Bitcoin can be a store of value, according to Nobel Laureate Eugene Fama. But only if it becomes accepted as money or medium of exchange. And it’s long.
The Economist observed that everything acquires value if there is an opportunity cost. For a medium of exchange, this opportunity cost is a limited supply. Bitcoin’s limited supply of 21 million makes it a candidate to become a medium of exchange. But there are still some hurdles for the leading cryptocurrency.
Bitcoin as a medium of exchange
Money is a unit of account and must be stable. It must be a store of value and retain its value over time.
But Bitcoin has not been stable. Even before entering its highly volatile trend in 2017, the coin rose an average of 2% from 2013 to 2017. In 2017, the coin rose from under $1,000 to over $19,000 before falling back to $8,000 in 2018. During the pandemic, the ups and downs were more dramatic. Bitcoin hit an all-time high of $65,000 in November 2021 before falling below $20,000 this year.
Although the coin has achieved higher returns than most other asset classes since 2008, the economist observes that it cannot be a long-term store of value unless there is something gives it this value.
Bitcoin will only stabilize when people start believing in its use as a medium of exchange. But people aren’t doing it yet, for good reason.
Fama was awarded the Nobel Prize in 2013 for his work on the efficient market theory hypothesis, portfolio theory and asset pricing. The Nobel laureate says Bitcoin’s volatility means the coin can go up or down dramatically from day to day. This makes it a poor medium for trading.
Economic activity is the exchange of goods and services and depends on a medium that can retain its value with a minimum of fluctuations. An economy based on a volatile environment will not survive.
Other Value Store Options
Bitcoin also has no intrinsic value despite its limited supply. On the other hand, gold, the supply of which is also limited, has intrinsic value but has been too volatile to be a store of value. Foreign exchange reserves have become the store of value, but after the Fed bought bonds in unprecedented amounts, even that is now considered unlimited supply.
Inflation, which has reached 40-year highs, appears to be easing as August showed a rise in the consumer price index of 8.3%, lower than July’s 8.5%. But core inflation rose 0.6% from July and indicates that higher prices will be present for some time. The only tool to fight inflation are interest rates, not Bitcoin or gold, concludes the economist.
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