What is a Store of Value?
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.
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.
- A store of value is an asset, currency, or a commodity that can be stored and retrieved at a later date without losing its value.
- An investment with a good store of value comes with a perpetual lifespan and infinite demand, making them low risk.
- Gold is regarded as the ultimate safe-haven asset since its store of value does not deteriorate in an economic crisis, is always in demand and is easily convertible.
Understanding Store of Value
Essentially, any asset, currency, or commodity that can reliably be converted to another 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, and prices will be maintained if there is 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, and will expire in 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 assets and commodities, such as gold, 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 over time.
In the monetary economy, money is considered a store of value, where it can be used 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
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, which means that it used gold to back its reserves. Investors could redeem their dollars for an amount 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 a fiat currency, which is a legal tender issued by the government but is not backed by a commodity.
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.
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.
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