As a currency Bitcoin has some flaws – its both expensive and slow to transfer. So as a transactional currency it currently doesn't work very well. Who wants to spend 20 minutes at the checkout waiting for your transaction to confirm!
So while it may not work for high speed transactions, Bitcoin could potentially be a great store of wealth. In this post I explore how Bitcoin can be used as a store of wealth/value and some of the pitfalls and risks.
What is a store of wealth
A store of wealth (or store of value) is a form of wealth that will maintain its value without depreciating. Gold has long been seen as a store of value, but could Bitcoin do a similar job? I explain below.
But first its good to know why you need a store of wealth. One word – inflation. Over time your fiat currency is worth less and less. That's why you could buy a bottle of milk for a few cents decades ago, and why it costs a few dollars now. So those looking to preserve wealth turn to stores of value such as gold, art, property etc.
The Advantages of storing wealth in Bitcoin
Low storage costs
Bitcoin can be stored in numerous ways. You can use a third party cold storage solution, a cloud wallet, a wallet on your own device or a secure USB device. And that's just some of the methods of storage. Most of them are relatively inexpensive and once purchased you don't need to keep paying.
Its still appreciating in value
At some point in the future, the price of Bitcoin may start falling. Buy that hasn't happened yet. Sure, there have been crashes and slow downs. But the general direction of Bitcoin has remained bullish.
Self Managed
Investing into Bitcoin is easy and can be done by anyone with basic computer skills. You don't need to go through a broker or numerous third parties who all take a cut of your purchase. Bitcoin can be bought and sold with relatively small fees at numerous exchanges.
Other stores of value often require complex signup processes and a bunch of people will end up taking a cut. As Bitcoin is not controlled by anyone, there aren't a bunch of people getting rich when you decide to invest.
Liquidity
Bitcoin is pretty liquid. There are exchanges available in most countries and other services that facilitate local bitcoin transfers. I've found that buying in and out of Bitcoin to be straightforward and easy.
The risks
Using Bitcoin as a store of wealth doesn't come without risks. I consider it to be one of the more risky options for storing wealth. Depending on your age and desired goals, you'll need to consider if the reward is worth the risk.
Volatility
This is one of the big risks of Bitcoin. It is currently more volatile than gold. Will it develop into a more mature currency? Quite possibly, but there are no guarantees. Right now, you need to be prepared to accept a certain amount of volatility.
Regulation
One of the big risks to Bitcoin at the moment is regulation. Governments can at anytime choose to ban Bitcoin. Now while enforcing this might be difficult due to the distributed nature of Bitcoin, it still will impact the price and liquidity.
Security
Bitcoin if not stored correctly is susceptible to hacking attacks. Cloud based storage services could also close down and run off with your coins. So before thinking using Bitcoin for storing large amounts of wealth you need to do your research and pick a secure storage method.
In Comparison to Gold
Gold is expensive to store
I'm not talking about those youtubers who have relatively small collections of Gold and silver hidden under their beds which they show off in their videos. I'm talking actual stores of Gold. storing it securely is expensive. The more Gold you have, the more it will cost to store.
Bitcoin is cheap to store. Like gold, there are different options available. From using your own hardware to renting secure cold storage. One advantage of Bitcoin is that your store can be encrypted and backed up. So even if it's stolen, it will be useless to the thief.
Gold can come with a large markup
Depending on what form of Gold you buy (managed account, bars, coins etc) there are varying markups. For example, buying a gold coin might seem like a cool idea, but the price you pay for that coin will be well above the spot price of gold. Lots of people are looking to make money off of you buying gold.
Where to Buy Bitcoin
The cheapest place to buy bitcoin is through an exchange such as Poloniex. For ease of use, I would recommend Coinbase. For those in Australia, either CoinSpot or BTCMarkets is your best bet.
