Bitcoin is a young and new class of investment. In the renaissance the Medici family stored much of their wealth in gold. But since the rise of paper money, vehicles for storing wealth are typically stocks, bonds, and real estate. Why is this?

At his death, Giovanni was worth 180,000 Gold Florins

Like many common currencies, the number of Canadian dollars has increased at roughly 10% per year, for the past forty years:

Decreasing scarcity of dollars, euros, and yen (and anything) reduces their value. People are induced to seek alternative stores of wealth, such as stocks, bonds, and real estate.

Nikkei Nikkei Yen Yen

Although correlation does not imply causation, on October 31, 2014 the Bank of Japan made a surprise announcement it would accelerate the already-fast rate at which they create yen. That week the Yen lost 7% of its value and the Nikkei hit a seven-year high.

Investing in stocks and bonds is expensive: research must be performed and fees must be paid. Research and fees also apply to real estate, along with taxes, repair bills, and dealing with renters who spill things on the carpet.

As more people realize the superiority of bitcoin, they sell dollars, yen, euros, and pesos to buy some. This increases the value of bitcoin and decreases the value of popular money. This caused the exchange rate for bitcoin to USD to roughly double every five months for the last five years:

Logarithmic graph of price of bitcoin in USD. From Blockchain.info Jan 15, 2015

A Drop In The Bucket

Only a couple million people are estimated to own any bitcoin. As bitcoin goes more mainstream the sale of common money will continue to lift bitcoin.

But still that will only be a splash in the bucket. If bitcoin becomes commonly accepted, then the reasons to invest in stock, bonds, and real estate will dry up, and wealth from those assets could be lift bitcoin to the moon.

What to watch: Warren Buffet Wisdom and Bitcoin