Store of Value

Store Of Value Definition

Store of Value refers to an asset or mode of holding wealth via an asset whose purchasing power remains intact despite being held over a significant period. It enables individuals and entities to protect their assets from the adverse effects of inflation, economic uncertainty, market changes, and other relevant factors that might cause the asset value or price to decline.

People can use stores of value to plan for the future, whether for retirement, education, or other long-term goals. By holding assets that retain or appreciate in value, they can better ensure their financial well-being. The presence of reliable stores of value contributes to trust in financial systems and institutions.

• Store of value refers to the value of an asset or item not affected by the passage of time. Such assets offer the same or higher returns to individuals holding them, helping them preserve their wealth or purchasing power in the future.
• An asset’s validity or effectiveness as a store of value depends on its stability, durability, liquidity, and transactability or acceptance within an economic system or society.
• A few common examples of items typically serving as stores of value in an economy are stable fiat currencies (such as the US Dollar or the Euro), precious metals like gold and silver, real estate, certain investment securities, and, in some cases, cryptocurrencies designed to retain their value over specified or required periods.

Store Of Value Explained

Store of Value refers to an asset or item that retains its value over time, allowing individuals to preserve their wealth or purchasing power for future use. In economic terms, a store of value is one of the three functions of money, where the medium of exchange and unit of account are the other two. The ability of an asset to serve as a reliable store of value is essential for economic stability and planning, as it allows individuals and businesses to save for future needs and invest with confidence.

In particular, the store of value function of money refers to its ability to hold its value over time, making wealth preservation a worthy and realizable goal for investors. This way, money becomes a medium people can use to maintain and/or enhance their economic resources without the risk of significant losses due to a dip in value after a certain period.

To be considered a good store of value, an asset must possess certain characteristics. They are:

• Stability is paramount; the asset's value should not experience significant fluctuations over time. This stability ensures people can rely on the asset to maintain its worth when they need to access it. Currencies issued by stable economies, such as the US Dollar or the Euro, are often considered effective stores of value due to their relative stability compared to other assets.
• Durability is another crucial attribute. An asset that is prone to deterioration or decay over time would fail to serve as a reliable store of value. Precious metals like gold and silver have historically been used as stores of value due to their resistance to corrosion and degradation.
• Liquidity is also a consideration. A good store of value should be relatively easy to convert into cash or other assets when needed without significant loss of value. This liquidity allows individuals to access their stored wealth in times of emergency or opportunity.
• Furthermore, trust and broad acceptance of the asset's value are key factors. People must have confidence that the asset will retain its value over time, and this confidence often stems from historical usage and widespread acceptance within a market or society.

Examples

Let us look at some examples to understand the concept better.

Example #1

Sarah decided to invest in a small gold bar, spending $1,000 to purchase it. She had heard that gold tends to hold its value well over time. Ten years later, when Sarah decides to sell the gold bar, she is pleasantly surprised to find that its value has risen to $1,500.

In this scenario, the gold bar served as a store of value for Sarah. Despite the passage of time and potential economic changes, the gold bar's value not only remained intact but also increased. This shows how the store of value concept works, where an asset retains its purchasing power over time, allowing individuals like Sarah to safeguard and potentially grow their wealth regardless of external economic fluctuations.

Example #2

According to a 2023 report, Argentina is facing economic instability due to frequent fluctuations in several key economic parameters. With its currency devaluation by almost 20% and a high inflation rate that stands at 115%, the economy seems fragile.

The Central Bank has raised interest rates to 118% to combat the rising prices. However, the exchange rate between Bitcoin and the Argentine Peso is much higher. This situation highlights the country's economic volatility. It also shows the potential of digital assets like Bitcoin as an alternative store of value amid traditional financial system instability.

From this example, we can see that the store of value is a critical metric that showcases a country’s stability in terms of transaction execution and corresponding growth.

Advantages And Disadvantages

Advantages

• Stability: Precious metals are known for their stability. For instance, the value of gold tends to hold relatively well over time, even during periods of economic uncertainty or inflation. This stability can provide a sense of security to individuals looking to preserve their wealth.
• Universal Acceptance: Certain commodities and assets have been recognized as valuable across cultures and civilizations for centuries. The best example of such value is gold. Its universal acceptance makes it relatively easy to buy, sell, and trade in various parts of the world.
• Limited Supply: Assets or wealth is a finite resource, which means the supply of any asset worth considering for long-term investment and potential appreciation later is likely limited. This scarcity can contribute to maintaining the value of such assets over the long term, as increased demand may not necessarily lead to an immediate surge in supply.

Disadvantages

• Lack of Income: Certain assets do not fall under the income-generating category. For example, gold does not generate any income on its own. Unlike stocks that may pay dividends or bonds that pay interest, gold does not offer regular or periodical returns. Its value relies solely on price appreciation.
• Storage Costs: Storing physical gold or other precious metals securely typically involves considerable expenditure. Whether it is a safe at home or a safety deposit box at a bank, these storage expenses can eat into the potential gains from holding gold.
• Price Volatility: Short-term price volatility can affect the value of assets, which might not be suitable for those seeking steady returns. While gold is generally stable, it is not immune to price fluctuations. 

Store Of Value vs Unit Of Account vs Medium Of Exchange

The differences between store of value, unit of account, and medium of exchange are discussed in this section.

Basis	Store of Value	Unit of Account	Medium of Exchange
Definition	Store of value refers to an asset or item that retains its value over time, allowing individuals to preserve their wealth for future use. It is a way to maintain purchasing power over the long term.	A unit of account is a standard measure used to represent the value of goods, services, assets, and transactions in an economy. It provides a common basis for comparing the value of different items.	A medium of exchange is an accepted instrument or currency that facilitates the buying and selling of goods and services. It is a tool that enables transactions between parties without the need for direct bartering.
Function	A store of value allows people to store their wealth and assets in a form expected to maintain their value, despite changes in the economic environment.	A unit of account simplifies economic transactions by providing a consistent way to express prices, values, and costs. It helps compare the relative worth of various items and make informed decisions.	A medium of exchange promotes economic efficiency by eliminating the complexities of barter systems. It enables people to exchange their goods or services for a universally accepted medium, which they can then use to obtain other goods and services.
Example	Gold, real estate, stable fiat currencies (e.g., the US Dollar), and certain investment assets can serve as stores of value.	In the US, the US Dollar serves as the unit of account. When we see the prices listed for products or services, they are typically denominated in the local currency (e.g., $10 for a book).	In modern economies, currency (physical notes and coins) and digital money in bank accounts serve as mediums of exchange. When one buys groceries using cash or credit cards, it means the transaction is executed using an accepted medium of exchange.

Frequently Asked Questions (FAQs)

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