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What is a Store of Value (SOV) for Crypto?

Jul 21, 2022

What is a store of value?

Let’s start with a definition of a store of value in economics: stores of value are those assets that don’t lose their value over time and that, for this reason, can be saved and then safely retrieved when needed.

This definition of a store of value can be misleading: as you’ll see from our examples, it’s evident that this doesn’t mean that the asset’s price won’t ever change. It can decrease, but the focus is on its value. The point is that, independently of market conditions, you can expect that a store of value will retain its value – especially when the supply of that asset is scarce.

Storing value: an example

An example of a store of value is money, and describing how it functions can help us to define a store of value better.

To give you a practical example, consider what happens when you earn money and put it in a bank account: you might earn interests to increase your funds, but the point is that you are storing your funds, which you can expect will keep a stable value over time, and then you can retrieve and exchange it if you need to.

That’s precisely how stores of value work. But, especially when it comes to money, you need to consider also that during hard financial times, it can lose its value, and in general, it loses value over time – think about inflation.

Other assets are considered stores of value – according to an economics definition. Moreover, dealing with the disadvantages of money as a store of value and the traditional financial system in which it is inglobed is why new stores of value – like Bitcoin – were conceived. But let’s see where all this comes from.

Historical Stores of Value

If it’s clear what a store of value means, it’s helpful to analyze some other assets that are historically considered stores of value.

The main points are the same: the possibility to exchange them and scarce supply if the point is to use something whose value increases over time.

The whole economic system has developed over time around specific stores of value and exchange systems.

The Barter System

This system is the oldest type of exchange. It consists in exchanging goods and services without the need for money. Especially when money didn’t even exist, people used this system to acquire goods or services they didn’t have but needed, and to get them, they used the goods they owned or their capabilities to deliver services.

Even after the genesis of money, this system is still in use, and it’s not hard to find this exchange system on the internet.

Despite this, money made it far easier to exchange value.

The genesis of money

Historians agree that the first coins – a tangible form of money – were introduced during the 8th-7th century BC in China.

With this system, it was easier to make exchanges, mainly for two reasons:

The intrinsic value of money was objective. Different from bartering, which requires you to find someone who agrees with your concept of value, coins were backed by other assets – usually metal – so everyone knew how much a coin was worth and what they could buy with it.
People could easily make transactions with little coins rather than stocks of goods.

As time passed, money started to lose its function as a store of value – for the simple reason that it lost its intrinsic value.

Photo by Christine Roy on Unsplash

And watered down money

It all started in the ‘30s when the United States began abandoning the gold standard.

Until that moment, money was backed by reserves of gold that guaranteed the intrinsic value of national currencies, but this limited the options to play with the economic system and adapt it to downturns.

The gold standard was abandoned at the beginning of the ‘70s when President Richard Nixon announced that the USD wouldn’t keep its fixed exchange with gold.

So, even if today people consider money a store of value, in reality, it has no intrinsic value, and it’s at the mercy of inflation and changes in national economic policies – including the fact that central banks and governments can decide to increase money supplies over time.

The point is that people believe that money has value, and that’s the foundation of its success as an SOV.

Other popular commodities

Other assets are considered stores of value – more reliable than money.

One above all is gold. This commodity is considered a safe haven – investors invest in it, especially during economic downturns, to preserve the value of their funds.

Gold price in USD since 1973. Source: GoldPrice.

Other popular investments are real estate – in this case, we’ve another asset that can retain value – and stocks.

But all these investments have some points of failure:

Precious metals are not easy to carry and use because you can’t easily divide them into smaller pieces to afford small purchases when needed, so you necessarily have to consider them as long-term investments that can’t be easily redeemed.
The same holds for real estate, and we all know that this kind of investment is not really able to retain value during a complex economic crisis.
Stocks are not the best weapon against inflation, so also, in this case, you need to deal with the fact that even if they can make you earn returns, those returns are expressed in inflationary fiat currencies.

All these points led some professionals to consider new stores of value – that’s why today we have Bitcoin and all the other cryptocurrencies.

Median home price in the US since 1993. Observe how the real estate market lost value after the 2008 crisis, mainly related to this market and the main reason behind the rise of cryptocurrencies.

Data source: DQYDJ.

Cryptocurrency as a store of value

Cryptocurrencies solve all the disadvantages we can find in traditional stores of value, and there are two points to take into account:

They have real value, especially when the supply is limited or when the tokenomics of specific crypto is designed to fight inflation;
In today’s economy, cryptos can represent other stores of value and give them the same advantage as a monetary system based on blockchain technology – as we’ll see later in more detail.

So, let’s look at why cryptocurrencies are considered stores of value.

It’s a long-term hedge against inflation

Contrarily to fiat currencies, cryptocurrencies like Bitcoin are designed to control inflation, which decreases over time.

To give you a practical example, let’s analyze Bitcoin:

It has a definite and relatively scarce supply – 21M BTC;
Its halving mechanism decreases the production of Bitcoin over time, which will be stopped once the maximum supply is reached.

So, as long as the demand remains at least stable, the value of Bitcoin increases over time, and it has all the features to be a store of value – also for the reasons we’re going to analyze in a while.

BTC/USD price chart. Source: CoinMarketCap.

Easy divisibility

You can divide cryptocurrencies into millions of subunits – of course, this statement always needs to be confirmed by the design of a specific cryptocurrency.

This makes cryptocurrencies suitable for both small and large on-chain transactions and investments.

Moreover, as we mentioned earlier, you can also use blockchain technology and cryptocurrencies to divide other types of assets into smaller units.

Think about NFTs: one of their use cases is the tokenization of houses, making them liquid assets.

Universal jurisdiction

Cryptocurrencies have no geographical borders. Generally, you must comply with national regulations if you use a centralized exchange. But if we look at the very construction of a blockchain, you can easily make cross-border transactions as long as you completely control your crypto wallets.

True ownership

This is an important point we’ve not covered yet.

While a central authority controls other assets used as stores of value – like governments, companies, and central banks – cryptocurrencies are decentralized and distributed. There is no central authority but a network of people and devices that work together towards a common goal.

As a result, and especially if you’re a DeFi enthusiast, you’ve complete control and ownership over your crypto assets, using them to model your financial goals.

The Bottom Line

Cryptocurrencies are the new stores of value: as for any other store of value, the critical feature is people’s perception, and it looks like it’s moving towards the preference for cryptocurrencies.

The reasons behind this shift in preference are related to the main problems observed with traditional stores of value – mainly hard divisibility and poor protection against inflation – all problems solved by cryptocurrencies and their innovative technology.

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