Role of Bitcoin as a Store of Value

Group 1: Umbrella Slider

Submitted to

Asst. Prof. Dr. Thanarerk Thanakijsombat

By
Prawit Singhnamwong 6380530
Natchuda Pinsuvanbut 6380955
Sakun Sappasarn 6380749
Thorfar Tanglukdee 6380981
Tullaya Taksina 6380810

ICMF 319 Multinational Corporate Finance

Section 2 T1/2022-2023

December 7, 2022
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Table of Contents

Introduction 2

Annotated Bibliography 3

I. Virtual currency bitcoin in the scope of money definition and store of value 3

II. Is bitcoin a real currency? An economic appraisal 4

III. Realized bitcoin volatility 5

IV. Are cryptocurrencies the future of money? 6

V. Can bitcoin become a viable alternative to fiat currencies? An empirical analysis 7

of bitcoin’s volatility based on a GARCH model

VI. The volatility of bitcoin and its role as a medium of exchange and a store of value 8

VII. Bitcoin as money? 9

VIII. Bitcoin as an aspirational store of value 10

IX. Can cryptocurrencies fulfill the functions of money? 11

X. A too convenient transaction: bitcoin and its further regulation 12

Analysis 13

References 14
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Introduction

More than 300 million people around the world use or own cryptocurrencies in 2022

according to Tuwiner (2022). In today's world, most people know or have heard about

cryptocurrencies, and it has become more popular that people want to own and use it. Moreover,

around 85 million people had created bitcoin wallets on Blockchain.com (Josh, 2022). From a lot

of people who possess bitcoin, the question “can bitcoin be used like money?” might be asked.

According to economic analysis, money must serve three functions: medium of exchange, unit of

account, and store of value. However, there are many weaknesses in bitcoin that people are

concerned about. For example, there is news about a traveler who only used bitcoin during his

trip. However, only a few retailers or merchants accept bitcoin payments as of now. This brings

the question of whether bitcoin is a legitimate medium of exchange. In addition, bitcoin's

volatility is one of the biggest problems because the price of bitcoin is not stable and fluctuates

on a daily basis. As a result, the focus of this article will be on the question of whether bitcoin

can be used as a store of value.

This article proceeds as follows. The first section is an annotated bibliography that we

find the related article and summarize. The second section is the conclusion whether bitcoin can

perform the function as a store of value.

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Annotated Bibliography

Kubát, M. (2015). Virtual currency bitcoin in the scope of money definition and store of

value. Procedia Economics and Finance, 30, 409–416.

https://doi.org/10.1016/s2212-5671(15)01308-8

In this article, the author describes whether bitcoin meets the legal, empirical, and

theoretical definitions of money, and focuses on the store of value money function. The

main ideas expressed are that although bitcoin is seen as money, it is not possible to

categorically classify virtual currency as money. The legal situation of bitcoin acceptance

is ambiguous; to be more specific, it is not explicitly addressed. Moreover, bitcoin is not

considered money when the legal status is specifically mentioned. On the other hand,

there is the argument that the store of value function is not fulfilled by fiat currencies and

the whole success of virtual currencies is based on the fact of non-inflation. However,

comparing the volatility calculation of gold, two currencies (EUR and PLU), and bitcoin

shows the volatility of bitcoin is significantly higher implying that holding property in

this system is riskier. In addition, another comparison based on different types of assets

volatility calculation, which is stock of companies (Dax and Apple) illustrate that the

volatility of bitcoin is higher than all mentioned assets. Therefore, this cancels the store

of value money function of bitcoin. This article explains the definition of money about

bitcoin and calculates volatility of bitcoin and compares it with other currencies and

assets. Therefore, this article is beneficial for the research topic to answer the question:

Can bitcoin store the value?. It shows that bitcoin still cannot store the value because they

are not guaranteed and involve some risk to store the value when compared with others.
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Yermack, D. (2015). Is bitcoin a real currency? An economic appraisal. Handbook of Digital

Currency, 31–43. https://doi.org/10.1016/b978-0-12-802117-0.00002-3

In this article, Yermack examines whether bitcoin is money by applying three main

functions of money: a medium of exchange, a unit of account, and a store of value.

Starting with the first criteria, a medium of exchange. Only a few merchants accept

bitcoin. Furthermore, the majority of bitcoin transactions are between speculators, with

only a few using it to purchase goods or services. A unit of account is the second

function. Because of bitcoin's extreme price volatility, retailers must frequently

recalculate product prices, and customers may become confused. Furthermore, the price

of one bitcoin is high in comparison to the majority of commonly used products. When

retailers quote prices for their products, they use a lot of decimal digits, which can create

difficulty for customers. Yermack argued that the last function, a store of value, means

the protection of currency from theft. Bitcoin has no physical currency; rather, it is stored

in a digital wallet. As a result, the biggest issue for this industry is wallet security.

Furthermore, bitcoin's exchange rate volatility is extremely high when compared to

commonly used currencies, gold, and the most risky stocks. Consequently, Yermack

concluded that bitcoin behaves as a speculative investment rather than money because it

fails to perform the function of money. This article is useful for this research question,

and the answer is that bitcoin cannot serve as a store of value due to insecurity and

market price volatility.

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Baur, D. G., & Dimpfl, T. (2017). Realized bitcoin volatility. SSRN Electronic Journal.

https://doi.org/10.2139/ssrn.2949754

In this article, the author examined bitcoin's volatility and how it affects bitcoin's ability

to serve as money: a medium of exchange, a store of value, and a unit of account. The

author used a sample time period of 1 January 2014 to 25 January 2017 by comparing the

volatility of different bitcoin markets and other FX markets. The author then used

previous bitcoin volatility to determine whether it should be considered money or an

investment. Beginning with a medium of exchange, the author argued that bitcoin's

volatility raises the risk. The approach to eliminate the risk which is the adoption of

bitcoin as a currency and restrict the exchange of bitcoin into other currencies is

impractical. The second function is a value store. The author argued that for a currency to

be a reliable store of value, it should have stable internal and external value as well as

low variance. However, the volatility analysis reveals that the external value of bitcoin

was extremely volatile during the sample period. Furthermore, the variance of bitcoin is

extremely high. As a result, it should be considered as an investment rather than money.

Finally, bitcoin underperforms as a unit of account. According to the author, bitcoin's

internal value fluctuates because there are no trade barriers or capital restrictions in an

open economy. As a result, bitcoin has become unreliable as a unit of account. Therefore,

this article is relevant to our research question and can provide an answer to the question:

Can bitcoin be used as a store of value? The answer is that bitcoin cannot function as a

store of value because its volatility causes internal and external values to fluctuate over

time.
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Gartz, M. & Linderbrandt, I. (2017). Are cryptocurrencies the future of money? KTH Royal

Institute of Technology School of Computer Science and Communication.

https://www.diva-portal.org/smash/get/diva2:1119782/FULLTEXT01.pdf

The authors describe whether Sweden will be able to use cryptocurrencies as the national

currency as well as the opportunities and limitations of using bitcoin as the

exemplification. There are three functions of a currency which are being a medium of

exchange, a unit of account, and a store of value. Bitcoin can fulfill the first criterion, a

medium of exchange, as it is widely known and accepted. However, bitcoin is not used

widely. For the second criterion, bitcoin also partially achieves the criteria since it can be

used to measure the value of goods and services, but cannot be used to measure the value

of assets or loans. Lastly, bitcoin cannot be a store of value because it is volatile. It may

theoretically be possible to use bitcoin or cryptocurrencies as a Swedish national

currency, but in practice, it is difficult to implement since it is hard to predict and control.

It is more likely that bitcoin will be used in cross-border payments as using bitcoin is less

time and cost-consuming. However, it cannot replace the traditional currency because

bitcoin has limitations on a long time for confirmation, large energy consumption, and

security concerns. It is better to use bitcoin alongside the traditional currency rather than

use it as a national currency. The usefulness of the article is that the exemplification is all

about bitcoin which is the most possible one to be a currency indicating that other

cryptocurrencies are far from being a currency. Therefore, this article is useful for this

research since it shows that bitcoin cannot be a store of value since it is volatile as well as

cannot be a currency because it cannot fulfill all of the criteria.

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Cermak, V. (2017). Can bitcoin become a viable alternative to fiat currencies? An empirical

analysis of bitcoin’s volatility based on a GARCH model. Skidmore College.

http://dx.doi.org/10.2139/ssrn.2961405

In this article, Cermak reviews that if the volatility of bitcoin is the same as the volatility

of fiat currencies, bitcoin will be possible to be a currency as it will be able to fulfill all of

the currency criteria. The major problem for bitcoin not being able to be an alternative

currency is its extreme volatility which is sensitive to external factors. One of the factors

that influence the volatility of bitcoin is government regulation. Since bitcoin cannot be a

store of value and has no intrinsic value, its value is determined by the willingness to

keep it and accept it. China is the biggest market where bitcoin is traded and mined the

most, so when the People's Bank of China (PBoC) announces any policies, it significantly

affects bitcoin’s volatility. Another factor that can affect bitcoin’s volatility is security

concerns. Although bitcoin is unhackable, third-party platforms are likely to be hacked.

As bitcoin is expensive and lacks control by the government, third-party wallets are likely

to be stolen. Bitcoin’s volatility will be higher when people feel insecure. Therefore, it is

difficult for bitcoin to have the same volatility level as fiat currencies since it is not under

the control of any central bank meaning that there is no control over the risk and the

stabilization of the exchange rate. Bitcoin value also depends not only on the volume of

transactions and the economy in China but also in the U.S. and the EU. The author

provides strong theoretical reasons for the volatility of bitcoin together with the example.

This article is useful for the research answering that bitcoin cannot be a store of value

because it is extremely volatile and easily influenced by external factors.

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Baur, D. G., & Dimpfl, T. (2021). The volatility of bitcoin and its role as a medium of exchange

and a store of value. Empirical Economics, 61(5), 2663–2683.

https://doi.org/10.1007/s00181-020-01990-5

The authors describe that bitcoin cannot be used as a medium of exchange because of its

extreme price volatility, but over the long run, it shows characteristics of a store of value.

The authors use the historical price of bitcoin against currencies (U.S. dollar, Euro,

Japanese Yen) from two different sources, in the short term from 2018 to 2020, and in the

long term data from 2010 to 2020 to calculate and compare each other. It is clear that the

volatility of bitcoin is much greater than the volatility of currency exchange rates.

However, the correlations of bitcoin returns are high in general and also increased over

time, and it is also higher than FX returns. Moreover, bitcoin is not clearly a suitable

portfolio diversifier or hedge due to its excess expected returns and volatility (relative to

the S&P 500). In addition, bitcoin is not accepted widely by buyers or sellers as a means

of payment. Therefore, bitcoin cannot currently be used as a medium of exchange and

cannot have the unit of account feature. Bitcoin's excessive volatility seems to reject its

use as a store of value. However, the store of value is volatile only in the short term but

relatively steady in the long term, so volatility may not be the main issue for bitcoin as a

store of value due to its deflationary design. The authors focus on volatility of bitcoin by

using data to compare with currencies and stock between two periods. Therefore, this

article can answer the question that bitcoin cannot store value in the short term, but in the

long term bitcoin is able to store the value.

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Boston, F. R. B. O. (2014b). Bitcoin as money? Federal Reserve Bank of Boston.

https://www.bostonfed.org/publications/current-policy-perspectives/2014/bitcoin-as-mon

ey.aspx

This article examines how the designed features of Bitcoin have interfered with its ability

to function as fiat money: a medium of exchange, a store of value, and a unit of account.

Bitcoin, unlike regular fiat money, is not backed by central authorities such as the central

bank. Although accepting Bitcoin as a payment relies completely on private agents that

are willing to accept it, there are various intermediaries that have emerged to facilitate

bitcoin’s use as a medium of exchange and have enabled the use of bitcoin to become

ubiquitous in certain regions of the world. However, Bitcoin fails to be used as a unit of

account because of its high volatility. Many merchants who accept bitcoin as payment

still tend to use fiat currencies such as dollars or euros to post prices of goods or services

instead of Bitcoin. This is because merchants have chosen to minimize exchange rates

risk when converting Bitcoin into fiat currencies. With such reasons, the high fluctuation

of Bitcoin’s prices have rendered it much less suitable as a unit of account and might also

dwindle the ability of Bitcoin to serve as a medium of exchange. Finally, Bitcoin can only

serve as a store of value in the future. The author provides strong supporting metrics for

the increasing popularity of Bitcoin and explains that the current value of the Bitcoin

market solely depends on the expectation that others are willing to accept Bitcoin at a

greater value in the future. Hence, Bitcoin becomes a good speculative investment and is

prone to bubbles. All in all, this article proves to be useful for this research in answering

that Bitcoin cannot be a store of value as of now but it could be one in the future.
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Bitcoin investment thesis: Bitcoin as an aspirational store of value system. (n.d.). Fidelity

Digital Assets. https://www.fidelitydigitalassets.com/research-and-insig

hts/bitcoin-investment-thesis-bitcoin-aspirational-store-value-system

This article examines the view that Bitcoin is an aspirational store of value. The

characteristics of Bitcoin are well-documented and the author goes on to discuss factors

that might allow Bitcoin to become a store of value in the future. The author suggests that

Bitcoin can offer huge upside potential if it is widely accepted by institutions because of

its key characteristics that signify a good store of value. The most important characteristic

that Bitcoin possesses is its scarcity. No one can ever fake a Bitcoin or create it out of

thin air, making Bitcoin supply inelastic which protects against the depreciation of its

value. Moreover, in response to the global pandemic, there are external factors such as

extreme levels of monetary and fiscal stimulus on the economy that are shifting the

attention of investors toward fixed supply assets. Bitcoin has the potential to become one

of the speculative assets to hedge against inflation due to its fixed supply characteristic

which might make it an aspirational store of value. However, one of the arguments

against Bitcoin as a store of value is due to its high volatility. Investment in Bitcoin is

considered as a risky investment and merely speculative because the prices of Bitcoin are

affected by several factors of the economic trend and the demand for it can change

rapidly. All these factors could be an important catalyst for Bitcoin adoption but that is

something we have to look forward to in the future. Therefore, this article is useful in

answering that Bitcoin has the potential to become a store of value only in the future and

in the long-term.
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Ammous, S. (2018). Can cryptocurrencies fulfill the functions of money? The Quarterly Review

of Economics and Finance, 70, 38–51. https://doi.org/10.1016/j.qref.2018.05.010

In this article, Saifedean Ammous discusses the potential for cryptocurrencies to fulfill

the roles of money. He begins by explaining the three main functions of money. Ammous

then argues that Bitcoin and other cryptocurrencies have the potential to fulfill these

functions, but that they must first overcome certain obstacles. He identifies issues like

scalability, liquidity, and volatility as areas of concern that need to be addressed. He

further explains that, despite these challenges, the success of Bitcoin and other

cryptocurrencies has shown that digital money is here to stay. The main argument raised

by the author is that cryptocurrencies have the potential to be a medium of exchange, a

unit of account, and a store of value, but that the potential for cryptocurrencies to be a

store of value is still underdeveloped. He argues that as the technology develops and the

risks associated with it become more manageable, cryptocurrencies will be adopted as a

store of value. He also suggests that as cryptocurrency technology evolves, it will become

more secure and reliable, leading to wider acceptance and adoption. The author provides

a strong theoretical argument on how cryptocurrencies can satisfy the medium of

exchange and unit of account functions of money but fails to fulfill the store of value

function. He explains that the volatility of cryptomarkets prevents them from being used

as a store of value, as people would prefer to hold stable currencies for long-term savings.

He further goes on to suggest that to gain the trust of users, cryptocurrencies should focus

on stability and security, which would make them more attractive for long-term

investment. The article would be useful in answering that Bitcoin is currently unable to

be a store of value since of its volatility and safety.

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Warren, J. M. (2020). A too convenient transaction: Bitcoin and its further regulation. Journal of

Law & Cyber Warfare, 8(1), 5–29. https://www.jstor.org/stable/26915562

In this article, the author examines the current legal and regulatory framework

surrounding Bitcoin and its transactions, highlighting the need for a more comprehensive

approach. The author’s research focused on the fact that with Bitcoin being a

decentralized digital currency where it allows users to anonymously transfer funds which

is convenient with low transaction cost, it makes it difficult for the government to

regulate and tax. Hence, the author argues, it results in increased opportunities for illicit

activities such as money laundering, and other fraudulent activities. Additionally, the

decentralized nature of Bitcoin makes it difficult for regulators to monitor and control,

thus posing high risk to users. The author suggests that governments should take a more

proactive approach to regulating Bitcoin and other cryptocurrencies, where it suggests

that governments should take measures to ensure the security of transactions and to

ensure that consumers are adequately protected from fraudulent activity. Finally, the

author suggests that governments should develop a taxation scheme for Bitcoin and other

cryptocurrencies in order to ensure that the transactions are properly tracked and taxed.

The author provides strong theoretical reasons as to why the technology currently

developed is not enough to ensure safety while providing in-depth further regulations

necessary to be added to Bitcoin and other types of cryptocurrencies that would help

strengthen the security system. The article would not be useful in answering that Bitcoin

is currently unable to be a store of value since of its security issues and difficulties that

comes with regulating decentralized currencies.

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Analysis

A store of value is an asset that retains its value over time rather than deteriorating or

often losing purchasing power. As a result, it is the ability of the asset to be saved, retrieved, and

exchanged at a later time, and to be helpful in a predictable manner when retrieved. To find the

answer whether Bitcoin can be a store of value or not, we study from 10 papers, which are

summarized in the previous part. The majority of the research agrees that Bitcoin cannot serve as

a store of value presently or in short-term. The main issue of Bitcoin as a store of value is

volatility, making it difficult to predict its value and exchange rate. According to Kubát (2015),

Yermack (2015), Baur & Dimpfl (2017), and Cermak (2017), this digital asset has high volatility

when compared to FX markets, gold, and stocks since Bitcoin can be influenced by the

government regulation of large countries like China. Therefore, the insecurity of cyber attacks,

such as third parties can be hackable, also extremely impacting the currency value (Warren,

2020). It is impossible for bitcoin to have the same volatility level as fiat money because it is not

under the control of the central bank. Therefore, there is no control over the risk and no

stabilization. However, based on the information from Baur & Dimpfl (2021) and Boston (2014),

although Bitcoin cannot store value in short-term, it can serve this function in the long-term. The

historical data prove that the volatility seems to decrease in the long-term. Moreover, Bitcoin can

offer huge upside potential if it is widely accepted by institutions because of its key

characteristics that signify a good store of value. The most important characteristic that Bitcoin

possesses is its scarcity, making Bitcoin supply inelastic which protects against the depreciation.
 14

References

Ammous, S. (2018). Can cryptocurrencies fulfill the functions of money? The Quarterly Review

of Economics and Finance, 70, 38–51. https://doi.org/10.1016/j.qref.2018.05.010

Baur, D. G., & Dimpfl, T. (2017). Realized bitcoin volatility. SSRN Electronic Journal.

https://doi.org/10.2139/ssrn.2949754

Baur, D. G., & Dimpfl, T. (2021). The volatility of bitcoin and its role as a medium of exchange

and a store of value. Empirical Economics, 61(5), 2663–2683.

https://doi.org/10.1007/s00181-020-01990-5

Bitcoin investment thesis: Bitcoin as an aspirational store of value system. (n.d.). Fidelity

Digital Assets. https://www.fidelitydigitalassets.com/research-and-insig

hts/bitcoin-investment-thesis-bitcoin-aspirational-store-value-system

Boston, F. R. B. O. (2014b). Bitcoin as money? Federal Reserve Bank of Boston.

https://www.bostonfed.org/publications/current-policy-perspectives/2014/bitcoin-as-mon

ey.aspx

Cermak, V. (2017). Can bitcoin become a viable alternative to fiat currencies? An empirical

analysis of bitcoin’s volatility based on a GARCH model. Skidmore College.

http://dx.doi.org/10.2139/ssrn.2961405

Gartz, M. & Linderbrandt, I. (2017). Are cryptocurrencies the future of money? KTH Royal

Institute of Technology School of Computer Science and Communication.

https://www.diva-portal.org/smash/get/diva2:1119782/FULLTEXT01.pdf

Josh, H. (2022). How many people own bitcoin? Exploding Topics.

https://explodingtopics.com/blog/blockchain-stats
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Kubát, M. (2015). Virtual currency bitcoin in the scope of money definition and store of

value. Procedia Economics and Finance, 30, 409–416.

https://doi.org/10.1016/s2212-5671(15)01308-8

Tuwiner, J. (2022). Cryptocurrency statistics, facts & trends (2022).

https://buybitcoinworldwide.com/cryptocurrency-statistics/

Warren, J. M. (2020). A too convenient transaction: Bitcoin and its further regulation. Journal of

Law & Cyber Warfare, 8(1), 5–29. https://www.jstor.org/stable/26915562

Yermack, D. (2015). Is bitcoin a real currency? An economic appraisal. Handbook of Digital

Currency, 31–43. https://doi.org/10.1016/b978-0-12-802117-0.00002-3