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Bitcoin as a store of value

The gold standard of the digital age?

_{Most people have heard of the gold standard but surprisingly few know of its predecessor, the silver standard, even though it lasted far longer. As outlined in the introduction of this review, before the gold standard came to the fore in the mid-to-late 19th century, most of the world’s economies ran on some kind of silver standard.}

_{The Encyclopaedia Britannica describes the silver standard as a monetary system whose 'basic unit of currency is defined as a stated quantity of silver and which is usually characterised by the coinage and circulation of silver' as well as the ‘unrestricted convertibility of other money into silver’}_[xiv].

_{Silver’s domination of the world’s currency systems lasted millennia. Indeed, the silver standard is believed to date all the way back to ancient Greece, where silver was the first metal used as a measure of currency}_[xv].

_{By the fall of the Roman Empire, some form of silver standard was in use in places as far and wide as China, India, Bohemia and other parts of Europe.}

_{Indeed, so ingrained was the use of silver in medieval and early-modern economies that in many languages the word for ‘silver’ became – and in some cases, still is – synonymous with the word for ‘money’.}

_{Yet in a matter of just a few decades in the late 19th century, the silver standard was completely eclipsed by the gold standard. China and Hong Kong were the last nations to use a currency system based on silver, abandoning it altogether in 1935.}

_{Since then, no country has returned to a silver standard, whose fall from grace is a reminder that when it comes to money, the so-called ‘Lindy Effect’ does not always apply.}

_{Historical timeline of money standards}

_{Modern monetary standards}

The Lindy Effect: What it is and why it matters

_{20th century: The decline of the gold standard and the rise of fiat currencies}

_{21st century: Emergence of the first digital, hard-capped supply, decentralised currency}

_{The Lindy Effect is a theorised principle that holds that the longer something has existed, the more likely it is to endure into the future. Originally applied to technology and cultural phenomena, it argues that things that have survived for a long time are likely to continue doing so because they have proven their resilience. When applied to money, the Lindy Effect suggests that a monetary system or currency that has been used for centuries such as silver has stood the test of time and can therefore be expected to endure.}

_{However, this conventional interpretation of the Lindy Effect overlooks the true drivers of a money’s longevity. Simply surviving for a long time is not enough; for a currency to endure, it must preserve its scarcity and resist devaluation over time. This is where the concept of ‘stock-to-flow’ comes into play, since it helps to explain why certain forms of money endure while others fall along the wayside.}

The stock-to-flow ratio

_{The stock-to-flow ratio is the critical metric that determines whether a money can maintain its value over time. It compares the existing supply of an asset (the stock) to the rate of new production (the flow).}

_{A higher stock-to-flow ratio indicates that the existing total inventory/stock/supply far outweighs the new supply (annual production), ensuring scarcity and preventing rapid inflation of the money supply.}

_{Gold is a prime example of this. Its stock-to-flow ratio has remained consistently high because, while new gold can be mined, the annual production (flow) is always small relative to the existing stock. This ensures that the supply of gold cannot be significantly inflated, which in turn preserves its value over time.}

_{For this reason, gold has long been the dominant global store of value.}_{As the eminent US banker JP Morgan famously said in his testimony before Congress in 1912, “Gold is money. Everything else is credit”}_[xvi].

_{In contrast, other commodities like silver and copper have largely failed as stores of value because they have relatively low stock-to-flow ratios. When their market value increases, new production ramps up quickly, causing the new supply to flood the market and devalue the currency.}

_{Silver was, as already mentioned, once widely used as money but it was eventually abandoned because it could be mined too easily, and its supply inflated, eroding its long-term value.}

_{Silver’s stock-to-flow ratio is 40:1, meaning that each year the amount of new silver issued is equivalent to roughly 2.5% of existing stock. In other words, it would take around 40 years for current silver production to double the current silver inventory.}

_{By contrast, gold’s stock-to-flow ratio is 70:1, meaning it would take 70 years for current gold production to double the current gold inventory. This is the main reason why gold eventually overtook silver as the world’s foremost monetary metal.}

The stock-to-flow ratio, the real measure of monetary endurance.

The gold standard of the digital age?

_{So, how is it that fiat currencies, with their much lower stock-to-flow ratios, ended up supplanting gold? As Lyn Alden writes in her bestselling book}_{Broken Money}_[xvii]_,_{it was the result of a combination of forces, including technological breakthroughs, political convenience and a convergence of interests between government and banks.}

_{^{While politics can impact how we interact with money locally and temporarily, it's technology that impacts how we interact with money globally and permanently.}}

_{"Ever since the invention and deployment of intercontinental telecommunication systems in the second half of the 19th century transactions have been able to move around the world at the speed of light, while scarce, self-custodial bearer asset money (e.g. gold) could only be transported and verified at the speed of matter. This speed gap opened a massive arbitrage opportunity for banks and governments to use, because it gave them custodial monopolies over fast long-distance payments. Bitcoin represents the first significant way to settle scarce value at the speed of light.}

_{While politics can impact how we interact with money locally and temporarily, it's technology that impacts how we interact with money globally and permanently. As new technologies come into existence, certain types of ledgers become obsolete and go extinct while new types of ledgers are born and become necessary. That's why new forms of money tend to be adopted everywhere rather than just locally.}

_{As the world became increasingly industrialised, gold won out over every other commodity. And then as the world became increasingly connected by telecommunication systems, fiat currencies displaced gold in every country. Now that digital scarcity and digital settlement exist as new forms of technology, there is an opening for a new monetary era yet again."}

Bitcoin: A new kind of scarcity

_{Enter bitcoin, the first form of money in all of history designed to have a hard-capped fixed supply. Bitcoin takes the principles of stock-to-flow and scarcity to a whole new level. Whereas gold’s stock-to-flow ratio has been high enough to preserve its value for millennia, bitcoin’s stock-to-flow ratio is designed to continuously improve as it becomes scarcer over time.}

_{Bitcoin’s total supply is capped at 21 million units, and its issuance rate is governed by a process called the halving, which reduces the rate of new bitcoin creation by half approximately every four years. The most recent halving occurred in April 2024, significantly reducing the flow of new bitcoins.}

_{As a result, bitcoin’s stock-to-flow ratio is now approximately double that of gold. And because of the halving, the stock-to-flow ratio of bitcoin will keep doubling every four years. This makes bitcoin the scarcest monetary asset in terms of stock-to-flow dynamics. With this increasing scarcity, bitcoin is now positioned to become the most valuable store of value in history, further enhancing its role as a deflationary asset immune to inflationary pressures.}

_{^{Source: Bitcoin Wiki – Controlled Supply}}

_{In his book}_{The Bitcoin Standard}_{, the economist Saifedean Ammous explains how bitcoin’s scarcity is unique}_[xviii]:

_{"No matter how many people use the network, how much its value rises, and how advanced the equipment used to produce it, there can only ever be 21 million bitcoins in existence. There is no technical possibility for increasing the supply to match the increased demand.”}

_{This built-in scarcity makes bitcoin immune to inflationary pressures. Unlike silver or copper, which suffered from overproduction, bitcoin’s supply is hard-capped, and its flow decreases with every halving event. This ensures that, as more people demand Bitcoin, its value will rise, rather than its supply being inflated.}

_{With the 2024 halving, bitcoin’s stock-to-flow ratio has now surpassed gold’s, making it the scarcest monetary asset on the planet. While gold has served as the premier store of value for millennia due to its scarcity, divisibility, and durability, bitcoin surpasses gold on these key metrics. Both assets are durable and resistant to inflation, but bitcoin’s fixed supply, continually decreasing issuance rate, ease of use, and portability give it a clear advantage.}

_{Bitcoin’s superior scarcity and deflationary nature position it as the optimal store of value in a world where maintaining wealth across time is becoming increasingly difficult. As demand for a reliable store of value grows, bitcoin is poised to attract more attention from individuals, corporations, and, as we’re seeing, even governments.}

A digital gold standard

_{Bitcoin's combination of stock-to-flow dynamics and its ability to maintain scarcity and trust over time makes it a rare and revolutionary store of value. Its unique monetary properties include:}

_{Absolute Scarcity}_{While gold’s supply is continuously expanded through mining, bitcoin’s total maximum supply is fixed forever. No matter how much demand increases, bitcoin’s flow will decrease over time, making it increasingly scarce.}

_{Portability and Divisibility}_{Bitcoin is digital, meaning it can be transferred across the world in seconds without any physical limitations. It is also easily divisible, with each bitcoin consisting of 100 million satoshis, allowing for microtransactions even as its value rises.}_{Decentralisation}_{Unlike gold, which can be hoarded or controlled by governments and central banks, bitcoin operates on a decentralised network. No single entity or authority can manipulate or alter bitcoin’s supply, ensuring that it remains trustworthy and immune to political interference.}_{Rising Stock-to-Flow}_{With bitcoin's 2024 halving already complete, its stock-to-flow ratio has now surpassed that of gold, currently standing at roughly double gold’s ratio. In 2028, bitcoin’s stock to flow will be quadruple that of gold. In 2032, it will be eight times that of gold, and so on, until bitcoin’s stock to flow becomes infinite. This makes bitcoin the scarcest monetary asset in history.}

The future of bitcoin as a store of value

_{History shows that the asset with the highest stock-to-flow ratio, and thus the greatest scarcity tends to become the dominant global store of value.}

_{Currencies and assets that cannot maintain a high stock-to-flow ratio, such as fiat currencies, are prone to inflation and eventual collapse. Fiat currencies like the US dollar have seen their value steadily decline over time due to monetary expansion, which dilutes their purchasing power. In contrast, the purchasing power of bitcoin, with its fixed supply and exponentially increasing stock-to-flow ratio, is destined to grow.}

_{As demand for bitcoin increases, its price will rise, not because more bitcoins are being created, but because the existing supply becomes more valuable. It is its deflationary nature that makes bitcoin a powerful hedge against the instability of fiat currencies and inflationary economies.}

_{Moreover, as more people adopt bitcoin and use it to store value, its network effects will strengthen. Currently,over 100 million people hold bitcoin, but this number is expected to grow substantially in the coming years. As adoption increases, bitcoin stands poised to transition from being just a store of value to a global medium of exchange. With its fixed supply and decentralised governance, it’s uniquely positioned to become the ultimate store of value in the years to come, a gold standard in the digital age.}