All Stores-of-Values Are Scarce Assets
A Store of Value (SoV) is an asset that preserves and accrues (monetary) value into the future. This property makes an SoV easier to save, store, or exchange at a later time, and is, therefore "desirable" by the market.
What attributes make a good Store-of-Value?
If you take a hard look, you will find that all time-tested stores-of-values are actually scarce assets! These assets are finite by nature and have a few additional important qualities (though not necessarily the same qualities).
It seems that "scarcity" is THE common attribute behind something becoming a Store of Value over time. Scarcity seems to be at the heart of accruing and preserving value!
Without scarcity, no matter how useful or how desirable something is, "value" won't accrue to an asset because no one would "store" it for the "future".
If you notice, the keywords here are 'store', 'value', and 'future' (i.e. over time). And it makes sense because we are talking about "Store of Value" (over time).
But is scarcity the only criterion and how do you measure it? In this article, we will try to answer these questions by primarily focusing on Gold, Real Estate, and Bitcoin.
Scarce Assets
As we saw in the list of SoV examples above, scarcity is THE common trait among all successful SoVs, and scarcity IS a must-have attribute for an SoV but it is not the only attribute that an asset possesses.
Different SoVs have other qualities as well which when combined with scarcity makes them a good SoV. For example, Real Estate solves the housing need, oil fuels modern global transportation, fertile land satiates everyone's hunger, and so on.
So they each have a unique property that is 'needed' and therefore 'desirable' by humans. Add scarcity to the equation, and you have an SoV.
Here is how any SoV evolves:
Need ? Desirability
Scarcity + Desriability ? SoV
Can Scarcity in itself be a desirable trait?
The short answer is Yes. And the best example is Gold.
So, yes, scarcity alone can drive the value of something IF there is a continuous demand for it. Over time the "demand" outpaces the "fixed" or "diminishing" supply, thus driving the price up.
Fixed or Diminishing Supply ? Scarcity
In other words, an asset that is difficult to produce relative to existing (or new) supply is by definition 'scarce', and for that reason alone, "desirable".
Scarcity ? Desirability
(Another great example would be the paintings and works of Leonardo da Vinci. Since there will ever be only one Leonardo da Vinci and the feats he accomplished for his time is impossible to replicate, all of his surviving works will always command a premium.)
We can't talk about scarcity, desirability, and market dynamics (supply & demand) without mentioning Stock to Flow.
Stock to Flow
The Stock to Flow (S2F) ratio is oftentimes used to gauge price pressure for a scarce asset. The "Stock" is the "total existing supply" of an asset whereas the "Flow" is the "new amount" that is produced annually. The smaller the newer annual supply, the higher the S2F ratio would be for an asset.
Real Estate, Gold, and Bitcoin, each have a high Stock-to-Flow ratio because it is harder to make more of them compared to their existing total supply and their net-total market demand (at any given time).
So basically anything that's desirable and hard to produce more of turns into a Store of Value because people tend to accumulate such assets with a mindset of never selling because they know that the demand for those assets will keep growing faster than the new supply that can be introduced.
Is Money a Store of Value?
Money has taken different forms through the ages. For almost 5000 years, the concept of money has been something that people everywhere have used to exchange goods and services.
From the Cowry shells in Africa to large stone wheels on the Pacific island of Yap, to strings of beads used by Native Americans to Gold and Silver, people have used some form of money to facilitate both local and global trades.
Over time, and also culturally, we have all grown up thinking of "money" as the most commonly used Store of Value. But is money really a Store of Value?
Historically speaking "money" has been a terrible Store of Value. From ancient history to the industrial age to our modern time, hundreds of nation-states have issued hundreds of "monies" and all of them have eventually failed and continue to decline (if they are still used today).
Below are a few examples of dominant state-issued monies of its time that worked as a Store of Value for a brief period but then fizzled out and lost to other monies. They all got replaced by other monies (which if you think about it doesn't sound like a "Store of Value" at all.) [Source]
Money vs. Store of Value
For something to qualify as "money", it needs to meet and serve three functions:
Good money, therefore, is also a reliable Store of Value. And for any "good money" or any asset to truly be considered an SoV, it needs to preserve its value over a long period of time. (Example: Gold)
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Next, good money should meet the following seven properties:
As you can see from the above functions and properties of money, it seems, the only area where money has been failing throughout human history is when it comes to the "Store of Value" and "Limited Supply". Without a transparent, predictable, known, and limited supply, you cannot turn human-made money into a "reliable" Store of Value.
Without a Store of Value property, human-made money cannot hold its purchasing power over time. With losing purchasing power a "failing money" then gets replaced by another (rising) money and the cycle repeats.
In conclusion, the value of money comes from scarcity (limited and transparent supply). You can view money as some sort of battery technology. The store of value property in good money helps its users to transfer purchasing power from the present to the future.
If money fails to reliably transfer value from the present to the future, it fails to attract continuous demand which in turn devalues it even further. It's a vicious cycle. While new money supply dilutes the purchasing power of existing money, weakening demand for it further devalues its purchasing power. These market dynamics continue until the said money reaches an excessive supply and almost non-existent demand, thus resulting in its total collapse.
The above picture (source) shows the collapse of Venezuela's currency due to an extremely high rate of inflation (the exact opposite of "limited supply"). When a currency loses its Store of Value property (or if it is perceived to lose its future purchasing power), it fails to function as money.
Scarcity Revisited
This brings us back to the beginning of this article where we were discussing if "scarcity" is the primary driver and foundation upon which all Stores-of-Values are based, and the answer seems to be not only YES, but it seems, in fact, scarcity is THE reason a Store of Value reliably maintains itself as a Store of Value over a long period of time.
Simply put, humans place a higher value on an object that is scarce, and a lower value on those that are in abundance. The less time and effort it takes to create something, the less scarce it is and therefore the less value it has.
Scarcity also means there are no natural and comparable competitors which cultivate trust in an asset as a Store of Value over time. Real Estate (fertile land beside a natural body of water) and Gold again are good examples of this characteristic.
Gold is possibly the oldest and most widely accepted store of value of mankind. Cities and empires have risen and fallen over the centuries but Gold has stayed the same. This has been possible due to the high cost and labor associated with new gold extraction and its limited and scarce supply.
Bitcoin as a SoV, Digital Gold, and Money
Since its inception in 2009, Bitcoin has come a long way to prove itself as a truly scarce and desirable asset. If you remember from our earlier conversation, while scarcity alone can make something desirable, it is scarcity coupled with desirability which makes an asset a Store of Value.
And Bitcoin is both scarce and desirable as demonstrated by the free market for over the past 12 years. Its monetary value has grown astronomically over the years and its total market cap was at one point was just over One Trillion USD. No wonder, the market has collectively agreed to call Bitcoin as “Digital Gold”.
In comparison, Gold's Total Market Cap is just over $10 Trillion USD and the financial market cap of Gold is almost $5 Trillion USD. When you compare 5000 years of Gold's history to Bitcoin's 12 years of existence, you have to stop and wonder, what is really going on here.
Bitcoin shares many of the characteristics of Gold such as its limited, known, and fixed supply, high liquidity, brand awareness, and acceptance, transportability, fungibility, privacy, and its property as a Store of Value.
Some people like to point out that due to excessive volatility, Bitcoin's classification as a Store of Value is incorrect. Though this may appear to be a good point, it is actually a false characterization.
While the day-to-day and quarter-to-quarter price of Bitcoin can be very volatile, if you look at its performace against the USD or any of the world's major currencies, it has not only maintained its purchasing power but in fact it has gained in value against all fait currencies over the last decade.
The chart below shows Bitcoin's price appreciation on a logarithmic scale. As you can notice, Bitcoin has continued to gain market share of the "liquid monies" of the world over the last 12 years and is still continuing to do so. [Source: PlanB]
Today there is even wider adoption and acceptance of Bitcoin by most of the major banks and financial institutions of the world. Furthermore, El Salvador, a country in Central America, recently declared Bitcoin as legal tender.
Think about that for a moment. Other than Gold and Silver, this has never happened ever in the history of humankind. All monies (except for Gold and Silver) throughout history have always been issued by the nation-states.
Bitcoin is the first of its kind and it has not only survived but thrived as it has gained more adoption over the years.
Was "scarcity" the main reason behind Bitcoin's success?
This brings us back to the original premise of this article that all stores-of-values are scarce assets. So the answer to the question about Bitcoin's success is indeed "true scarcity".
In my opinion, if not for the absolute scarcity (Bitcoin's fixed 21 million coins supply), Bitcoin would have not succeeded. Its scarcity led to its initial desirability.
Once Bitcoin became desirable because of its electronic nature which basically makes it easier to carry, store, transfer, and transact with compared to physical gold bars and coins.
Soon after, it was inevitable for Bitcoin to established itself as one of the top stores of value.
Bitcoin's supply can’t be inflated by anyone and its value is purely driven by supply and demand. Bitcoin is not issued or controlled by anyone and it is not debt-based. Bitcoin simply exists as it is in its completeness.
Again, think about that for a moment!
There are several groundbreaking innovations in Bitcoin's white paper but the true success lies in making it truly scarce. How do you make something scarce (especially if it is digital in nature)?
Well, that's what Bitcoin's main innovation is -- an absolute scarcity based on maths and social consensus which makes it desirable and therefore a new Store of Value asset.
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PS: This should be clear and obvious but just in case, THIS IS NOT A FINANCIAL ADVICE. This essay is purely an intellectual exercise. Please do your own research before making any financial investment.
Stock trader, blogger at bonnashejve.space
9 个月Great observation, actually we love something that it is hard to get. It is human nature, dear ??