The collapse in bitcoin prices over the past few weeks has made it clear that the cryptocurrency is far from the stable store of value that many envision it to be.

After trading in a relatively tight range between $50,000 and $60,000 for several weeks between mid-February and early May – a quiet period by bitcoin standards – bitcoin prices began to buckle.

Sceptical comments by Tesla founder and CEO Elon Musk regarding the bitcoin network’s energy consumption, as well as restrictions on cryptocurrency trading by Chinese regulators, were enough to trigger a cascade of selling that peaked on 19 May with bitcoin dropping as much as 31% in a matter of hours.

From peak to trough, bitcoin dropped 54% in about one month.

Not a store of value

An asset whose value halves in a matter of weeks can hardly be considered a store of value, at least in the traditional sense.

Wikipedia defines ‘store of value’ as “the function of an asset that can be saved, retrieved and exchanged at a later time, and be predictably useful when retrieved. More generally, a store of value is anything that retains purchasing power into the future.”

By this definition, bitcoin is much too volatile to be considered a store of value. Assets like the US dollar, ultra-safe dollar-denominated bonds like US Treasuries and even gold better fit the criteria.

The latter, for example, has seen annualised volatility of 17% over the past year, a quarter of bitcoin’s volatility. Some would argue that gold is still too volatile to be considered a proper store of value, but it has proven to maintain its value over long periods of time.

Consider this inflation-adjusted gold price chart:

Source: Bloomberg
Note: Base year 1982
indexed to US CPI

What gold lacks in day-to-day stability it makes up for through its long-term resilience.

Bitcoin, on the other hand, has neither day-to-day stability nor an extensive history backing up its store of value claim, having only been around since 2009.

Bitcoin vs gold

None of this is a knock against bitcoin. Every year that bitcoin has been around, it has gained thousands of adherents. Bitcoin will likely never be like the US dollar – it is not a bonafide currency, lacking the key unit of account and medium of exchange properties; nor does it have the backing of a powerful government (though there is still a movement to make bitcoin into something more than just a store of value).

That said, bitcoin can be like gold, which garners its value largely through scarcity and the collective belief that it is valuable – attributes shared by bitcoin.

As bitcoin has rallied over the past year, it has gained more and more believers. Even some major corporations – including Tesla, Square and Mercado Libre – have bought into the idea that bitcoin is something with lasting value. 

Value in the eye of the beholder

As long as the number of adherents continues to grow, the price of bitcoin may rise, just as it has up until now. At the same time, volatility may decline as bitcoins become distributed across a larger base of owners, and as bitcoins shift from the hands of speculators into the hands of longer-term holders.

In this paradigm, the natural end point is for bitcoin to reach a state where most of those who are inclined to buy bitcoin have already bought it, and it is no longer controversial whether or not bitcoin is valuable.

At that point, bitcoin will probably act much more like gold does today. Whether they own it or not, to a certain extent, nearly everyone considers gold a valuable asset – while a certain portion of those care enough about it to buy it and treat it like a store of value.

This end state is probably what most investors think of when they refer to bitcoin as a store of value (though some maximalists go further by imagining bitcoin replacing the US dollar, just as gold bugs imagine the same for gold).

Bitcoin is not a store of value today, but it could be one down the line if it manages to capture enough adherents. This future is not a foregone conclusion by any means, but it has become more likely as the cryptocurrency has continued to thrive despite the obstacles in its way.

Growth stock phase

Another thing to consider is that bitcoin’s investment thesis today (assuming bitcoin has not reached its peak already) is different than it will be in the future. Today, it is a high-risk/high-reward asset whose buyers believe it will someday become a stable store of value.

Many of those investors, seeing the enormous returns the asset has delivered in the past, anticipate that it will continue to deliver outsized returns as it gains more adherents on its way to becoming a dominant store of value.

Is bitcoin the new gold?

Most of those investors are not in bitcoin just to preserve their purchasing power; they are in it to generate large returns. There may be a few investors in bitcoin today who would be happy for it just to retain its value on an inflation-adjusted basis, but they are almost certainly the minority.

Bitcoin’s store of value irony

There is a bit of irony here. Most investors in bitcoin today believe it will be a store of value. Yet if it were a store of value, they probably would not want to own it. It would be boring – like gold.

It is rather like how a hot growth stock might eventually mature into a steady dividend-paying value stock. That is not necessarily a bad thing; it is just another type of asset with another type of investor base.

Bitcoin is still in that ‘hot growth stock’ phase.

This story was originally published on ETF.com