Cryptocurrency and the store of value question
Bank of England (BoE) Deputy Governor Dave Ramsden took the occasion of a late April 2019 CNBC interview to reiterate the government's official position that cryptocurrencies do not qualify as a store of value. That position was adopted by the UK's Financial Policy Committee in 2018.
All of the reasons cited by Ramsden make sense only if one views cryptocurrency as separate from any and all other assets an investor might buy. But when you start comparing it to things like fiat currency and precious metals, the line between what constitutes a store of value and what does not starts to blur.
There probably isn't a black and white answer to the store of value question. Therefore, it is up to each investor to decide for him or herself whether or not to put money into cryptocurrency. To that end, it might be helpful to go through the principle of store of value and how it might apply to cryptocurrencies like Bitcoin, Litecoin, Ethereum, etc.
Store of value defined
The place to start our discussion is with a concrete definition of store of value. For that we turn to Investopedia. According to a definition published on 30 July 2018, a store of value is "an asset that maintains its value without depreciating."
Investopedia goes on to talk about precious metals, perishable goods, and even interest-bearing assets like U.S. Treasury bonds as it seeks to explain the difference between a store of value and some other asset with little to no value guarantee. We will not go through the details of that post here. Rather, we will focus on the core definition suggesting that a store of value is an asset with a stable value not subject to depreciation.
Note that 'depreciation' is the operative word here. From a business and investment standpoint, depreciation is the natural process of an asset losing value over time. However, the loss of value has less to do with supply and demand and more to do with a loss of usefulness.
A building that constitutes a company's headquarters may depreciate over time if it is not maintained and/or upgraded. Why? Because that building will become less useful without proper upkeep. Even if demand for commercial property in the local area is high, the value of that building will not be in line with local trends because it is less useful in its poorly maintained state.
Precious metals as a store of value
With a proper definition at hand, let us move on to precious metals. They are often cited as one of the strongest stores of value available to investors. Take gold and silver for example. It is generally accepted that both precious metals will always have value regardless of supply and demand. They will always have value despite their market price in relation to fiat.
Undoubtedly you have heard people encourage you to put money into gold or silver during times of recession. As the thinking goes, both precious metals will give you spending power even if fiat totally collapses. This is a perfect illustration of why gold and silver are considered stores of value.
There is only one problem with this thinking: you cannot take a gold coin down to the market to buy a loaf of bread. Not only is the market not likely to accept your gold coin but, even if it did, they would not have enough cash on hand to give you your change. And if fiat completely collapsed, there would be no measure to determine how much gold to charge for a loaf of bread. Its usefulness as a means of buying things suddenly goes way down.
Precious metals and supply and demand
One also cannot deny that the price of gold and silver is intrinsically linked to supply and demand - just like cryptocurrencies. As more people want gold, the price goes up. When investors begin selling off silver, prices go down. This is one of the fundamentals of free markets that does not change regardless of how 'store of value' is defined.
If you have been around long enough to know anything about precious metals, you know that the prices of gold and silver can be terribly volatile. Yet strangely enough, one of the reasons the BOE takes such a strong position against cryptocurrency is its volatility. They claim that volatility makes cryptocurrencies not eligible to be classified as stores of value.
As a medium of exchange
The next argument offered by the BoE against cryptocurrencies being a store of value is the innate lack of utility as a medium of exchange. In simple English, it is the BoE position that not enough people are using crypto as a monetary system to justify considering a store of value. BoE officials cite the alleged high cost of transacting business in crypto as a problem here.
Let's look at both of these arguments individually, beginning with using crypto as a medium of exchange. Understand that Bitcoin was conceived as a medium of exchange more than a decade ago. Bitcoin was never intended to be a store of value as an investment; it was intended from the get-go to be a way to pay for things electronically.
To that end, Bitcoin and its competitors have more than succeeded - at least in terms of potential. Unlike fiat currencies, cryptocurrencies are available to anyone in the world with an internet connection and either a computer or mobile device. Anyone can establish a digital wallet and purchase crypto. Anyone can use that crypto to send funds or transact business.
The only area in which this argument has legs is in cryptocurrency's utility. In other words, the majority of the world's merchants still do not accept cryptocurrency payments. That is not to say they can't, just that they choose not to. But this lack of participation among merchants by no means implies that cryptocurrency is not a practical means of exchange.
Quite to the contrary, cryptocurrencies are incredibly practical. They are even more practical than credit cards, debit cards, and bank transfers. Why? Because cryptocurrency transactions require no middleman and no settlement. Moreover, they occur nearly instantaneously.
As for the suggestion that transaction fees are too high, the BoE clearly has never done business with crypto. Fees for most people are significantly lower when you compare them to all of the cumulative fees charged by banks, payment processors, credit card companies, etc.
Not a currency, either
Ramsden's criticism of crypto did not end with the store of value question. He went on to say that your typical crypto does not meet the definition of a currency because of its small size (volume) in relation to fiat. In essence, Ramsden is saying that because the total number of coins released by any given cryptocurrency pales in comparison to the number of bills and coins minted by central banks, crypto does not qualify as a legitimate currency.
That argument makes absolutely no sense. Since when is the volume of bills and coins in circulation a precursor to classifying something as a currency? If every one pound coin in the UK were recalled and taken out of circulation, would sterling no longer be a legitimate currency? Absolutely not.
Bills and minted coins are nothing more than paper and metal. They are only worth anything at all because those who do business with them agree to their value. If the entire UK agreed that sterling no longer had any intrinsic value, it would collapse instantly.
In that sense, fiat is identical to cryptocurrency. It is only worth something if people agree to that worth. That takes the volume argument out of the equation. It puts both fiat and crypto on a level playing field where consumers get to choose which kind of currency they prefer.
Store of value for investors
Cryptocurrency investors that argue in favor of their digital tokens being a store of value are quick to cite historic appreciation as the final arbiter. They say that when you compare the appreciation of most cryptocurrencies against other stores of value over a long period of time, crypto comes out on top.
The argument does hold some water, but most of it is due to the 2017 banner year that saw the bulls push Bitcoin prices to nearly $20,000. You know where the price is today. Take out that temporary boom and you have relative parity for the most part.
Arguing in favor of crypto as a store of value is rooted in the belief that anyone can make a profit on cryptocurrency investments if he or she is willing to wait long enough. It is similar to arguments in favor of stocks and commodities. Markets do have their ups and downs, but most markets historically appreciate over prolonged periods of time. So hold on to your bitcoins long enough and you make a good profit.
So where does that leave us? The same place such discussions always leave us: with the individual investor getting to make his or her own choice. If you believe cryptocurrency is a store of value worth investing in, go for it. If not, find someplace else to put your money. Whatever you do though, do not assume that the position the BoE takes is gospel simply because it is their position. They have been wrong before (for example selling Britain's gold between 1999 and 2002, when gold prices were at their lowest in 20 years), and they will be wrong again in the future.