This is not a fact-based essay; it is my philosophical argument against Bitcoin being a true store of value. I argue for your Bitcoin to hold its value, how someone has to keep doing work after its mined.
Disclaimer: As I write this, I have no significant investments in either Bitcoin/Crypto or Gold/Precious Metals.
First Things First
Let me get this thing out the way first, I wish I had bought Bitcoin in 2013, or 2014, or the start of 2017! It has probably made more millionaires than anything else in history and I wish I had invested at the right time.
I am not approaching this subject as a sore-loser though and am more than willing to listen to any criticism of arguments made here.
Also, this argument is specifically against Bitcoin and other Crypto-Currencies being a true store of value; not against their other uses and the revolutionary nature of the underlying technologies of Blockchain and other Crypto Distributed Ledgers.
When I hear the term Store of Value, I see long-term value; not a few months or years; the term should be measured in decades or even generations.
To understand how something can store value, you first need to understand how value is created. In case of both Bitcoin and Gold, the value is created by someone doing work to produce the asset. In case of Gold, its the mining company doing some physical work; for Bitcoin, its a mining computer solving a mathematical problem to produce a fixed amount of Bitcoin every 10 minutes.
To generate value, both Gold and Bitcoin miners have to invest capital to buy the equipment (computers, mining machines etc.) and incur production costs and operating expenses to maintain and run that equipment (cooling, electricity, manual labor etc.). For simplicity, I am going to include operating expenses into production costs in the remainder of this article.
For a miner to keep producing the asset, the market price for the asset should be higher than at least the production cost (assuming all capital is already paid off).
For example, if the expenses to produce an ounce of Gold are $1000, but the price of Gold is $900/ounce, the miners will probably shut down the mine.
Similarly, the Bitcoin miners will only keep mining if the transaction fee + block reward are more valuable than the production costs of the mining rig.
Scenario 1: Gold
Consider that you bought some Gold at $1000/ounce and the current cost of mining Gold is $500/ounce. A couple years down the road the current mines are drying up and the cost of mining shoots up to $1500/ounce, while the market price holds at $1000/ounce; all of the miners shut down their operations. What is the value of your Gold now? Still $1000/ounce!
In essence, the value of your Gold is independent of the continuing effort of others or even you. There is no action required on anybody's part for your Gold to retain its value.
Scenario 2: Bitcoin
Now, let's look at a similar example in Bitcoin. You bought your Bitcoin at $1000/coin. Cost of mining shot up to more than $1000/coin and all the miners shut down their operations.
What value does your Bitcoin have? A big fat zero! Why?
In contrast to Gold, where the value is stored in the physical asset, Bitcoin's value is based on a distributed ledger hosted on the network. And, the network requires constant upkeep for you to maintain the value of your Bitcoin.
Unlike Gold, Bitcoin requires a constant amount of work by the network to maintain its value. Hence, it is not a true store of value.
In some respects, Bitcoin is more like a security, where you are betting that value will be maintained on someone's future work and less like a commodity, where value has already been generated and is maintained by a demand for the commodity.
Definition of a Security as interpreted by the Supreme Court... "[a]n investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party. 66 S.Ct. at 1103." ↩︎