Is Bitcoin the only store of value?

tldr; By definition, any cryptocurrency can be a store of value. Bitcoin is likely to remain the premier store of value due to its age and that there is historical precedent for “just good enough” solutions becoming too entrenched to be displaced by better ones.

Introduction

One of the harder questions to reason about is whether Bitcoin will be replaced as a store of value by another cryptocurrency like Ethereum. Ethereum, for example, can do everything Bitcoin can do. There are no strictly technical reasons about the design of Ethereum which makes it fail to act both for its intended purpose (smart contract platform) and as a store of value. In this article I will describe what a store of value is; properties which allow a cryptocurrency to act as a SoV; what other cryptocurrencies can be viewed as stores of value; and how well they satisfy this use case.

What is a store of value?

From Wikipedia:

A 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. More generally, a store of value is anything that retains purchasing power into the future.

This can also thought of as something which is durable, liquid, easy to transfer, and price stable. These qualities are not binary and but for virtually all major cryptocurrencies, they are durable, liquid, and easy to transfer. What they currently fail at is price stability, with the exception of StableCoins.

Cryptocurrencies do not yet function as effective stores of value

This is because of their highly variable purchasing power fluctuations over short periods of time. In my analysis I will not touch on this topic much because it is a factor extrinsic to the technology, likely temporary, and a social issue. That said, StableCoins may act as an effective store of value given that they are designed to be price fixed, but all existing StableCoins are so young that there is no established history from which we can say these assets are actually durable. When the cryptocurrency ecosystem matures, the older projects will all more-or-less function as stores of value in the same way precious metals do. Being a store of value is actually pretty generic. Anyone saying other cryptocurrencies can also act as stores of value is correct.

Why is Bitcoin called a SoV if it’s a generic quality?

This actually has historical context. The biggest point of contention in the direction of Bitcoin’s development was its preferred scaling solution. A minority wanted Bitcoin to act as an efficient medium of exchange on-chain. The majority was willing to sacrifice this quality to retain decentralization and security, and felt that 2nd layer solutions were a better path forward. This is the origin of the medium-of-exchange vs store-of-value debate. Reframed another way, Bitcoin acting as a SoV is just saying that it is not meant to be an efficient MoE. It is not necessarily commentary on Bitcoin’s unique ability to act as a SoV.

What intrinsic properties make a cryptocurrency a better or worse SoV?

The most important property is age. The age of a token can give people an easy way to come to a consensus that it will survive in the long term. This is called the Lindy effect. All of these cryptocurrency projects are extremely young and there is a lot of uncertainty about their long-term viability for both technical and non-technical reasons. The older a project is the more certainty we perceive about its life expectancy.

The next most important aspect is the underlying utility of the token. The utility of tokens can give people an easy way to come to a consensus that an asset has intrinsic value. That this utility increases the demand of the token is a side benefit.

Tokens that were the first of their kind to offer a compelling feature are best-suited. Even though Bitcoin is probably the least fully-featured cryptocurrency, anyone switching from paper money to cryptocurrencies will see value in the project. Projects that lack differentiation from existing cryptocurrencies, or with an uncertain value proposition are worse suited. This is why ZClassic is not considered to be very useful, why XRP has an uncertain future, and why ETC lives in relative obscurity.

The third aspect is monetary policy. The monetary policy can give people an easy way to come to a consensus that an asset will remain scarce. Namely, what happens to your share of the token supply over time? Fixed token supply, deflationary policy, and disinflationary policy which converges to some upper bound are all good; No longer how long you hold your tokens, their value will not be diluted. Projects with inflation and hence an unbounded supply are worse suited. A cryptocurrency with inflation makes it not much more effective as a SoV than paper money.

Together these features help people come to a consensus about the durability, value, and scarcity of an cryptoasset. Since every cryptocurrency fulfills the basic technical requirements for acting as a SoV, which ones actually are used for this purpose come down to consensus.

The current argument for Ethereum

It comes down to utility of the underlying token. Ethereum is the premier smart contract platform, so its functionality extends to every smart contract. While there are other tokens that could be candidates for displacing Bitcoin, the most fully featured kind of token will be a smart contract platform. In contrast, Bitcoin is just a vanilla cryptocurrency. It lacks features by design and this will not change. Everything Bitcoin can do, Ethereum can do.

Today it is easy to see Bitcoin as having value given that it is the representative cryptocurrency. When making the switch from paper money to cryptocurrency, the value proposition of Bitcoin is clear. But what happens when that transition ends and cryptocurrencies become normalized? At that time, it will be harder to reach a consensus that Bitcoin has inherent value. Also at that time, the dApp ecosystem may be well-developed, where any person can see the utility in dApps. Perhaps that lack of consensus around Bitcoin and growing consensus around Ethereum will make Ethereum the premier store of value.

The argument for Bitcoin

There is an idiom “The enemy of the perfect is the just good enough.” The history of technology has a continuing trend where the first major iteration of an invention is compelling enough to achieve widespread market dominance, never to be displaced by better, more efficient iterations. The best-known example is the QWERTY keyboard. The layout of the keys was chosen during a time where typewriters were mechanical and would jam, so the design was not optimized for, and possibly optimized against, fast typing. Better keyboard layouts like DVORAK were eventually developed for faster typing and less hand strain but failed to reach a substantial level of market penetration. Most people have probably never even heard of DVORAK. QWERTY was so ubiquitous that it could not be replaced by a better iteration of the keyboard layout. Many other examples exist.

A store of value is likely to take the same path. Bitcoin may not be the only store of value, but it will likely be the most widely used for that purpose due to its network effects. I doubt that we are going to see Bitcoin being completely displaced or fade into obscurity because I am not even sure if there is a historical precedent for this. On a technical level Bitcoin is near optimal as a SoV. It is not as if Ethereum will replace Bitcoin for this use case as cars replaced horses, because ETH does not have any meaningful technical advantages as a SoV compared to the incumbent. Bitcoin in its current form is already “just good enough” for the purposes of acting as a digital SoV.

Best stores of value from the above criteria

Bitcoin is the clear winner due to its age, being the oldest at almost ten years. This is a huge head start in an ecosystem where most projects are just a few years old. Even though Bitcoin is not the most fully-featured project, anyone switching from paper money to cryptocurrencies will see a clear value proposition in Bitcoin even though it lacks features relative to newer projects. Eventually Bitcoin may be the QWERTY keyboard of cryptocurrencies where network effects keep it in a position of prominence.

I think Ethereum is unlikely to overtake Bitcoin as a store of value for a number of reasons. The most important reason is Vitalik’s plans to switch to proof-of-stake, which will mean the token supply has an inflationary component. There is also too much about the project which is in flux right now, with many major features on the base layer yet to be completed such as the PoS migration and sharding. As experimental software whose final form is ambiguous and far from completion, I think it is too early to even have this conversation about Ethereum.

ZCash has a lot of potential as a SoV. The perfect privacy provided by zk-SNARKs is a very useful feature for parking your money and using the same monetary policy of Bitcoin works well for it. The big risk though comes from the possibility of undetected inflation. This is actually a pretty huge liability. If a nation-state were going to use ZCash as a reserve asset, the risk of the amount of value that could be wiped out due to a single bug like this would probably make them nervous.

Litecoin and Ethereum Classic are also worth mentioning.

Conclusions

All cryptocurrencies can act as stores of value by definition. What makes something a good store of value comes down to age, value, and monetary policy. These things allow people to come to a consensus about the durability, intrinsic value, and scarcity of an asset. Even though Bitcoin is not fully-featured like newer projects, there is historical precedent for just good enough solutions outcompeting better solutions that applies to this situation. Bitcoin, ZCash, Litecoin, and Ethereum classic are some of the best-suited SoVs today.