Store of value

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A store of value is any commodity or asset that would normally retain purchasing power into the future and is the function of the asset that can be saved, retrieved and exchanged at a later time, and be predictably useful when retrieved.[ citation needed ]

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The most common store of value in modern times has been money, currency, or a commodity like a precious metal or financial capital. The point of any store of value is risk management due to a stable demand for the underlying asset. [1]

Money as a store of value

Various bills and coins Currency, Money,before Euro.jpg
Various bills and coins

Monetary economics is the branch of economics which analyses the functions of money. Storage of value is one of the three generally accepted functions of money. [2] The other functions are the medium of exchange, which is used as an intermediary to avoid the inconveniences of the coincidence of wants, and the unit of account, which allows the value of various goods, services, assets and liabilities to be rendered in multiples of the same unit. Money is well-suited to storing value because of its purchasing power. [3] It is also useful because of its durability. [4]

Because of its function as a store of value, large quantities of money are hoarded. [5] Money's usefulness as a store of value declines if there are significant changes in the general level of prices. [6] So if inflation rises, purchasing power declines and a cost is placed on those holding money. [7]

Workers who are paid in a currency which is experiencing high-inflation will prefer to spend their income quickly instead of saving it. [4] When a currency loses its store of value, or more accurately when a currency is perceived to lose its future purchasing power, it fails to function as money. This causes people to use currencies from other countries as a substitute. [4]

According to the Cambridge cash-balance theory, which is represented by the Cambridge equation, money's ability to store value is more important than its function as a medium of exchange. [8] Cambridge claims that the demand for money is derived from its ability to store value. This is contrary to Fisher economists' belief that demand arises because money is needed for exchange. [9]

Other stores of value

Polish National Government bond, 1863 Bond of National Loan issued by Polish National Government 1863.png
Polish National Government bond, 1863
Commodities such as gold and other precious metals have historically been good stores of value Gold-295936.jpg
Commodities such as gold and other precious metals have historically been good stores of value

The term cash is often used to indicate both currency, which is usually represented by paper money or coins in industrialized countries, [10] and sums deposited and payable almost immediately on order.

Apart from cash, legal tender issued on the fiat of a sovereign government, [11] [12] examples of assets used as potential stores of value are:

In addition, currency can take many alternative forms, such as cryptocurrency, livestock (e.g. some pre-colonial African currencies), [10] labor vouchers, gift economy relationships or stored-value cards (value is recorded directly on computer chips of the cards). [19]

While the above-mentioned assets may be inconvenient to trade daily or store, and may vary in value quite significantly, they are expected to rarely lose all value. It need not be a capital asset at all, merely have economic value that is not believed to disappear even in the worst situation.

The disadvantage for land, houses and property as a store for value is that it may take time to find a buyer for those assets. [7]

As stores of value, gold and precious metals are generally favored to industrial commodities, because of their demand and rarity in nature, which reduces the risk of devaluation associated with increased production and supply.

Cryptocurrency's role as a store of value is currently a matter of debate. [20] [21] [22] [23] The Internal Revenue Service has issued guidance on "virtual currencies" that refers to them as "a medium of exchange, a unit of account, and/or a store of value." [24] The cryptocurrency Bitcoin is often compared by advocates to gold. [25] [26] In their role as a store of value, cryptocurrencies often elicit concern, due to their extreme volatility, [27] or due to concerns about the emergence of regulation and contradictory handling by governments. [28] Note that the Bitcoin blockchain ledger is unalterable and that Bitcoin cannot be taken from someone, except by force, known as the 'five-dollar wrench attack'. [29]

See also

Related Research Articles

A currency is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general definition is that a currency is a system of money in common use within a specific environment over time, especially for people in a nation state. Under this definition, the British Pound sterling (£), euros (€), Japanese yen (¥), and U.S. dollars (US$) are examples of (government-issued) fiat currencies. Currencies may act as stores of value and be traded between nations in foreign exchange markets, which determine the relative values of the different currencies. Currencies in this sense are either chosen by users or decreed by governments, and each type has limited boundaries of acceptance; i.e., legal tender laws may require a particular unit of account for payments to government agencies.

An exchange-traded fund (ETF) is a type of investment fund that is also an exchange-traded product, i.e., it is traded on stock exchanges. ETFs own financial assets such as stocks, bonds, currencies, debts, futures contracts, and/or commodities such as gold bars. Many ETFs provide some level of diversification compared to owning an individual stock.

<span class="mw-page-title-main">Financial transaction</span> Form of agreement carried out between a buyer and seller

A financial transaction is an agreement, or communication, between a buyer and seller to exchange goods, services, or assets for payment. Any transaction involves a change in the status of the finances of two or more businesses or individuals. A financial transaction always involves one or more financial asset, most commonly money or another valuable item such as gold or silver.

<span class="mw-page-title-main">Digital currency</span> Currency stored on electronic systems

Digital currency is any currency, money, or money-like asset that is primarily managed, stored or exchanged on digital computer systems, especially over the internet. Types of digital currencies include cryptocurrency, virtual currency and central bank digital currency. Digital currency may be recorded on a distributed database on the internet, a centralized electronic computer database owned by a company or bank, within digital files or even on a stored-value card.

In finance, an asset class is a group of financial instruments that have similar financial characteristics and behave similarly in the marketplace. We can often break these instruments into those having to do with real assets and those having to do with financial assets. Often, assets within the same asset class are subject to the same laws and regulations; however, this is not always true. For instance, futures on an asset are often considered part of the same asset class as the underlying instrument but are subject to different regulations than the underlying instrument.

A cryptocurrency exchange, or a digital currency exchange (DCE), is a business that allows customers to trade cryptocurrencies or digital currencies for other assets, such as conventional fiat money or other digital currencies. Exchanges may accept credit card payments, wire transfers or other forms of payment in exchange for digital currencies or cryptocurrencies. A cryptocurrency exchange can be a market maker that typically takes the bid–ask spreads as a transaction commission for its service or, as a matching platform, simply charges fees.

A private currency is a currency issued by a private entity, be it an individual, a commercial business, a nonprofit or decentralized common enterprise. It is often contrasted with fiat currency issued by governments or central banks. In many countries, the issuance of private paper currencies and/or the minting of metal coins intended to be used as currency may even be a criminal act such as in the United States. Digital cryptocurrency is sometimes treated as an asset instead of a currency. Cryptocurrency is illegal as a currency in a few countries.

Virtual currency, or virtual money, is a digital currency that is largely unregulated, issued and usually controlled by its developers, and used and accepted electronically among the members of a specific virtual community. In 2014, the European Banking Authority defined virtual currency as "a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically." A digital currency issued by a central bank is referred to as a central bank digital currency.

<span class="mw-page-title-main">Money</span> Object or record accepted as payment

Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are: medium of exchange, a unit of account, a store of value and sometimes, a standard of deferred payment.

<span class="mw-page-title-main">Fiat money</span> Currency not backed by any commodity

Fiat money is a type of currency that is not backed by a precious metal, such as gold or silver, or backed by any other tangible asset or commodity. Fiat currency is typically designated by the issuing government to be legal tender, and is authorized by government regulation. Since the end of the Bretton Woods system in 1971, the major currencies in the world are fiat money.

<span class="mw-page-title-main">Bitcoin</span> Decentralized digital currency

Bitcoin is the first decentralized cryptocurrency. Nodes in the peer-to-peer bitcoin network verify transactions through cryptography and record them in a public distributed ledger, called a blockchain, without central oversight. Consensus between nodes is achieved using a computationally intensive process based on proof of work, called mining, that guarantees the security of the bitcoin blockchain. Mining consumes large quantities of electricity and has been criticized for its environmental effects.

<span class="mw-page-title-main">Cryptocurrency</span> Digital currency not reliant on a central authority

A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it.

<span class="mw-page-title-main">History of bitcoin</span> Cryptocurrency

Bitcoin is a cryptocurrency, a digital asset that uses cryptography to control its creation and management rather than relying on central authorities. Originally designed as a medium of exchange, Bitcoin is now primarily regarded as a store of value. The history of bitcoin started with its invention and implementation by Satoshi Nakamoto, who integrated many existing ideas from the cryptography community. Over the course of bitcoin's history, it has undergone rapid growth to become a significant store of value both on- and offline. From the mid-2010s, some businesses began accepting bitcoin in addition to traditional currencies.

<span class="mw-page-title-main">Legality of cryptocurrency by country or territory</span>

The legal status of cryptocurrencies varies substantially from one jurisdiction to another, and is still undefined or changing in many of them. Whereas, in the majority of countries the usage of cryptocurrency isn't in itself illegal, its status and usability as a means of payment varies, with differing regulatory implications.

Blockchain.com is a cryptocurrency financial services company. The company began as the first Bitcoin blockchain explorer in 2011 and later created a cryptocurrency wallet that accounted for 28% of bitcoin transactions between 2012 and 2020. It also operates a cryptocurrency exchange and provides institutional markets lending business and data, charts, and analytics.

Bitfinex is a cryptocurrency exchange owned and operated by iFinex Inc, and is registered in the British Virgin Islands. Bitfinex was founded in 2012. It was originally a peer-to-peer Bitcoin exchange, and later added support for other cryptocurrencies.

Bitcoin was designed by its pseudonymous inventor, Satoshi Nakamoto, to work as a currency, but its status as a currency is disputed. Economists define money as a store of value, a medium of exchange and a unit of account, and agree that bitcoin does not currently meet all these criteria.

A cryptocurrency wallet is a device, physical medium, program or an online service which stores the public and/or private keys for cryptocurrency transactions. In addition to this basic function of storing the keys, a cryptocurrency wallet more often offers the functionality of encrypting and/or signing information. Signing can for example result in executing a smart contract, a cryptocurrency transaction, identification, or legally signing a 'document'.

Cryptocurrency and crime describe notable examples of cybercrime related to theft of cryptocurrencies and some methods or security vulnerabilities commonly exploited. Cryptojacking is a form of cybercrime specific to cryptocurrencies that have been used on websites to hijack a victim's resources and use them for hashing and mining cryptocurrency.

A stablecoin is a type of cryptocurrency where the value of the digital asset is supposed to be pegged to a reference asset, which is either fiat money, exchange-traded commodities, or another cryptocurrency.

References

  1. ↑ Mankiw, N. Gregory (2012). Essentials of Economics. Cengage Learning. p. 437. ISBN   978-1133418948 . Retrieved 2 January 2017.
  2. ↑ Mankiw, N. Gregory (2012). Essentials of Economics. Cengage Learning. p. 437. ISBN   978-1133418948 . Retrieved 2 January 2017.
  3. ↑ Gwartney, James; Richard Stroup; Russell Sobel; David Macpherson (2008). Economics: Private and Public Choice. Cengage Learning. p. 264. ISBN   978-0324580181 . Retrieved 2 January 2017.
  4. 1 2 3 Boyes, William; Michael Melvin (2011). Fundamentals of Economics. Cengage Learning. p. 295. ISBN   978-1133172994 . Retrieved 3 January 2017.
  5. ↑ Einzig, Paul (2014). Primitive Money: In its Ethnological, Historical and Economic Aspects, Edition 2. Elsevier. p. 425. ISBN   9781483157153 . Retrieved 3 January 2017.
  6. ↑ Currie, David A. (1981). Macro Economic Analysis. Nirali Prakashan. p. 2.14. ISBN   9380064195 . Retrieved 3 January 2017.
  7. 1 2 Gwartney, James; Richard Stroup; Russell Sobel; David Macpherson (2008). Macroeconomics: Public and Private Choice. Cengage Learning. p. 264. ISBN   978-0324580198 . Retrieved 3 January 2017.
  8. ↑ Economic Concepts and Methods. FK Publications. 2008. p. 297. ISBN   978-8188597185 . Retrieved 4 January 2017.[ permanent dead link ]
  9. ↑ Reddy, R. Jayaprakash (2004). Advanced Monitory Theory & Policies. APH Publishing. p. 50. ISBN   8176486124 . Retrieved 4 January 2017.
  10. 1 2 Currency at the Encyclopædia Britannica
  11. ↑ Cash at the Encyclopædia Britannica
  12. ↑ Money at the Encyclopædia Britannica
  13. ↑ Wondering how to invest in real estate? Four ways to get started at the Encyclopædia Britannica
  14. ↑ Gold-plated investing strategy? Shiny metal and your portfolio at the Encyclopædia Britannica
  15. ↑ What are commodities? at the Encyclopædia Britannica
  16. ↑ How to invest in art and collectibles: From pastime to portfolio at the Encyclopædia Britannica
  17. ↑ Investment types at the Encyclopædia Britannica
  18. ↑ "Store of value". Corporate Finance Institute. Retrieved August 1, 2024. A store of value is an asset, currency, or commodity that maintains its value over a long period. An item would be considered a store of value if its value is either stable or increases over time but doesn't depreciate.
  19. ↑ Credit and money at the Encyclopædia Britannica
  20. ↑ "Mark Cuban: Bitcoin is 'more religion than solution' and won't help in 'doomsday scenarios'". CNBC. 17 December 2020.
  21. ↑ Davies, Gavyn (10 January 2021). "Bitcoin has ambitions for gold's role". Financial Times. Archived from the original on 2022-12-10.
  22. ↑ Shiller, Robert J. (15 December 2017). "What is Bitcoin Really Worth? Don't Even Ask". The New York Times.
  23. ↑ "As bitcoin's price plunges, skeptics say the cryptocurrency has no value. Here's one argument for why they're wrong". CNBC. 16 January 2018.
  24. ↑ "Internal Revenue Bulletin: 2014-16 | Internal Revenue Service".
  25. ↑ "Tom Lee gives the long-term bullish case for bitcoin and why it's better than gold". CNBC. 4 February 2021.
  26. ↑ "JPMorgan says bitcoin could rise to $146,000 long term as it competes with gold". CNBC. 5 January 2021.
  27. ↑ Shiller, Robert J. (15 December 2017). "What is Bitcoin Really Worth? Don't Even Ask". The New York Times.
  28. ↑ "Does Regulation Chill Cryptocurrency Trading?". The Regulatory Review. 31 August 2020.
  29. ↑ Kamau, Rufas. "How To Send And Receive Bitcoin Privately". Forbes. Retrieved 2022-11-05.
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