Store of Value

The function of an asset, currency, or a commodity that can be stored and retrieved at a later date without losing value

What is a Store of Value?

A store of value is the property of an asset, currency, or commodity that makes it suitable to use without diminishing in value over a long period of time. An item would be considered a store of value if its value is either stable or increases over time but is not depreciating.

 

Store of Value

 

If an item can be held and converted into money in the future without a decrease in value, it is considered a good store of value. Various commodities are considered stores of value by virtue of their divisibility, durability, and portability.

 

Summary

  • A store of value is the function of an asset, currency, or a commodity that can be stored and retrieved at a later date without losing value.
  • Stores of values come with a long lifespan and perpetual demand, making them less risky.
  • Gold is regarded as the ultimate safe-haven asset since its store of value does not exacerbate an economic crisis through a negative feedback effect.

 

Understanding Store of Value

Essentially, anything such as an asset, currency, or commodity that can predictably be useful when used at a later date can serve as a store of value. The conditions upon which an item qualifies to be a store of value depends on whether it can be saved, retrieved, and exchanged while maintaining its purchasing power.

Risk aversion is the central concept behind a store of value due to a perpetual demand for the underlying item. To illustrate, gold and other precious metals are stores of value because they yield utility due to their prolonged shelf life, without diminishing in value.

Interest-bearing assets also qualify to be stores of value because they generate income while maintaining value. On the other hand, a commodity like milk is a poor store of value because it is perishable, meaning its value will dwindle in no time and end up worthless.

 

Money as a Store of Value

For the better part of history, various commodities played the role of money. Initially, trade agents used a number of assets and commodities as mediums of exchange based on their intrinsic values, durability, and portability. The functions of money are universal, and its defining property is based on the function it performs, such as purchasing power between traders in a long period of time.

In the monetary economy, money is considered a store of value, which represents it as a means of saving and allocating capital. Money’s property as a store of value facilitates a transfer of purchasing power over time.

Another defining property of money is its use as a medium of exchange, which means that money is a carrier of a store of value between independent transactions. Since money can transfer purchasing power from one period to another, it is suited to store value. For example, people maintain value when they hold money in their wallets until they want to exchange it for goods or services. At the same time, the store of value concept allows people to save and postpone consumption until a later date.

Large quantities of money are hoarded because of its store of value property. However, significant changes in prices can make money fail to outlive its usefulness as a store of value. Notably, in the case of rising inflation, the purchasing power reduces, and a cost is imposed on the holders of money; hence, the liquidity constraint will be binding.

 

Other Examples of Stores of Values

 

Precious metals

in the past, precious metals were used by many economies to facilitate trade. For example, precious metals – like gold, silver, and platinum – served as stores of value due to their portability and divisibility features.

Until 1993, the U.S. was a gold standard country, meaning that it used gold to back its reserves. Investors could redeem their dollars for a specific ounce of gold. The end of the gold standard concept gave the Federal Reserve even more power to influence macro factors such as inflation, unemployment rates, and economic outputs. Afterward, the U.S. implemented fiat currency, which is a type of currency issued by the government but lacks intrinsic value.

 

Currency

Currency is a government-issued legal tender and a standard for debt repayment.  A reasonably robust currency is the bloodline for a country’s economic well-being. A nation’s legal tender must be robust enough to facilitate labor, trade, savings, and expenditure.

 

Cryptocurrency

Some economists view cryptocurrencies, such as bitcoin and ethereum, as a good store of value. Their features – such as scarcity, divisibility, decentralized security network, and as a holder of transfer of value – make it a good store of value.

 

Related Readings

CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

  • Bitcoin Mining
  • Federal Reserve
  • Underlying Asset
  • Virtual Currency

Valuation Techniques

Learn the most important valuation techniques in CFI’s Business Valuation course!

Step by step instruction on how the professionals on Wall Street value a company.

 

Learn valuation

the easy way with templates and step by step instruction!