Bitcoin managed to win many people’s hearts, disappoint others, and attract harsh criticism, especially from traditional finance purists. And yet it is considered a store of value that is right up there with gold and other assets.

Anyone who bought Bitcoin at a higher price level and panic sold at a loss would argue otherwise but those that got in at a lower price level still see it as a store of value. How can it carry such a role and still be so volatile? A look at the dynamics of gold and fiat money might provide insights into this asset’s volatile nature while giving a clearer picture of why it is considered a store of wealth.

The Bretton Woods system required fiat currency to be pegged to the price of gold which is finite. Unfortunately, the limited amount of gold meant that money was also limited and this system was abolished in the 1970s allowing the dollar to be used for global reserves. However, eliminating the requirement for the dollar to be pegged to a finite amount paved way for more accessibility to money because more could be printed.

Unfortunately, the insatiable appetite for money printing paved the way for higher levels of inflation. This financial evil is the reason why a dollar is now worth less than it was in the 1980s. To put it simply, you can purchase less with $1 today than you could purchase 20 or 30 years ago. It follows the principle of supply and demand. Printing more money increases the supply of the dollar while too much supply with unmatched demand causes a decrease in value.

Source: Binance

Bitcoin – Value through scarcity

Unlike fiat money, Bitcoin has a finite amount just like gold. The latter has managed to maintain its value quite well and an ounce of it is even more valuable than it was 2 decades ago. Bitcoin is not only finite but scarce considering that there will only ever be 21 million BTC coins in existence. Less if you consider the coins that have so far been lost.

The scarce nature of Bitcoin means it has more demand than its supply, thus explaining its higher value. Of course, it helps that people agree that it has value but where does this value come from? The fact that it can facilitate payments is the main reason Bitcoin has value. You can send it as a transfer of wealth and as a payment for goods or services although it is not the most convenient method for regular transactions considering the high transaction fees associated with it.

When Bitcoin’s value and scarcity characteristics are put together, people start realizing that it is scarce, they are willing to pay just a little more for it. They are willing to buy it with the expectation that their money will be worth more at a certain point in the future. This explains why Bitcoin’s price has gained so much value compared to its early days and will continue to gain value as long as there is demand and also considering its limited supply.

What about volatility and shouldn’t it discredit its store of wealth status?

Turns out Bitcoin’s daily price is heavily influenced by the same supply and demand factors that have allowed it to have such a high price tag. If someone is selling BTC at a specific price at any given point, while others are willing to buy at that price. If the demand is higher than the supply at a certain price point, then there is more buying than selling, which consequently pushes up the price. If there is more selling than buying, the price goes down, thus its volatility.

The volatility is further aided by the ease of transferring BTC compared to fiat or gold. Bitcoin still holds its store of wealth status because its value will eventually continue going up over time as long-term demand continues to outweigh supply.