Why Money Needs to Function as a Store of Value

The concept of a “store of value” describes assets capable of retaining or increasing their worth over time rather than declining in value. This mechanism enables individuals to preserve their wealth without experiencing erosion over extended periods. Money has three critical functions in modern finance, and store of value remains one of the most essential—the others being medium of exchange and unit of account. Understanding what makes an effective store of value is crucial for anyone seeking to protect their purchasing power in an increasingly inflationary world.

The Real Problem: Why We Can’t Rely on Traditional Money Anymore

Money serves an essential purpose for trading goods and services, but it must also reliably preserve wealth to secure our financial future. Modern fiat currencies—paper money backed by government decree rather than physical commodities—have a fundamental flaw: they consistently lose value over time due to inflation, historically averaging around 2-3% annually in developed economies.

The problem intensifies in regions experiencing hyperinflation. In nations like Venezuela, South Sudan, and Zimbabwe, astronomical inflation rates have rendered fiat currencies nearly worthless as mechanisms for storing value. While these represent extreme cases, rising inflation levels are becoming increasingly common globally, creating a natural imperative to find alternatives that can beat traditional 2-3% annual devaluation rates. Without a reliable store of value, fiat currencies actually discourage people from saving or building wealth in the first place—why accumulate money that loses value every year?

What Defines an Effective Store of Value?

A store of value is an asset, currency, or commodity you can trust to hold its worth over time with minimal risk. Investors with lower risk tolerance traditionally seek stores of value characterized by enduring lifespan, stable demand, and low volatility. However, not all assets qualify equally.

The concept evolved through research on “salability”—the critical property allowing something to be freely used as money. For an asset to possess genuine salability, it must exhibit three dimensions:

• Divisibility (Scale): The ability to be divided into smaller units for transactions
• Transportability (Space): The capacity to move across locations efficiently
• Durability (Time): The ability to maintain functionality and value indefinitely

When an asset maintains salability across time, it becomes a good store of value because you can trust it will preserve wealth into the future.

The Three Essential Properties That Define Strong Wealth Preservation

To function effectively as a store of value, any asset or form of money must demonstrate three core properties:

Scarcity: Computer scientist Nick Szabo coined the term “unforgeable costliness” to describe genuine scarcity—when the cost of creating something cannot be faked or easily replicated. If money is too plentiful, its value erodes as more units are created. Compare this to fiat currencies, where governments can print unlimited amounts, diluting existing holdings.

Durability: This property reflects an asset’s ability to maintain its physical and functional properties indefinitely. A proper store of value must withstand wear and tear, remain useful over long periods, and resist deterioration without losing value. Gold accomplishes this through natural resistance to corrosion; Bitcoin achieves it through immutable digital architecture.

Immutability: A desirable property particularly relevant in modern finance—once a transaction is confirmed and recorded, it cannot be altered or reversed. This ensures transaction integrity and prevents tampering, creating trust in the system’s reliability.

How Different Assets Compare: The Historical Test

One benchmark for evaluating store-of-value function involves tracking whether assets maintain purchasing power across centuries. The “gold-to-decent-suit ratio” illustrates this principle: in Ancient Rome, one ounce of gold reportedly equaled the cost of a high-quality toga. After 2,000 years, an ounce of gold still approximates the price of a quality men’s suit—demonstrating remarkable value preservation across time.

Another revealing comparison: oil pricing in fiat versus gold. In 1913, crude oil cost $0.97 per barrel; one ounce of gold purchased 22 barrels. Today, while fiat oil prices appear far higher in absolute terms, gold still buys roughly 24 barrels—showing virtually no difference in the gold price while fiat currency has severely depreciated. This stark contrast illustrates why money needs superior store-of-value characteristics.

Ranking Assets: Which Money and Investments Actually Preserve Wealth?

Different assets demonstrate varying effectiveness as stores of value, and this ranking often depends on market dynamics and individual investor preferences.

Strong Stores of Value:

Bitcoin increasingly qualifies as an excellent store of value despite early speculation dismissing it as volatile. Initially regarded as speculative, Bitcoin revealed itself as digital sound money offering store-of-value properties superior to traditional alternatives. It has a finite supply cap of 21 million coins, making it resistant to inflation plaguing fiat money. Its immutable blockchain ensures no transaction tampering, and its purely data-based architecture means it never deteriorates. Bitcoin has actually appreciated against gold since inception, demonstrating outperformance even against precious metals.

Precious metals like gold, palladium, and platinum have historically served as stores of value due to perpetual shelf life and genuine scarcity. Their relatively limited supply means value appreciates relative to fiat money over time. However, physical storage of large quantities proves expensive and challenging, prompting investors to consider digital alternatives or gold stocks—though these introduce counterparty risks.

Real estate represents one of the most common stores of value through its tangibility and utility. Since the 1970s, property values have generally increased, providing physical security and wealth preservation. However, real estate lacks liquidity and censorship resistance—you cannot quickly access cash, and properties remain subject to government intervention.

Stock market investments on exchanges like NYSE, LSE, and JPX have proven worthwhile investments as companies increased worth over decades. Stocks provide decent store-of-value characteristics historically, though they experience higher volatility dependent on economic movements. Index funds and ETFs offer similar benefits with improved diversification, cost efficiency, and tax advantages over individual stocks.

What Fails as Money and Store of Value

Not everything qualifies as effective wealth preservation.

Perishable items expire and lose value entirely. Food with expiration dates, concert tickets, and transportation passes become worthless after specific dates, making them poor stores of value by definition.

Fiat currencies consistently lose purchasing power annually due to inflation. Every year, goods and services cost more dollars relative to the currency, ensuring persistent value erosion.

Alternative cryptocurrencies present higher risks than Bitcoin, behaving like speculative stocks with shorter lifespans. Swan Bitcoin research analyzing 8,000 cryptocurrencies since 2016 found that 2,635 underperformed Bitcoin while 5,175 no longer exist. Most altcoins prioritize functionality over security and scarcity, weakening store-of-value properties and making them poor long-term wealth preservation vehicles.

Speculative stocks trading under $5 per share (penny stocks) exhibit extreme volatility and minimal market capitalization, capable of sudden total loss. Their high speculation levels eliminate any store-of-value characteristics.

Government bonds once represented reliable value storage simply because governments backed them. However, years of negative interest rates in Japan, Germany, and European nations have rendered many bonds unattractive. While inflation-protected bonds like I-bonds and TIPS theoretically protect wealth, they remain government-dependent and rely on potentially unreliable inflation calculations.

The Path Forward: Money That Actually Preserves Value

Understanding store of value fundamentals reveals a critical principle: genuine wealth preservation requires assets with limited supply, proven durability, and immutable characteristics. Most assets fall somewhere on a spectrum from excellent to poor store-of-value functions.

Many observers still regard Bitcoin as an ongoing experiment. However, its demonstrated history proves it embodies all properties typical of superior money while functioning as an exceptionally strong store of value. The future will determine whether Bitcoin can also successfully serve the third money function: reliable unit of account.