Fixed supply = store of value? Productive assets and stablecoins are better long-term store of value tools.

Compared to Bitcoin and gold, productive assets are a better long-term store of value.

(This article is authorized to be reprinted from ChainNews, the original title is "Fixed Supply Does Not Mean a Good Store of Value", original article here)

I believe that the narrative of "store of value" and the misunderstanding of what truly constitutes "fiat" are significant issues that are undermining the entire cryptocurrency world. Only when we have an honest understanding of this can we truly build something better.

Advertisement - Please scroll down for more content

Here are the core arguments that I believe in, and I will explain them throughout the article:

• The claim of "store of value" is unfounded. There is nothing that guarantees the transfer of value into the future, and having a fixed supply asset does not solve this issue.
• If you want to create as much value as possible in the future, what you truly need are productive assets, for long-term stability, and stablecoins if you need money in the near future.

Why "Store of Value" Does Not Exist

This is a common claim in the narrative of cryptocurrencies:

Look at fiat currency, the purchasing power of $1 in 1950 is 10 times higher than $1 now. It's a scam. If you store value in dollars, you will constantly suffer losses due to inflation. This is because central banks/governments can simply print more dollars. Instead, you should store value in assets with predictable supply, such as gold and Bitcoin, where this problem does not exist.

The truth in this claim is that if you store value in dollars, you would lose a significant portion of your purchasing power over decades. That's not the issue. The issue is whether there is another method that implies "store of value" but does not possess this characteristic. Supporters of store of value claim that it exists if you use an asset with predictable supply.

Of course, historical data somewhat supports this claim:

If you store value in gold instead of dollars, your situation would be better. For example, if you bought 1 ounce of gold for $35 in 1950, its value is now about $1,765 as of June 20, 2021, sourced from price data. Considering that due to inflation, the value of the dollar has decreased by 10 times, $35 in 1950 is now worth $176.5, or it has increased 5 times.

But we can actually do better than this:

If we had invested the $35 from 1950 in a fund tracking the S&P 500 index, we would now have a whopping $74,418.65, which is a 212-fold increase after adjusting for the 10-fold loss in dollar purchasing power. So, it's like turning $7,441.87 from 1950 into $74,418.65. Therefore, this investment is a better "store of value" than investing in gold.

Bitcoin has outperformed the S&P 500 index and gold significantly in the past decade. However, this is a very short period during which Bitcoin has gone from an extremely niche asset to one that most people in the world have heard of, and some influential few have invested in. This is unlikely to happen again, in my opinion.

Historical data on gold indicates that for a long time, assets based solely on "limited supply" as a store of value underperformed productive assets.[1]

So why do people believe that gold or Bitcoin is a better store of value compared to productive assets like companies and real estate? I see two reasons:

1. The stock market is evidently highly volatile. Hence, they may consider productive assets good long-term stores of value but not short-term ones.
2. Those who believe in the "limited supply" bringing value storage have a doomsday mentality. They believe that in a societal collapse, what they store value in would somewhat outperform more productive assets.

The first argument doesn't convince me at all. It is based on the assumption that the volatility of their chosen store of value is lower than that of productive assets, which is not empirically proven. The volatility of gold and Bitcoin is much higher than holding a fund tracking the S&P 500 index. If stability is what you want, you should opt for productive assets.

The second argument implies that you can simply "send" value into the future, even in the event of a societal collapse. I find this quite a crazy idea—because when society collapses, the value you can purchase and the demand for "limited supply assets" will also collapse.

Of course, people argue that companies, including the S&P 500 index, can go bankrupt, but other assets won't fare better:

1. Is real estate a good "store of value" in disasters? Real estate's value is mainly due to its location and association with valuable economic and social activities. Properties in Manhattan's central district are valuable because many people want to live in that city. A piece of land in the middle of nowhere usually has little value. In major disasters, properties in Manhattan's central district are unlikely to hold value, perhaps even less valuable than properties with a garden to grow your own food.
2. Similarly, the value of gold stems from societal tradition, though it has been upheld for a long time. Society can decide on a new highly valuable asset, which is what Bitcoin enthusiasts advocate. But more importantly, if there's nothing valuable to buy, your gold actually has no value.

If we agree that value depends on a society that provides valuable goods, then there's no guaranteed method to send money into the future. It's better to make real investments in productive assets.

What We Need Are Productive Assets and Stablecoins

In the preceding text, I argue why I believe "limited supply store of value" (assets like gold or Bitcoin, non-productive assets whose value solely comes from scarcity without utility value) is not superior to productive assets like stocks. They have the same, or even higher volatility, but at least gold, with a long history, has shown that it doesn't perform as well as productive assets in the long run.

When Bitcoin absorbs initial demand and reaches a stable position like gold, a similar scenario may happen with Bitcoin. Other outcomes, such as a significant drop in value, are also possible. They may not perform better in disasters; if that's your concern, you might be better off buying goods useful in disasters.

This implies that productive assets should be better long-term stores of value because they are superior in all aspects.

However, evidently, the volatility of productive assets is something people find hard to accept for many applications that currently use fiat currency. I don't think many people would be happy with their monthly wages fluctuating by 50%. In fact, if their wages suddenly dropped by 50%, the vast majority would struggle to cover all their expenses. What most people need or want is more stability than this.

Similarly, if you save money to buy a house in the near future or to run a business, maintaining cash reserves to ensure they can pay salaries and suppliers, what you need is stability.

Even if everyone were to suddenly start using Bitcoin, it wouldn't solve this problem at all. Because its supply cannot dynamically adjust, its value will continue to be highly unstable due to economic fluctuations.

Fortunately, mechanisms now exist that construct stablecoins using unstable assets to address these situations. My favorite system is the design behind MakerDAO and DAI, and I discuss my views in this article.

If Our Current System Is Already Good, Why Do We Need Cryptocurrencies?

In the field of cryptocurrencies, I believe we need to think more carefully and, if we want to succeed, start seeing the true characteristics of the systems we are trying to rebuild. For current fiat currencies, as long as we understand their nature, we see they have achieved great success. Their essence is to prevent short-term fluctuations, not to maximize long-term value.

I believe cryptocurrencies can greatly improve the current financial system, but the hope is not just by providing an asset with limited supply—it doesn't address most crucial issues. Instead, we should ensure our assets are productive, can maximize long-term value, and construct stablecoins for applications that need to avoid instability. This system can improve our current financial system because:

1. It's more transparent—anyone can verify asset balance sheets and risk exposure, not just professional audit firms. This is crucial because currently, detailed risk exposure of banks is not public, meaning depositors do not really understand the bank's situation, making it difficult to make wise choices on which bank to trust.
2. We can make it fairer—allowing everyone equal access to the financial system. For example, why can banks access central bank accounts while ordinary individuals and companies cannot?
3. It can improve governance, involving everyone in significant decision-making, such as quantitative easing policies after the global financial crisis.
4. Getting rid of burdens like physical currency, making the system more flexible; for example, when all balances are electronic, there's no technical need for inflation, although in practice, this may be done for psychological reasons or "price stickiness."
5. Most importantly, creating a system where anyone can participate at all levels, without permission and resistance to censorship.

Special thanks to David Andolfatto, Vitalik Buterin, Chih-Cheng Liang, Barnabé Monnot, and Danny Ryan for their comments on this article.

[1] Vitalik points out that this may somewhat exaggerate the opposition to Bitcoin, as since 1950, the supply of gold has increased much more than Bitcoin's in a comparable time frame. Nevertheless, I don't think this can offset the huge difference in returns between gold and the S&P 500 index.