I started poking Bitcoin with a stick back in late 2013/early 2014 after discovering it by chance in a mainstream newspaper article.
I had little understanding of what it was about really, but I did know I was immediately fascinated. I kept reading and learning about it and eventually bought some. Well, once I’d figured out how to navigate the wild west of charlatans ready to steal my money, that is.
At the time, buying Bitcoin was a pretty risky proposition and trusting the wrong person or company would always result in a complete loss. Thankfully, this is no longer the case.
However, it wasn’t until 2017 that I started to get really serious, eventually selling my existing business so I could focus on it full time.
But here’s the point: during this entire period— and almost certainly before I even got involved — the argument over whether Bitcoin was actually a real and genuine ‘store of value’ raged backward and forwards between both supporters and detractors, sometimes even within their own camps. That’s over eleven years of ‘discussion’ to date.
Although my personal (and well documented) view has always been that Bitcoin most definitely IS an excellent store of value, this has been based only on my interpretation of the economic theory, a selection of sporadic examples and, to be honest, a little sprinkle of ‘gut feel’.
That is, until now.
Enter the Black Swan
Even as I type these words, Covid-19, also known colloquially as the ‘Coronavirus’, is sweeping across the world at an alarming speed, causing widespread panic and indiscriminate deaths.
This is not, of course, the first time such a thing has happened, but with each passing year bringing increases in international travel and technology creating more and more integrated financial systems, it is inevitable that each successive pandemic outbreak will cause more damage than the last.
In human terms, the effect of the outbreak is not yet fully known, but in economic terms, we already know where we’re going. And it isn’t good.
The markets had been enjoying years of high growth and were almost certainly due to a significant correction anyway, but as soon as one major company announced that they would miss their targets because of supply chain issues linked to the virus, it signaled the end of the halcyon days.
The selloff began.
So much for the rules
The dumping of equities and commodities that followed was as brutal as it was relentless. Bitcoin was caught in the rush to go full ‘risk-off’ and convert everything back to fiat.
At first, gold reacted positively as money tried to find any safe port in the storm — exactly as tradition dictates — but then something unexpected happened; gold, also, began to fall. After reaching a peak just shy of $1700 in early March, it’s now well below $1500, taking it back to the levels last seen in mid-December 2019.
Silver fared even worse, dropping back to levels not seen since 2009 which, in a crushing irony, was the very year Bitcoin itself began its life. That means if you put $100 into silver, you’d still have $100 today ($85.96 in real terms, adjusting for US inflation over the period), but if you’d put that $100 into Bitcoin, you’d now have $9,000,000. No, that’s not a typo.
Whilst, of course, this is technically an indicator of return on investment rather than of store of value, I think it’s pretty clear that we’re arguing semantics here. Call it what you will. I’d rather have had my money in Bitcoin than silver.
Oil had already faltered over the last decade, delivering a negative return between 2010 and 2020, but, as of yesterday, hit a double decade low. This was partly due to the global production crash coming into effect, but also of Russia and Saudi Arabia’s spat over production levels with the former determined to stop the US shale industry benefiting from higher prices.
Globally, markets wiped out roughly four years of gains within a few days, with most indices recording losses on a scale not seen since 1987 or even 1929. Everyone is now affected, whether directly in the markets or not, and this was bought home to me by the sudden arrival of an email this morning from my pension company.
I should point out that I have had a pension scheme with this provider in one form or another for over twenty years and this was the first time I had ever received an unsolicited email. It was apparently triggered because of regulation by the Financial Conduct Authority (a UK body) as it went on to explain:
Again, having an understanding of what is going on in the world, this didn’t surprise me at all, but it’s still hard to accept that your net worth has dropped so much in such a short time.
The bottom line is that at this moment in time, there are no safe havens at all. Not commodities, equities, bonds, Bitcoin or even precious metals.
There is only one place everyone wants to be; Cold. Hard. Cash.
Cash is a poor safe haven
Of course, moving to fiat is not without its problems. Leaving anything in pure cash terms will lose value over time with a certainty that is absolute due to inflation, so the fact that so many people are choosing to do this confirms the level of fear that currently exists. It’s not a great place to be, but it’s familiar.
It’s the ‘least bad’ option.
But now almost all governments around the world have embarked on an unprecedented level of Quantitative Easing to try and limit the damage caused by the spread of the Coronavirus. And when you print more money, especially to the level they are currently doing it, the laws of economics mean that its value will drop through inflation.
Everyone knows this of course, including the very policymakers driving it through, but right now this is about doing whatever is possible to support the system. The thinking is that we’ll get through and we’ll deal with the fallout later.
And that fallout will be enormous.
So, where does that leave Bitcoin?
Since Bitcoin’s price drop from just over $10,000 about four weeks ago to just under $5,000 at the low point a few days ago, the question as to whether it could ever be a real store of value has, of course, come up regularly.
I’d make three comments in response:
First, Bitcoin is very young compared to other assets. It is simply not widely adopted enough yet to be properly considered a store of value at this time. No-one, including myself, was surprised that it was included in the sell-off with all other assets because it’s still considered too risky for most people.
It’s possible that had this happened a few years into the future when Bitcoin has a much higher penetration globally, it would have been a different story. Even gold — an asset that has hundreds of years of a head start — couldn't hold its ground in such a crisis, but it’s tempting to think that something that would be much easier for the average person to turn to may be more appealing.
Second, the argument that ‘Bitcoin has no value’ must now be settled once and for all. The fact that Bitcoin did not even set a new twelve month low during the height of the sell-off proves that whatever we think of the asset, there is a confirmed perceived value at the very least. And perceived value, as we know from our own fiat currencies, is enough to support an entire system.
To put it another way, an asset that was truly considered to have no value would have fallen to zero the second there was the slightest hint of trouble.
Finally, the analysis of the blockchain reveals some fascinating data. The vast majority of the coins changing hands were last moved less than twelve months ago. This means that most people who sold almost certainly did so at a loss and had only recently joined the space in relative terms. It’s a classic knee jerk, panic reaction by green investors.
Coins older than 12 months were barely affected, meaning those who had a long term view remained as committed to the concept of Bitcoin as they were before. These people clearly think that Bitcoin is a superior store of value compared to fiat. For them, it’s another bump in the long road to wider adoption and value. They simply wouldn’t dream off offloading their Bitcoin for something as worthless and common as fiat.
What happens next?
We are in completely uncharted territory now in financial terms. There are no precedents and we’re making up the rules as we go along.
The only certainties we have are that governments will print as much money as they need to protect their own economies, there will be a much higher sustained rate of inflation in due course and it will take decades to recover. Things will probably never be the same.
Interestingly, this has created the ideal theoretical conditions for Bitcoin to thrive. It hasn’t needed a $1.5 trillion bailout to try and support it. It hasn’t activated any circuit breakers to stop its 24-hour trading. It is the only currency on earth that hasn’t increased its supply.
And yet, even without those things afforded to its financial counterparts, Bitcoin’s price has been recovering over the last 48–72 hours while gold has not. Even the markets themselves have been unimpressed thus far with the stimulus packages offered.
Meanwhile, silently and without fanfare, Bitcoin remains steadfast. It stands entirely unaffected in practical and financial terms, accessible to every single person on the planet with a smart device and internet connection. It remains easier to buy or liquidate than any other asset available to the everyday man.
Of course, we are many weeks (or possibly months) away from the end of the crisis that we now find ourselves in. The levels of quantitative easing are likely to be far higher by the time we finish and we don’t even know what we don’t know yet. It could be better, or far worse than we think.
For many of us, even considering financial matters such as these may be far from the thing that’s most on our minds.
But if you were to go to the Supreme Court today to argue the case as to whether Bitcoin is really a store of value or not with all the new evidence that has come to light, which side would you be on? For or against?
All I know is, if you were arguing against, you’d need a hell of a lawyer.
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There is a Podcast version of this article with a little more detail available for free here:
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Disclosure: The author of this opinion piece has been heavily involved with Bitcoin for several years and holds a substantial cryptocurrency portfolio, including Bitcoin. He also has a mining operation running the SHA 256 algorithm based in Siberia and is a published author on the subject of promoting the understanding of cryptocurrency.
Disclaimer: Investing in any cryptocurrency is extremely risky. The above should not be taken as financial advice, nor construed as so. Always do your own research before investing or consult with a professional financial planner.