In economic terms, when people talk about a store of value, they’re talking about an economic good that retains its exchangeable market value in the short-run and the long-run. All value is individually subjective so exchangeable market value is the assumption that consumers and producers in the aggregate feel confident that there will be a coincidence of subjective exchangeable value between them at any time so they can use the good in trade.
This means that two people both value the good in trade independent of its current market price and are willing to trade it independent of the price of the good being traded for. If the trade doesn’t happen, it’s not for lack of subjective exchangeable value on both parts, it’s because they couldn’t agree on a price.
If they both value it but one is not willing to trade it in exchange for something else independent of the price of the good being traded for then it’s not a store of exchangeable market value. It’s a personal store of value based on personal preferences and values and it is not a medium of exchange.
For example, gold has been a store of exchangeable market value for thousands of years but certain types of gold coins have numismatic or sentimental value to collectors and they will not trade them regardless of the price offered. Those coins do not store exchangeable market value.
Whether a good is a store of exchangeable market value in the short-run and the long-run or not depends on its economic fundamentals. The short-run price of a store of value will vary but its fundamentals will ensure that it has a coincidence of exchangeable market value in the short-run and the long-run that can be used in exchange whatever that value might be at the time.
Key point: a store of exchangeable market value doesn’t mean a high price in the long-run, it means that the good will have a coincidence of exchangeable market value in the short-run and long-run regardless what the market price is at any given time.
A store of value has to be durable so that regardless what happens to it physically, the nature of the good is difficult to destroy so it can be used in exchange. An ice cream cone doesn’t make a good store of value since the ice cream will melt and all you’ll be left with is the cone. But since gold and silver are fundamental elements, regardless what form or state they are in, they’re still gold and silver. That’s true for any precious metal so precious metals are durable.
A store of exchangeable value has to have utility and value across diverse markets so that even if it loses value in one market, it still has value that can be exchanged in others. This diversity of value is what insures that the good will have exchangeable value in the short-run and the long-run. Although a bowling ball is durable and difficult for the consumer to destroy its value is limited to the context of bowling and doesn’t have diverse value in other markets. The long-run value of a bowling ball depends on the demand for bowling and bowling alone. If the demand for bowling dries up so does the value of bowling balls so bowling balls don’t make a good store of value.
The nature of gold, silver and other precious metals as natural elements make them durable and they have utility and value in a large number of markets: adorning furniture, adorning clothing, jewelry, electrical circuits, heat shielding etc. Precious metals have the sort of durability and market diversity that makes them a good store of exchangeable market value that can be used in exchange at any time.
Even if I don’t need gold or silver, given their market diversity, I feel confident that others will accept gold and silver in trade at any time so I’ll accept them as well in order to trade them later.
Is Bitcoin a store of exchangeable market value?
Is a Bitcoin durable, is it difficult for the consumer to destroy the nature of it? If you keep your Bitcoin wallet on any hardware device – computer, cellphone, memory stick, external hard-drive — and they are damaged beyond repair then your Bitcoins have been destroyed. There are certain measures that can be taken to attempt to recover the wallet but nothing is guaranteed. If you live in an area where you lose electrical power and/or Internet, cellphone connectivity then your Bitcoins cannot be exchanged and since you can’t do anything with them, they are worthless at that point in time which is the antithesis of a store of value.
Does a Bitcoin have diverse market utility and value? No, the only use for a Bitcoin is on the Bitcoin blockchain. The long-run exchangeable market value of a Bitcoin depends on the demand for people to use the Bitcoin blockchain to transact business. If that demand dries up so does the exchangeable market value of Bitcoins.
Speculative value is not the same as exchangeable value. In other words the fact that the price of Bitcoin fluctuates wildly – it lost 80% of its price in one year and 24% in one weekend — isn’t a characteristic of a store of value. The speculative value depends on the speculator not using, not exchanging his Bitcoins on the blockchain but rather continuing to hold them in hopes of recovering from the wild price dips and the price climbing in order to profit from continued speculative demand. A store of exchangeable market value must have a coincidence of market value that can be used in exchange at any time in the short-run and long-run regardless of the price.
Since people hold their Bitcoin in speculation, it decreases its exchangeable value rather than storing it.