Bitcoin analysis part 4: can it be a useful store of value?

An attractive store of value is scarce, durable, and maintains a stable price over time. Bitcoin is currently lacking in all these aspects.

This is the fourth article in a series analysing Bitcoin. The other posts are linked at the bottom of this piece.

A store of value is something whose price remains stable over time. Bitcoin doesn’t fit the bill at the moment, as its price swings wildly from day to day. Yet the cryptocurrency’s promoters believe that as time goes by it will settle down and shine as a kind of “digital gold”.

In this post, I’ll explain how Bitcoin measures up against two of the world’s most widely-used stores of value: the US dollar and gold. I’ll focus on three attributes that are desirable in a store of value:

Price stability

Scarcity

Durability

Price stability

To see how bad Bitcoin is as a store of value, let’s compare it to the US dollar. In the chart below, the green line shows the price of a typical basket of goods in the US (the Consumer Price Index) in terms of the dollar. The line is almost flat from 2014 to 2017, meaning that the dollar held its value consistently over the period. Someone holding dollars could be confident that the money would buy roughly the same amount of goods and services whenever he decided to spend them in the years ahead.

Contrast that with the red line, which shows the price of the same basket of goods in terms of Bitcoin. From month to month, the price of things in terms of Bitcoin veers all over the place. Holding Bitcoin exposes someone to the possibility of windfall gains, or big losses. This may be a desirable quality for a speculative asset or a casino, but not in a store of value.

Bitcoin faces a massive chicken-and-egg problem here. For its price to be stable relative to other goods and services, it would need to become deeply embedded in an economy as a medium of exchange and a unit of account. But as I’ve explained in the last two posts, this is extraordinarily unlikely to happen because fiat currencies already do these jobs more effectively than Bitcoin.