Babbitt column | Bitcoin is not a good value storage tool
Gold is a value storage tool; antique calligraphy is a value storage tool; bitcoin is a stored value tool.
In this case, we have heard too much, but what is value storage?
Storage, this is a very easy to understand word. For example, the bucket is for storing water, and the cylinder can be used for storing air. A lot of things, if you don't limit it in some way, they will flow freely. Water, if there is no bucket, the water will run without a shadow, storage is the container that limits these things.
Value storage, what is the stuff in the store?
The value storage function of money generally refers to the storage of purchasing power, and the storage of wealth.
We use the renminbi and other legal currency to have the function of storing purchasing power. Because today you have legal currency, you can buy things after one year. This purchasing power storage capacity of the French currency is guaranteed by government credit. But because the French currency has inflation, the purchasing power of the French currency will tend to decay over time.
We generally refer to things that have value as wealth, and to those that have economic utility. The legal currency also has the function of storing wealth, because the legal currency is a general equivalent and can be used to exchange almost all wealth. The legal currency itself is wealth, and everyone will exchange other wealth in their hands for legal currency.
The vast majority of wealth, such as our labor, natural resources, spiritual wealth, …. It is impossible to directly exchange other wealth that we want to consume, such as eating, drinking, and so on. That is, we can say that the vast majority of wealth itself has no direct purchasing power. These wealthes need to be traded to store their value, such as in a currency, to create purchasing power.
The vast majority of wealth itself, if not stored in value, its wealth attributes will disappear with time. Parents are the child's greatest wealth, but this wealth cannot be stored. Our workforce is of course wealth, but if we don't sell our labor, then the wealth attribute will naturally disappear. Natural resources, if they cannot be mined and exchanged into some kind of stored value tool, are not wealth. Excess products produced can not be sold, not only wealth, but also garbage, which needs to consume wealth to deal with.
We talk about value storage. In general, it refers to the storage of purchasing power and wealth.
We say that gold is a value storage tool, which means that gold can store purchasing power and store wealth. The same is true for antique calligraphy and painting.
There is another layer of meaning in value storage, which I have compared to the concept of value investing. This is due to the concept of “value investment” invented by Graham and Fisher, and thanks to Buffett’s success in promoting this concept.
The essence of value investment is to measure the value of assets such as stocks by discounting their future cash flows. Because stocks have dividends, the dividends will be treated as future cash flows, and then a certain discount rate will be deducted to calculate the amount of stocks that appear. For example, according to the 10 times price-earnings ratio calculation, that is, calculate the dividend for the next 10 years, and after deducting the discount rate, calculate how much the current stock value is. Then compare the calculated price with the price on the market today, you know it is cheap or expensive. Think of the stock as a hen that will lay eggs.
Similar to the house, buying a house, you can get the right to rent in the future. The house becomes a storage tool for rent. It is also possible to calculate the discount of future rents to gauge whether the price of the house is high or low.
According to the concept of value investment, stocks can be regarded as a storage tool for a company's future cash flow, and the house is regarded as a storage tool for future rents. Since it is a tool for “cash flow”, it is a value storage tool.
Stocks with dividends, houses that can be rented, and antiques that can lend money to the exhibition are all value storage tools. Legal currency, the existence of a bank, can also stably obtain interest, which is also a value storage tool.
And those wealth that cannot produce future cash flow do not have the value storage attribute of this dimension.
When it comes to value storage, we must mention the concept of reserve currency. Although the two are essentially different, they are particularly easy to be confused.
The reserve currency generally refers to the currency held by the national government and used as foreign exchange reserves. It can be simply understood as the money that the government saves to buy things internationally.
The reserve currency generally contains internationally versatile currencies such as gold, dollars, euros, and yen.
The reserve currency is essentially the international purchasing power and international wealth stored by the national government. Because international hard currency such as gold and the US dollar is internationally liquid, it can become the national reserve currency.
Now answer, can Bitcoin and other encrypted digital currencies become value storage tools?
Want to be a good tool for purchasing purchasing power, it is best to always appreciate, it is not good, like the legal currency, there is a stable downside expectation can also become a stored value tool. But like Bitcoin, the volatility is so great that it will be 20% if it doesn't move. If it doesn't fall 80%, it is not suitable for storing purchasing power.
Another major factor in storing purchasing power is that trading friction is small, and this is what Bitcoin has.
If you want to develop the attributes of Bitcoin's storage purchasing power, you need to greatly reduce its volatility.
Bitcoin can store wealth, and mining is a way of storing wealth. Mining is the storage of electricity resources, which is wealth, in the form of bitcoin. The Chinese have a lot of used power stations, especially hydropower in the upper reaches of the Yangtze River. A large number of power stations are wasted. The national grid does not charge these electricity, and these wealth will be wasted. With Bitcoin, these wealth can be stored.
A lot of things that were originally wealth, but the transaction costs are too large to be stored, they are wasted. Transnational small-scale trade, because there is no reasonable payment method, a lot of wealth has disappeared. But with bitcoin, a multinational currency, it can greatly reduce the trade costs between small multinational businesses. For example, from 2014 to 2017, I will help foreigners to do translations and earn bitcoin wages. This is the wealth storage function of Bitcoin.
In most cases, Bitcoin is only a transit point in the process of wealth storage. For example, the wealth of power resources is temporarily stored in Bitcoin and then transferred to the exchange for sale. But there are also some bitcoin enthusiasts who will store their wealth in Bitcoin for a long time. Some bitcoin enthusiasts will exchange their wages into bitcoin for wealth storage.
The reason why Bitcoin can become a storage tool for some wealth is that Bitcoin reduces the transaction cost of these wealth.
From the perspective of value investment, Bitcoin does not generate future cash, so it cannot be a stored value tool for future cash flow.
From the perspective of reserve currency, it is necessary for Bitcoin to rise to a sufficiently high price. It has sufficient liquidity and trading depth in the international market, and it can be regarded as a reserve currency by the government under the legal system of the mainstream power. At present, it is obviously not qualified.
In summary, Bitcoin is not a good purchasing power value-adding tool; Bitcoin can reduce the trade friction of some wealth and become a wealth storage tool; Bitcoin cannot exercise future cash flow storage function; Bitcoin is currently unlikely to become a national reserve currency.
Unless Bitcoin rises to a very, very high price and its volatility falls, it can be a good value storage tool. Before that, we still regard it as an investment target. For now, all the encrypted digital currency assets are the fate.