Whether it be on Reddit, Medium, Twitter or more mainstream media, one of the most popular argument brought forward by Bitcoin supporters is that Bitcoin acts as a store of value, essentially representing a kind of ‘digital gold.’ This is utterly false.

Skipping all the counter-arguments that can be made about the shift from the original philosophical objectives of Bitcoin as a peer-to-peer digital currency to a store of value, the simplest way to dismantle this narrative of digital gold is by explaining why comparing it with gold is a false equivalency.

Value vs. valuation

The most difficult concept for new investors to grasp seems to be the concept of value. In almost any society, our first role economic role is that of a consumer. Even as children, we manage minute wealth: we buy (or, more often, encourage our parents to buy) toys, candy, video games, light-up shoes, Spider-man backpacks and more. The collective influence we have as kids is enough to support entire industries. It’s also our first exposure to the economic system: we learn that in many cases, we can fulfill our desires (value) by spending a variable amount of money (valuation) for goods and services. Even as adults, being a consumer remains a principal role, so it’s only natural that we tend to equate value with valuation. In reality, this is rarely the case.

The image above illustrates the influence of manipulation in different markets (crypto, stocks and apples). Usually, when supply is large and indistinguishable, a market is considered commoditized and will abide by the rules of the free market: price will be equivalent or close to the supply and demand equilibrium point. Even in a commoditized market, cartels can be formed. These cartels control a vast portion of supply and intentionally shift the point of equilibrium with the objective of increasing profits. This is the case with Bitcoin and most other cryptocurrencies.

Value is a feeling

If value is not equal to valuation, then what is value?

In a perfectly free market, both are equivalent, so it will come as no surprise that even educated adults have a hard time discerning the two. The easiest way to understand value is by using the most universally consumable good as an example: food. We are able to quantify the impact food will have on our hunger by breaking down nutritional value and calorie count, but we can go further than that.

In the end, we experience the world in the form of electrical signals in our brain, which are interpreted as sensations and emotions. As such, anything that doesn’t directly contribute to our survival only has value if it can make us feel better: either by suppressing negative sensations or emotions, or triggering positive ones. Food eliminates hunger, an umbrella shields us from the cold discomfort of rain and a long massage deeply relaxes our body. Those are the more obvious examples, but what about something a little more complex like a sports car?

In the graph above, we can see a very simplistic depiction of value extracted over time from our sports car purchase. The blue, orange and grey areas represent value experienced as excitement, status and functionality, respectively and over the span of six months. If we had a formula that allowed us to normalize and weigh emotions to quantify them in a standard manner, we could measure the impact of each of these emotions has and assign a precise ‘inherent value’ number to anything we’d like. Being inherent, this value does not rely on a functioning economy; it simply requires the presence of a living being to experience it. Furthermore, all value is ultimately pegged to inherent value: any price we assign to a good or service is contingent on our ability to generate an ‘emotional profit’ (although several steps may separate our direct use of our purchase from this profit), ergo prompting us to evaluate our good or service positively. As soon as the bridge between extrinsic and inherent value is broken, the former is meaningless.

Bitcoin is no gold

The narrative of Bitcoin as ‘digital gold’ has existed for a few years now, largely created as a response to skeptics who have witnessed the network’s scaling difficulties and subsequently rising fees. Unfortunately, it does not hold up to scrutiny.

A common argument presented against the store of value line is that Bitcoin’s volatility makes it ineligible, especially in the light of losing nearly 85% of its market capitalization between late December 2017 and January 2019. It’s a valid concern, but Gold has been through similar cycles before: since a high of nearly 1,900 USD/oz in 2011, its price went down to almost half that (1,050 USD/oz) in 2016 and it has yet to fully recovering, sitting today around 1,280 USD/oz. The percentages aren’t as dramatic, but gold is widely considered to be one of (if not the) main store of value today. Why is that?

The answer lies with the velocity of wealth. Items that appreciate over time tend to be hoarded, while those that lose monetary value over time tend to be used or spent quickly. In the end, however, the rate of consumption (and its relation to the rate of production) is the most important force, because consumption is the bridge between monetary and emotional (and thus, inherent) value. Nevertheless, an object does not need to be destroyed during this consumption process: a painting can be consumed by thousands of different people simply by attracting their gaze for a moment, yet it will still be present the next day.

For gold, this rate of consumption is likely much higher than you think. An estimated 47.7% of total gold supply is in the form of jewelry, while only 38.2% is held as private or official sector investments, with the remaining 14.1% present in our technology and other use cases. In other words: the world values gold because of its inherent properties just as much as its financial worth, making it a good store of value.

Unlike the precious metal, Bitcoin is incredibly hard to consume, and as such very few people do consume it. It is is not a very fast currency, nor is it cheap to use. It is not a particularly safe way of storing wealth due to its volatility, and it is not anonymous or private either. As such, only individuals in extremely poor or unstable countries are able to truly consume it, as superior alternatives are available everywhere else. Even then in their case, however, much better alternatives such as the Tangle and its native currency, IOTA, are set to disrupt the stage and would make Bitcoin entirely irrelevant. So, Bitcoin leaves us only with extrinsic value: it enables ‘investors’ to sell to other ‘investors’ who believe they themselves will be able to perform the same trick. This is a literal application of the Greater Fool theory, making Bitcoin as it currently stands a terrible currency, a terrible store of value and a terrible investment.

Sources:

[1] Gold price history

[2] Gold supply