Is Cryptocurrency a Store of Wealth? A Deep Dive into the Historical Perspective

In the world of finance and investment, few subjects spark as much debate as cryptocurrency’s role as a store of wealth. Recently, one of our readers, Josh, posed an insightful question: "I understand that you dispute that cryptocurrency is a store of wealth because it is outside the central banks. Is this your position? Could you explain?"

Let’s explore this topic from the foundations of economic theory and historical evidence, shedding light on why cryptocurrency might not fulfill the aspirations set upon it by its advocates.

The Concept of Store of Value: What Does it Really Mean?

At its core, a "store of value" refers to an asset that retains its purchasing power over time. Traditionally, this could be in the form of gold, real estate, or stable fiat currencies. Investopedia succinctly defines it as an asset, commodity, or currency that maintains its value without depreciation.

However, the notion that any asset can serve as an immutable store of value in the face of economic cycles is fundamentally flawed. Historical evidence demonstrates that throughout time, every form of money or asset has experienced booms and busts, influenced by market dynamics and shifting demand.

The Flaws in the Store of Wealth Argument

To assert that cryptocurrencies, such as Bitcoin, are a store of value inherently overlooks the recurring volatility witnessed in their markets. This idea may stem from a Marxist Utopian perspective that misplaced faith in government control over the economy can eliminate inherent business cycles. Yet, as we learn from notable figures like former Federal Reserve chairman Paul Volcker, the business cycle is as timeless as it is inescapable.

Volcker famously stated that, despite the advent of "new economics" which aimed to smooth out economic fluctuations, the reality remains that the business cycle always prevails. Similarly, Arthur Burns, another pivotal Fed chairman, acknowledged after the collapse of the Bretton Woods system that the cyclical nature of economies cannot be ignored.

The Reality of Supply and Demand

Assets, including cryptocurrencies, rise and fall on the principles of supply and demand. The central banks may control monetary supply to some extent, but they cannot dictate how an asset’s value will change in the broader market.

For instance, when the British pound fell to $1.03 against the US dollar in the mid-’80s, Americans flocked to buy British properties, prompting a market explosion that British locals did not foresee. This showcases how inflow of foreign capital can significantly alter local economic landscapes without direct action from monetary authorities.

When you buy assets abroad, you influence local money supply dynamics, wholly independent of central bank directives. The lesson? No asset, including Bitcoin, can be viewed as a guaranteed store of value forever; they all fluctuate based on evolving demand.

Why Historical Trends Matter

Throughout history, empires have risen and fallen, often correlating with the behavior of their currencies and valuations. Nothing has consistently maintained a flat line in terms of value. This ever-changing landscape suggests that investments that are touted as "stores of wealth" should be approached with skepticism.

Even the once-revered silver standard saw diminishing returns during the Roman Empire’s decline. Just as those ancient times witnessed shifts in currency value and stability, modern investors must remain aware that cryptocurrencies could face similar challenges.

Conclusion: A Pragmatic Perspective

At Extreme Investor Network, we aim to equip investors with the most comprehensive understanding of market dynamics, historical trends, and the pitfalls of investing in "store of wealth" assets. Recognizing that volatility and market forces govern all investments is essential.

While cryptocurrencies may hold promise for future innovations in finance, aspiring to categorize them as a definitive "store of value" presents a risky prospect. Instead, it’s crucial to assess assets with a discerning eye, aware that the only consistent truth in economics is change.

Stay tuned to our blog for further insights and updates on the ever-evolving landscape of economics and investment strategies that truly stand the test of time.