This is the thing I don't understand. Why should savings automatically hold value or appreciate in value? If I invest my money in something risky, I get a reward for taking the risk. My reward comes from the value created by the things I invested in, so if I invest in a business which succeeds, some of that success comes back to me. If I don't make any investments, but keep my cash under the mattress instead, I lose out.
If I buy Bitcoin, what value-creating activity occurs that pays for my reward?
> If I buy Bitcoin, what value-creating activity occurs that pays for my reward?
None. But then:
1. You reasoning applies exactly to gold. Yet, people keep buying it. It's call supply and demand. Demand doesn't have to be grounded in anything rational. If it exists and the supply is limited, the price will go up.
2. Bitcoin has never been about value creation. It's about *preserving* value, something the USD has been historically terrible at [1]
About half of gold is used to make jewelry, and 10% is used in industry [per wikipedia]. If the demand for the remaining portion that is purchased as investments/speculation fell to zero, gold would still have value. If bitcoin's investment/speculation interest fell to zero, the price would also fall to zero (or close to it) - it doesnt really do anything else.
Jewelry, a really useful thing if there ever was one.
You're missing the point here, like all acolytes of the "intrinsic value" cult.
There is no such thing as intrinsic value, as much as most people like to sing themselves that lullaby.
There's is just one thing: supply and demand.
Where demand comes from, whether it is rational or irrational is completely irrelevant to the equation.
People want gold (who knows why, whether it's rational or not, and who cares), the supply is scarce (even though it's not limited) therefore it has value.
People want Bitcoin, the supply is finite, therefore it has value.
Add in the fact that it has some nice properties that gold doesn't have (e.g. easy to move and very hard to confiscate unless you're dumb enough to disclose your holdings) ... you get the price we have today.
People need air, therefore demand is strong. However, supply is - for all intent and purposes - infinite (a bit like the USD), therefore it has no value.
>Jewelry, a really useful thing if there ever was one.
If people didn't care about their looks everyone would use plain color clothes. Gold jewelry also works as a status symbol. It definitely performs some utility that way.
If gold had only speculative demand it would be long forgotten by now.
Nothing like that for bitcoin, it's purely speculative demand and to realize a profit you need another speculator to sell to, and the situation repeats. It's also inflationary and requires billions to run, generating losses, which mathematically guarantess that average bitcoin has negative EV. How do you know when to sell?
So far it only exists during the longest bull market in history, leaving many people and companies with a lot of paper wealth they don't know what to do with. If that situation ever ends, forcing people and companies to spend their financial reserves just to survive, purely speculative bubbles like bitcoin are going to collapse the most - as buyers disappear and many sellers appear.
But that doesn't answer the question. If I buy shares in a business, I am helping that business to grow, and I am rewarded if it does. If I buy Bitcoin, nothing changes except that the price of Bitcoin goes up.
Basic economic rules are not designed but result of trade.
If you buy in the present what others want to own in the future, you create value for yourself as the price of the asset rises.
You can also understand Bitcoin as a business. Assuming it's a better form of money, it allows any agent of the system to better store or transfer money.
By owning Bitcoin you are assuming a risk, but also making the total value locked (TVL) bigger, through making the token less volatile. That helps. :-)
Savers desire to not lose value. This is why people who save naturally tend towards "harder" money, or money that doesn't lose value. So there is nothing that requires savings not to lose value, other than savers who desire this property and park their savings in assets that are closest to this ideal.
I understand why it is desirable! But why is Bitcoin better for this than, say, an index fund?
Even in the case of an index fund, you are ultimately buying shares of businesses which decreases the cost of financing for those businesses and helps them to grow. It's not as impactful as an angel investment in a startup, but it still means that your outcome is linked to successful economic activity that you helped to finance. In the case of Bitcoin, no such activity takes place, so where is the reward coming from?
They are not the same thing. Investing in an index fund is a bet that over your holding period your rate of return will be positive for the companies invested in. But recessions happen, and if you don’t want exposure to recessions then you don’t want an index fund.
Furthermore it is non-trivial for global citizens, especially those in corrupt and financially moronic countries like Argentina, Turkey, and Lebanon to get access to a US index fund. Bitcoin is global and apps exist for every platform and country to help people buy it.
One way to look at Bitcoin is that it is an improved version of gold. By your logic, why would anyone want to hold gold? But many do. Bitcoin is an internet-native digital asset that acts like gold but has many interesting properties in how it is custodies and transmitted that make it different if not superior to gold.
Clearly what someone doesn’t want to hold is cash - whether USD and especially fiat currency in mismanaged countries like Venezuela. In the USA it is much easier to avoid holding cash than in other countries.
The amount of human work possible is limited and so are raw material.
By investing you are giving somebody money that when used will make access to those bought resources more expensive to other agents.
That is why in the perfect system you don't want to put "all money to work". You want the perfect balance between investing and saving.
Savings allow you to preserve your value into the future till you detect a worthy investing opportunity.
Sadly enough, the present world has lost most important tools to save and preserve value: money and government bonds. Thus obliging all agents with value into risky investing instead of safely save for the future.
The situation explains why gold and Bitcoin soared last decade: economic agents need some store of value to park their savings.
"Bitcoin is a non-sovereign, hard-capped supply, global, immutable, decentralized digital store of value. It’s an insurance policy against monetary and fiscal policy irresponsibility from central banks and governments globally."
If I buy Bitcoin, what value-creating activity occurs that pays for my reward?