This is the third and final in a series of articles. In part 1 I wrote that bitcoin will only be used as a medium of exchange when it can function as a store of value and that bitcoin will only be able to function as a store of value if there is increased and constant demand for bitcoin. In part 2 I wrote about the main themes that I think will result in increased demand for bitcoin over the coming 3–5 years, and therefore help bitcoin along its path towards functioning as a store of value.
This part 3 looks at when bitcoin might function as a store of value and a medium of exchange.
Bitcoin as a Store Of Value
Bitcoin will only function as a store of value when a significant portion of the world’s population store wealth in bitcoin for extended periods of time. For this to happen, many more people need to learn various things about bitcoin and become more and more comfortable with bitcoin and this is only likely to happen over an extended period of time. We must not forget that bitcoin is like nothing the world has ever seen and it is only 10 years old.
I don’t think we should expect bitcoin to function as a store of value in the next 3–5 years. It is more likely that another 10 to 15 years will pass before it will do so.
Bitcoin As A Store Of Value And A Medium Of Exchange
Right now, the vast majority of people who own bitcoin don’t want to spend it because they foresee its value increasing over the coming 5–10 years. So, in these people’s minds, the opportunity cost of spending bitcoin now is too high. However, as more people value bitcoin the amount of wealth stored in bitcoin will rise and at that point the extent of the potential for further upside will decrease because there is only so much value in the world that bitcoin can capture. At this point the opportunity cost of spending bitcoin will be far less.
In addition, when bitcoin is widely valued within society and it functions as a store of value, it will not only be accepted but it will also be demanded in exchange. This is so because in a free market when one form of money is recognised by society as a superior store of value to another form of money, sellers of goods and services start to demand the superior store of value in exchange. The result is that at that point holders of bitcoin will have to spend their bitcoin.
This principle has been illustrated time again in countries where the purchasing power of the local currency has collapsed (e.g. Zimbabwe, Venezuela, Argentina etc.). At these times, sellers of goods and services demand the USD and do not accept the local currency because the USD is the only money available to them that has the potential to store value.
The same or similar dynamics will play out if and when bitcoin becomes a superior store of value to any other money. At that point it will be used globally as the medium of exchange. However, a world in which bitcoin is the medium of exchange used by the majority of the population is probably anywhere between 15–25 years away.
The volatility of bitcoin’s purchasing power is not new. Between 2011 and 2015, bitcoin lost more than 80% of its value on four separate occasions. Nevertheless, it recovered each time to achieve new all-time highs. Probably the most impressive recovery to date was when bitcoin reached the new all-time high of more than 1200 USD in March 2017. This recovery was particularly impressive because it happened notwithstanding that it took more than 3 years to transpire.
Here’s to looking forward to bitcoin’s next recovery and to what happens after that!
Disclaimer: The comments, views, opinions and any forecasts of future events reflect the opinion of the quoted author, do not necessarily reflect the views of Switch or other professionals at Switch, are not guarantees of future events or results and are not intended to provide financial planning or investment advice.