is a high market cap crypto that continues to grow as investors and traders see the future benefit of blockchain technology. Bitcoin is also most investors’ entry point into the crypto market, so demand is always high. This makes Bitcoin a good store of value as demand increases. More importantly, the ITM / OTM indicator shows that Bitcoin does not lose much of its value over time.
Finally, Stablecoins are a better store of value because they use fiat currencies and reserve assets to remedy price volatility.
A good store of value is a cryptocurrency that has low inflation, utility, and is not prone to huge price fluctuations.
Also, the ITM / OTM indicator can show how the value of cryptocurrency rises or falls within a given period. By looking at this, an investor can determine if a coin is a good store of value or not.
Finally, stablecoins and some tokens are also good stores of value because they are backed by fiat currencies and a blockchain, respectively.