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Bitcoin as a Store of Value: Part 2

Earlier in the year we provided an analysis of Bitcoin’s role and potential as a Store of Value.  One can find that analysis at the following link:

https://cryptortrust.com/2016/06/28/bitcoin-as-a-store-of-value-where-1-really-adds-up/

Prior to catching up on where we stand currently, let’s review a definition of the term Store of Value so we clearly understand the intent here.  This is how Wikipedia defines Store of Value:

store of value is the function of an asset that can be saved, retrieved and exchanged at a later time, and be predictably useful when retrieved. The most common store of value in modern times has been money, currency, or a commodity like gold, or financial capital.

The definition of Store of Value as a function is certainly easy enough to understand, but let’s not confuse simplicity with lack of significance.  An effective Store of Value needs to be easily and seamlessly retrieved, exchanged at a later time, and predictably useful when one does retrieve it for use.  Discussions over practical use and what is most likely to happen in a world dominated by technology and mobile connectivity can easily lead to a comparison of Bitcoin and gold and silver as a Store of Value.

Critics of Bitcoin tend to refer to how gold and silver continue to withstand the test of time and “hold their value”.  That is true.  The physical piece of metal, assuming it is not fake, will always retain some level of value.  However, it is more important to consider which options that we have now will perform the best as Stores of Value moving forward rather than the past performance and history of precious metals. 

Given that, let’s compare the performances of Bitcoin, gold, and silver as Stores of Value measured in USD and going back to September 1, 2015.  We will compare the price action from this date because in middle to late August of 2015 the PBOC (People’s Bank of China, or China’s “Central Bank”) started to very clearly and publicly reveal its intentions to devalue the Yuan.  Although we understand that nations always have and always will engage in “currency wars”, this verbal and written action by the PBOC ratcheted up the intensity.  We can see this is indeed the case simply by looking at the Yuan versus USD and the Yuan versus a basket of currencies representing China’s top trading partners since this time.

Here is the performance of each denominated in USD since 9/1/2015:

Bitcoin +305%

Gold +3%

Silver +9%

Naturally after major moves in prices people tend to ask if it is “too late” or if they “missed out” on an opportunity.  This raises the question of whether it is “too late” to effectively use Bitcoin as a Store of Value and where we are in terms of this entire experience with Bitcoin and cryptocurrency in general.  In short, how much potential still exists for the market value of Bitcoin to rise substantially?

This analysis contends that we are still very, very early in the game fully understanding that Bitcoin has been operational since 2009.  Bitcoin enthusiasts, early adopters, blockchain techie experts, and VCs tend to express frustration over a “lack of killer apps” or the purported failure of Bitcoin to “go mainstream”.  We will analyze what killer apps may appear next in another piece but regardless there is still an absolutely enormous amount of potential for Bitcoin to continue performing exceptionally well as a Store of Value.  In fact, this analysis contends it is likely that the “killer app” of Bitcoin will remain Store of Value for the foreseeable future because it has the most direct and significant impact on human nature and hence economic behavior.  Applications for the use of Bitcoin will continue to emerge but there is certainly nothing wrong with Bitcoin “only” being used by most as a Store of Value for the time being.

Part 1 of our discussion of Bitcoin as a Store of Value looked at merely 1% penetration of massive pools of funds such as bank deposits in China and global FX daily trading volume.  Obviously those factors are still present, but let’s veer into another couple of topics that could also play a strengthening role in the very near future.  An emerging battle between Bitcoin and gold, looming Bitcoin ETF approvals at the SEC (Securities and Exchange Commission), and the extremely intense battle against cash are three spaces that could very well shine bright lights on Bitcoin over the next several months and beyond.

Given the price performances noted above it is natural and highly likely that more and more people and investment professionals start to at least consider trimming exposure to precious metals and initiating exposure to Bitcoin.  Gold topped in 2011 and has been in a bear market since with the typical bear market rallies elevating levels of hope that “this time is different” and gold will soon instantaneously vault to $5,000/oz or $10,000/oz.  Perhaps gold will enter a new bull market at some point but the reality is that over the last 12, 24, 36, and 72 month periods, gold’s performance falls well short of that of Bitcoin.  Globally about $7 Trillion is stored in gold.  The GLD ETF stores about $30 Billion and there are several other ETFs related to gold or gold miners.  Bitcoin currently stores around $15 Billion.  As more people ask why they should not shift at least some funds oriented around gold into Bitcoin the size of the potential funds moving could substantially impact Bitcoin’s market value.

This analysis will not speculate on if or when either of the two pending ETFs for Bitcoin will or will not gain approval from the SEC.  Chances are that at some point there will be a way for individuals and institutions to gain exposure to Bitcoin through the status quo channels if only because of the desire of the establishment to profit from Bitcoin.  However, the key here is the potential for institutions to be able to enter into significant Bitcoin positions via an ETF eventually.  Currently there is no seamless and direct way for professional money managers to gain exposure to Bitcoin using OPM (“Other People’s Money”).  In most cases the charters and regulations governing their funds place very strict controls on what they can and can’t buy.  If institutions could quickly direct seven and eight figure sums into Bitcoin or even more this would have an enormous impact on Bitcoin’s market value in both directions.  People may not completely understand and absorb that unlike gold or silver money managers moving very large sums of funds can’t simply buy a large chunk of Bitcoin with the click of a mouse or phone call.  Professional money managers crave and need Alpha (the delta or difference between their AUM and fund’s performance and its benchmark).  Don’t be shocked if Bitcoin ETFs are used to try and generate Alpha.  This is a potential stimulus that is still sitting out there as a future catalyst.

Venezuela.  India.  Australia.  Pakistan.  These are not tiny countries with miniscule populations in the grand scheme of things.  Venezuela and India already banished certain bank notes literally at the drop of a hat and instantly created even more havoc for their citizens and economies.  Australia and Pakistan announced plans to do the same in the near future.  It is very obvious that this is not a crazy, hypothetical scenario and that Central Banks are and will continue their battle against physical cash (to see our prior analysis click here: https://cryptortrust.com/2016/07/07/real-reason-for-cash-ban-and-why-it-will-only-boost-bitcoin/ ).  Banning cash will only push more people into using Bitcoin as a Store of Value and even a Medium of Exchange as well.

Despite the exceptional performance of Bitcoin since 2009 as a Store of Value relative to all major currencies, we are still very early in the game.  The current market value of Bitcoin is a microscopic drop in the bucket in the global tsunami of fiat and liquidity sloshing around.  We have not yet even seen the impact institutions can have on Bitcoin and the War on Cash is just entering the tornado phase.  Shifting 10% of the $7 Trillion stored in gold currently is $700 Billion.  How high can Bitcoin’s market value ultimately rise over time?  We can’t answer that definitively.  How much DEBT IN TRANSIT (state sponsored, Central Bank issued fiat currency) can be exchanged for Bitcoin?

Stay focused on the basic fundamentals:

SCARCITY

STORE OF VALUE

UNIT OF ACCOUNT

MEDIUM OF EXCHANGE

PORTABLE

FUNGIBLE

DIVISIBLE

HARD TO COUNTERFEIT

EASY TO STORE

David Young

Buy Bitcoin in 3 Simple Ways

Cryptocurrency is a new thing for almost everybody. It is a revolutionary way of thinking money as well as using it. In this quick guide we review three options to buy bitcoin all over the world.

> 1st Option – Buy Bitcoin Face to Face from a Seller

bitcoin_payment
Illustration by Harry Campbell

Nowadays there are firm possibilities of finding other bitcoin enthusiasts in your city town that would like to make a face to face deal with you. This could be a great first experience since it allows you to research who the seller is before taking your chances, and spend some time exchanging ideas and personal experiences if you arrange the meeting.

For this purpose you can find people in many places. From eBay to Facebook and Linkedin groups, Twitter and local Meetups.

There are also companies in the bitcoin ecosystem that have seen this need and created a marketplace to connect bitcoin buyers and sellers. Two of them are LocalBitcoins and TradeBitcoin.

> 2nd Option – Buy Bitcoin Using Exchanges

Bitcoin exchanges have popped up everywhere. You can use global exchanges widely accepted in many regions, or choose a local dedicated bitcoin exchange at your country. Both options have positive and negative connotations, so you should try to make the most informed decision.

Take this three suggestions to help your decision:

A- Local exchanges are incorporated as local companies, meaning that while bitcoin might not be recognized by the local government, companies are still regulated under the jurisdiction. They pay taxes, adjust to the local legal frame and have responsibility towards customers.

B- Regional or global exchanges do not provide the advantage above, but might have enough social/user proof on their records to justify your choice. Have in mind that some of them have received large sums of money in VC funding to support their operations and take it to the next level, what doesn’t provide 100% assurance but is an element that others might not have.

C- Finally, always read the terms of use AND find where people is talking about this exchanges, whether they say good or bad things about them, testimonials are the best reference point to consider.

[Would you add other suggestions to this list? Please let me know in the comments section!]

> 3rd Option – Buy Bitcoin as an Exchange for Goods or Services

This is probably a zero risk way to build your bitcoin first capital. I’m sure you might be an specialist in something that somebody else could need and would accept as a payment for his bitcoin. In the same way, if you have goods not currently in use, you can exchange them for bitcoin. The benefits of bitcoin for small business owners are encouraging!

Maximiliano Garcia
Cryptor Trust Inc.

Learn How Bitcoin Transactions Work

Bitcoin transfers are one of the main concerns for those taking their first steps at the crypto-currency ecosystem.

For sure you already know how the usual electronic transfer operates. There are two parties and a middle man. The two parties want to electronically move money from one side to the other. To do so they need a middle man that provides the service, call it bank, Paypal, Western Union, etc. who will almost always take a pretty relevant percentage of the money being sent.

> So, What is Different with Bitcoin Transfers?

money-transfer-stock-board

In the first place, the middle man is now out of the equation. Transfers are made from peer to peer (P2P) using bitcoin wallets. This is digitally signed for security reasons.

> The Transaction Structure Involves 3 Pieces of Information

Those are: Input > Amount > Output

Supposing that John wants to send bitcoins to Mark, the first piece of information is the “Input”, which specifies the address from where John received bitcoins in the first place (from Peter’s address). The second piece of information is the “Amount” that John want to send to Mark, and the third is the “Output”, which will be Mark’s wallet address.

The transfer is distributed through the network and registered in a vast general ledger (public record) called block chain that validates all transactions. This means that everyone can know about transactions being made and trace its history to the point of its inception.

> Sending Bitcoins is Fairly Simple

To send bitcoin, both the address (public key) and the private key assigned to your bitcoin wallet are needed.

At the time John (from the example above) wants to send bitcoins to Mark, the private key is what he will use to sign the message that includes the input, amount and output (Mark’s address).

After the bitcoin is sent from John’s wallet into the BTC network, miners will verify the transaction, put it on a transaction block and solve it. This verification process made by miners usually take up to 10 minutes or less. The bitcoin protocol is set on that time frame to mine each block. You should wait until the process is fully confirmed, but usually some merchants will trust on you assuming that you will not try to spend the same bitcoins before the process is completed.

> Bitcoin Transactions May Involve Fees

Bitcoiners will not always have to pay transaction fees, but that doesn’t mean you shouldn’t. Wallets usually let you manually set the transaction fees. Miners usually process transactions for free as they are rewarded by the block (with bitcoin), but we might see miners starting to raise some low fees in the future, as the block reward decrease.

Sometimes there are portions of transactions that the recipient doesn’t pick up or is considered as change. This is usually considered a fee or a tip for the miner’s good job!

If you have any doubts about how bitcoin transactions work, please let us know by leaving us a comment in the comments section below.

Maximiliano Garcia
Cryptor Trust Inc.