Medium of Exchange vs Store of Value - and effect on BTC worth

[npl]

Is Bitcoin primarily a medium of exchange or a store of value? No financial instrument can be both things equally well. Despite what some Bitcoin proponents believe, specialization in one direction is inevitable (many people who seem to think it can somehow be both are the same ones advocating 'buy and hold forever'...).

The BTC paradox is that when it was created, it was intended to become primarily a medium of exchange (so Satoshi claimed) but the manner in which the protocol was devised makes it far more suited to be a store of value.

If it does become a significant store of value what might it be worth? Obviously we still cannot say with any certainty, but to determine the upper limit assume Bitcoin somehow fully replaced gold. Then the price of 1 BTC would roughly equal $330,000 (5.6 billion ounces*1250/21,000,000). Of course that is the upper limit and not very realistic.

[kdrop22]

It is both a currency and store of value.
If you run through the numbers of calculating
a) Bitcoin's market cap provided it captures 10% of internet transactions
b) Bitcoin's market cap provided it captures 10% of gold market cap.
You will find that valuation for B) is about 10 times greater than A).
According to my calculations Item B), 10% of gold would put it around 30,000$.
That is the potential, but you need to figure in the risk as well.

[BitchicksHusband]

The OP is basically saying, "Gold CAN'T be both a store of value and a medium of exchange."

Well, yeah, it was.  For millennia.

As bitcoin goes up in price it will get far more stable.  Once it gets very stable, purchasing with it will become very popular.  It will still probably beat inflation at that point, so it will still be better than your fiat for store of value as well.

[Pente]

I see it as three synergistic things:

1) A frictionless means of exchange.
2) A better way of storing and transporting wealth.
3) An investment in the bitcoin network.

I have also seen videos on it's use as programmable money. I guess I am to old to see the value in that, but I can take it on faith that their will be additional uses for bitcoin. The internet has given me things of great value that I could never have imagined.

I am so grateful to be alive at this time in history.

[Shneebly]

Is Bitcoin primarily a medium of exchange or a store of value? No financial instrument can be both things equally well. Despite what some Bitcoin proponents believe, specialization in one direction is inevitable (many people who seem to think it can somehow be both are the same ones advocating 'buy and hold forever'...).

I disagree with your premise. Bitcoin makes a fantastic medium of exchange (best in human history), and due to the predictability and certainty of mining new Bitcoins (at predetermined rates), and the lack of monetary inflation, it will also make a great store of value.

Please explain why one cannot both save and spend in Bitcoin?

[Abdussamad]

Is Bitcoin primarily a medium of exchange or a store of value? No financial instrument can be both things equally well. Despite what some Bitcoin proponents believe, specialization in one direction is inevitable (many people who seem to think it can somehow be both are the same ones advocating 'buy and hold forever'...).

I disagree with your premise. Bitcoin makes a fantastic medium of exchange (best in human history), and due to the predictability and certainty of mining new Bitcoins (at predetermined rates), and the lack of monetary inflation, it will also make a great store of value.

Please explain why one cannot both save and spend in Bitcoin?

Price is too volatile for it to be used as a medium of exchange. In my experience ordinary people only use bitcoin as a medium of exchange when they have no other alternative. For example because other payment systems are not as well developed in that part of the planet.

Bitcoin's deflationary nature discourages spending and encourages saving making it more suitable as a store of value.

So, yes, it can be used as both and some people will use it as both but it will primarily be used as a store of value.

[npl]

Is Bitcoin primarily a medium of exchange or a store of value? No financial instrument can be both things equally well. Despite what some Bitcoin proponents believe, specialization in one direction is inevitable (many people who seem to think it can somehow be both are the same ones advocating 'buy and hold forever'...).

I disagree with your premise. Bitcoin makes a fantastic medium of exchange (best in human history), and due to the predictability and certainty of mining new Bitcoins (at predetermined rates), and the lack of monetary inflation, it will also make a great store of value.

Please explain why one cannot both save and spend in Bitcoin?

For a modern capitalist economy to function properly the following must hold true, in the long run:

A. currency in actual circulation (i.e. circulating paper money) must be expected to decline in terms of purchasing power in the long run. Otherwise there is no incentive to turn to stores of values (which, as explained below leads to decreased spending and no new investments = economy grinding to a halt).

assuming A is fulfilled, and people turn to stores of value, then:

B. commodity stores of value (gold) must expected, in the long run, to not outperform investment vehicles that provide a return on value (i.e. growth from anticipated real price increase plus dividends). When people no longer believe that to be the case (e.g. because of strong economic or political turmoil) they increasingly turn to gold, thus putting further pressure on the economy (because not enough money being directed to investment).

bottom line: BTC can be both store of value and medium of exchange - but only in the context of a sustained strong economic downturn (or even collapse) of a capitalist economic system. If this is desirable or not - I leave to you to decide for yourself.  

[npl]

The OP is basically saying, "Gold CAN'T be both a store of value and a medium of exchange."

Well, yeah, it was.  For millennia.

As bitcoin goes up in price it will get far more stable.  Once it gets very stable, purchasing with it will become very popular.  It will still probably beat inflation at that point, so it will still be better than your fiat for store of value as well.

while the historical use of gold as both isn't quite as clear cut as you are making it out to be (for much of that time gold backed instruments were mediums of exchange, rather than gold itself), it doesn't really matter because our present economic situation is quite different than 1000 BC Assyria or even 1840's England.

[Misesian]

The function of currency as a store of value is derived from its status as a means of exchange, acceptance of bitcoin as a means of exchange will only enhance it's function as a store of value, this has been the same historically with other means of exchange like gold and silver. For something to be universally accepted as a means of exchange however it must contain properties that give it an advantage as a means of exchange, for gold this was limited supply and high mining costs,  homogeneous and divisible, every unit is the same as every other and it can be blended or formed in any quantity, it's status as a luxury good meant it was sought by humans. Bitcoin has many advantages as a medium of exchange as well, limited supply, infinite divisibility, homogenous and low transaction costs. The problem is governments have forced fiat money onto us by requiring we pay taxes in fiat  money this has prevented market forces from picking a dominant currency which could be anything, hopefully bitcoin for those invested in it, the reason why many are choosing bitcoin as a store of value is because people have lost faith in fiat money and believe bitcoin is a safe haven that will protect them from inflation, or they are just simply speculating.

[Ibian]

It's both. Think electronic gold coins.

[deisik]

If it does become a significant store of value what might it be worth? Obviously we still cannot say with any certainty, but to determine the upper limit assume Bitcoin somehow fully replaced gold. Then the price of 1 BTC would roughly equal $330,000 (5.6 billion ounces*1250/21,000,000). Of course that is the upper limit and not very realistic.

Gold is no longer a means of exchange and has not been so for many decades already, so it is not correct to make such assumptions because Bitcoin is also used to some extent as a means of exchange (unlike gold). If we take that such reasoning has some value in it, that would in fact give us the lower limit for Bitcoin price...

[invisiblehand]

Is Bitcoin primarily a medium of exchange or a store of value? No financial instrument can be both things equally well. Despite what some Bitcoin proponents believe, specialization in one direction is inevitable (many people who seem to think it can somehow be both are the same ones advocating 'buy and hold forever'...).

The BTC paradox is that when it was created, it was intended to become primarily a medium of exchange (so Satoshi claimed) but the manner in which the protocol was devised makes it far more suited to be a store of value.

If it does become a significant store of value what might it be worth? Obviously we still cannot say with any certainty, but to determine the upper limit assume Bitcoin somehow fully replaced gold. Then the price of 1 BTC would roughly equal $330,000 (5.6 billion ounces*1250/21,000,000). Of course that is the upper limit and not very realistic.

I like it more as a store of value.  I'll spend USD.  Gresham's Law.

[Ibian]

Bitcoin is a store of value, currency and a transfer protocol. That makes it more valuable than any of gold, fiat or paypal.

The upper bound is their combined value. More realistically it will take a bite out of each of them. $300k is my personal realistic goal, with 1 million being the "wouldn't it be nice if..." target.

[deisik]

I disagree with your premise. Bitcoin makes a fantastic medium of exchange (best in human history), and due to the predictability and certainty of mining new Bitcoins (at predetermined rates), and the lack of monetary inflation, it will also make a great store of value.

How could it possibly be "a fantastic medium of exchange" with that type of volatility? For a medium of exchange, it is of utmost importance beyond anything else that its exchange rate to a basket of other main currencies be as stable as ever possible. If you are curious, this stability is predetermined by the size of the economy a currency encompasses...

[deisik]

Is Bitcoin primarily a medium of exchange or a store of value? No financial instrument can be both things equally well. Despite what some Bitcoin proponents believe, specialization in one direction is inevitable (many people who seem to think it can somehow be both are the same ones advocating 'buy and hold forever'...).

The BTC paradox is that when it was created, it was intended to become primarily a medium of exchange (so Satoshi claimed) but the manner in which the protocol was devised makes it far more suited to be a store of value.

If it does become a significant store of value what might it be worth? Obviously we still cannot say with any certainty, but to determine the upper limit assume Bitcoin somehow fully replaced gold. Then the price of 1 BTC would roughly equal $330,000 (5.6 billion ounces*1250/21,000,000). Of course that is the upper limit and not very realistic.

I like it more as a store of value.  I'll spend USD.  Gresham's Law.

Strictly speaking, it is not Gresham's Law, rather an extension to it taking into account a floating exchange rate between the currency pairs that I proposed somewhere in this forum (actually in this thread)...

[invisiblehand]

Strictly speaking, it is not Gresham's Law, rather an extension to it taking into account a floating exchange rate between the currency pairs that I proposed somewhere in this forum...

Yeah I just read about that to clarify.

But it does not make sense to spend BTC if people accept (ostensibly inferior) USD--presuming the exchange rate is fair

[natd]

Is Bitcoin primarily a medium of exchange or a store of value? No financial instrument can be both things equally well. Despite what some Bitcoin proponents believe, specialization in one direction is inevitable (many people who seem to think it can somehow be both are the same ones advocating 'buy and hold forever'...).

The BTC paradox is that when it was created, it was intended to become primarily a medium of exchange (so Satoshi claimed) but the manner in which the protocol was devised makes it far more suited to be a store of value.

If it does become a significant store of value what might it be worth? Obviously we still cannot say with any certainty, but to determine the upper limit assume Bitcoin somehow fully replaced gold. Then the price of 1 BTC would roughly equal $330,000 (5.6 billion ounces*1250/21,000,000). Of course that is the upper limit and not very realistic.

 BTC is no store of value, it's a highly speculative volatile medium of exchange. And yes, gold coins can be both.

[deisik]

Strictly speaking, it is not Gresham's Law, rather an extension to it taking into account a floating exchange rate between the currency pairs that I proposed somewhere in this forum...

Yeah I just read about that to clarify.

But it does not make sense to spend BTC if people accept (ostensibly inferior) USD--presuming the exchange rate is fair

If the exchange rate was fair and only that was counted in, then your assumption wouldn't be reasonable (in fact, it would be false just because of that alone). It is individuals expectations about future exchange rate that make Gresham's Law valid even for floating exchange rates. I edited my previous post giving the link to the discussion about it. So if you are interested you could go there and read my explanation (ant its critique) why Gresham's Law still holds...

[Misesian]

I disagree with your premise. Bitcoin makes a fantastic medium of exchange (best in human history), and due to the predictability and certainty of mining new Bitcoins (at predetermined rates), and the lack of monetary inflation, it will also make a great store of value.

How could it possibly be "a fantastic medium of exchange" with that type of volatility? For a medium of exchange, it is of utmost importance beyond anything else that its exchange rate to a basket of other main currencies be as stable as ever possible. If you are curious, this stability is predetermined by the size of the economy a currency encompasses...

The volatility you're talking about is when you price bitcoins in fiat money in which the supply is constantly expanding (fiat), we are forced to use centrally controlled fiat money because that is what our masters demand we pay our taxes in, if we had a system of free banking who would use a currency that was centrally controlled by government? Everybody would be using things like gold, silver and bitcoins because they provide many more advantages as currency one of them being a reliable store of value.

[Ibian]

BTC is no store of value,

Explain.