As we enter 2023, that means you need a store of value. Preferably one that does not lose value over time. Anything that does not reduce your net worth by a guaranteed 5% or more per year. Could cryptocurrencies be the store of value of the future? That's what we are about to analyze:
What makes a good store of value?
Why gold is a good baseline for a store of value.
Bitcoin or Ethereum: which crypto will be the better store of value?
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What Makes a Good Store of Value?
Let's start from first principles.
The average crypto-investing pleb gets their money from labor. With the money you earn, you can buy stuff. If you buy less stuff than you earn, you amass more money. Money is just a measure of value, so the more money you have, the more value you possess.
Unfortunately, keeping your value in fiat money allows you to buy less stuff over time. That is because of inflation. Look at how a Big Mac has become 10X more expensive in fiat currency in the last 50 years:
Thus, you need to somehow store the value you accumulate over time. More precisely, you want to retain or increase the purchasing power of your value: a good store of value buys you at least as many Big Macs in 1972 as in 2022.
So, could you store your value in Big Macs themselves?
McDonald's food is infamously durable, but ideally, you want a conservable store of value. Money is a decent store of value because of its specific attributes:
Divisible: you can easily divide it into smaller units.
Portable: you can easily transport it.
Durable: it doesn't rot or break easily.
Fungible: units are interchangeable with one another.
Verifiable: you can check it's "the real thing" and not counterfeit.
Scarce: its supply doesn't change quickly.
Utility: it has some sort of intrinsic value.
But money is not the only store of value to choose from — for example, a house is not very portable or divisible, but it also stores your value.
There are many different stores of value:
Equity (ownership of your or someone else's company)
Bonds (someone's debt)
And, of course, crypto.
One particular commodity is seen as the baseline for all other stores of value:gold.
Why Gold Is a Good Baseline as a Store of Value
Imagine a Genie made you immortal under one condition: find the best store of value for the next 2,000 years. What would you pick?
If you go back 2,000 years in history, the answer becomes clear:
Real estate: probably destroyed. How many ancient Roman buildings are still standing?
Equity: no companies from the time of Christ left.
Debt: same here.
Commodities: good luck pumping oil 2,000 years ago.
That leaves gold. Gold has retained its value ever since humans discovered it, and its specific attributes make it exceptionally suitable as money. Remember that unbacked fiat currencies are only a 50-year-old experiment. Before that, gold doubled as money and a store of value for millennia. Thus it makes sense to use it as a baseline for all other stores of value.
We can compare gold to a few other stores of value to back up this theory. For example, cash is a terrible long-term store of value. Here is how many milligrams of gold one dollar has been worth over the years:
Gold has also been a better store of value than real estate over the last 50 years, although the two have a very volatile relationship. Here are U.S. home prices measured in gold:
Stocks are a better store of value than gold — if you know when to sell:
Finally, oil and gold have had a volatile relationship as well:
To be clear: gold is not the “best” store of value. Investments like stocks or real estate can outperform gold. But it is the most tried and tested and a good measuring stick for all other stores of value.
Bitcoin or Ethereum: Which Will Be the Better Store of Value?
Remember the goal of our store of value: retain or increase the purchasing power of the initial investment.
Can cryptocurrencies do that? So far, their track record has been great: in the last five years, BTC and ETH outperformed the growth in money supply by 46% (BTC) and 141% (ETH). Their price measured in gold is also up (48% for BTC, 163% for ETH). That is only the last five years, thus excluding the most explosive growth phase during their first years.
But can cryptocurrencies become a store of value without becoming money?
In theory, yes. Real estate, art or even gold are all asset classes that are not used as money but as stores of value. However, both communities want their coin to be money (Bitcoin’s more explicitly and more broadly than Ethereum’s). Thus, it is hard to see how they can become long-term stores of value without being used in some form as money.
To make the leap from “speculative asset” to “store of value,” two things need to happen:
The perception of the assets needs to change: even a decade into Bitcoin, you can't say crypto without saying risky in the same sentence. The fewer Ponzi schemes are built in crypto, the more people will see it as a fundamental investment and vice versa.
The volatility needs to decrease: the higher an asset's market cap, the more money it takes to move its price.
Ultimately, we are looking for growth and utility. A store of value is a positive externality that arises from these two factors. It is not something you can build consciously: gold did not set out to be one; it just happened.
How BTC and ETH Are Different as Store of Value
Even though both are cryptocurrencies, there are a few key differences between these two:
In simple terms, in a “hyperbitcoinized world,” you will pay for anything with Bitcoin while in a “hyperethereumized world,” Ethereum will just provide the backend.
We need to answer the following to understand which asset will be the better store of value:
Which of these coins will see more growth and utility in this decade?
Let's compare the bull and bear cases for each.
The Bull and Bear Case for BTC as a Store of Value
Bitcoin's long-term bull case is the (in)famous hyperbitcoinization. Bitcoin replaces all the world's money, and humanity builds a new financial system atop the 21 million coins. At this point, the network achieves its maximum point of growth and its maximum utility (provided that a Bitcoin-based financial system works as well as Bitcoiners hope).
The bear case is the reduction of Bitcoin to its minimum viable utility and no growth beyond that. Bitcoin's first use cases were ransomware and using it for trading drugs on the dark web, which explains the accusations that it facilitates crime. If Bitcoin “fails” for some reason, there would still be demand for these proven use cases.
How this could happen:
A “Bitcoin ban” enacted and decisively executed by governments would be the end of Bitcoin, even though the currency would never completely vanish. The costs of it would be massive, but that does not mean it isn’t possible. It would probably be accompanied by the introduction of and push for adoption of a CBDC like the Nigerian eNaira. Bitcoin would be, once again, an underground currency that’s possible to use, but criminalized.
The Bull and Bear Case for ETH as a Store of Value
Ethereum's bull case is a bit murkier. Replacing the backend of the current financial system is a reasonable assumption. Ideally, Ethereum and protocols built on it would replace (or reform) Visa, NASDAQ and many other legacy financial institutions. However, ETH does not aim to be a unit of account for the entire economy like BTC. In a hypothetical future where Ethereum has scaled to such a degree, there may also be non-financial use cases like enabling the Internet of Things. Ethereum-based protocols would ideally straddle different sectors.
How this could happen:
Improving existing use cases and developing new Web3 use cases would be a start. Ethereum’s roadmap will not only be completed but overfulfilled. Ethereum will be accepted by and integrated with existing financial systems, which, in this future, realize that Ethereum is superior to centralized systems.
The bear case is the same as for Bitcoin: Ethereum is reduced to its minimum viable utility. However, all blockchains do the same at their core: transferring value without intermediaries. Take away all Ethereum's additional use cases like DeFi and NFT, and what is left is...sending ETH or ERC-20 tokens. Thus, you can make the case that its minimum viable utility is the same as for Bitcoin. However, in a worst-case scenario where crypto “dies,” people will be more likely to use BTC.
How this could happen:
Ethereum would almost certainly be declared a security. The roadmap would fail due to its complexity and overcentralization, which leads users to abandon Ethereum. Cases like frozen cryptocurrencies on Ethereum would become a regular phenomenon. Eventually, the network may also suffer from a hypothetical “crypto ban” and users turning away from it for more privacy-focused underground coins.
Could both bull cases happen simultaneously? Ethereum power the Internet of Things in a hyperbitcoinized world?
In theory, yes. But that seems unlikely, because both still solve the same problem. That is why you see talk of DeFi on Bitcoin, and that is why there is such a fierce “rivalry” between the two communities. Both currencies compete in the same market.
Alright, so which cryptocurrency is the better store of value???
That depends on which cryptocurrency will likely come closer to its bull case in this decade. Most probably, neither hyperbitcoinization nor a total Ethereum takeover will happen until 2030. And most likely, neither will be banned nor abandoned by its users.
Use this framework to assess the risks and opportunities of each network. If you believe that both make a good case, you could invest in both.
Both Bitcoin and Ethereum can become excellent stores of value. But that does not mean that both will become stores of value. While gold and other assets have proven themselves to be reliable over centuries to millennia, cryptocurrencies are still in stage one of their development.
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