The Bitcoin Store of Value (SoV) vs Medium of Exchange (MoE) Debate

Data & Research / 11.03.2021

There’s been a quiet war raging behind the Bitcoin scene for years that most investors are unaware exists. The Bitcoin Store-of-Value (SoV) vs. Mode-of-Exchange (MoE) debate is perhaps one of the most heated discussions in Bitcoin. Both sides of this argument have gone to great lengths to further their cause and prove that they are right. However, it’s been 12-years since Bitcoin’s launch, and no clear winner is evident. Here’s a glimpse into one of the oldest and most controversial Bitcoin debates ever.

To understand this battle’s essence, you first need to fully grasp the concepts and differences between an SoV and an MoE. Both are valuable financial tools that are necessary for an economy to function properly. It should also state that an SoV can function as an MoE and vice versa, although neither does the job of the other perfectly.

MoE – Medium of Exchange

A medium of exchange can be thought of as money people use in everyday life. The US dollar is a perfect example of a medium of exchange that most people are familiar with. Bitcoin’s whitepaper famously states that the coin’s true purpose, as Satoshi envisioned, was a “Bitcoin: A Peer-to-Peer Electronic Cash System.”

The world’s first crypto was designed to replace fiat currency in many aspects. It intended to be faster, more secure, global, and censorship-resistant. These qualities made Bitcoin an ideal replacement for the old and outdated fiat currencies in use currently.

Things to Consider about MoE

Today’s MoEs, fiat currencies accomplish their goals, albeit not in an ideal manner. Most fiat currencies hold value purely based on their location, with very few exceptions. You will need to use the government’s currency of the region to make daily purchases at your local grocery store.

For example, if you were to go into your local convenient store, fill up a cart, and attempt to check out with Mexican pesos, but you live in the US, you would quickly learn that local merchants are not open to the idea. In most instances, they will tell you to return with your local currency to complete the sale.

International MoEs

Now, some fiat currencies, such as the US dollar, hold value internationally. These fiat currencies are rare and are usually possessed by countries with overwhelming military might. For example, the US dollar is accepted globally for many reasons.

One of these reasons is that the US military has installations all around the world. These bases operate utilizing the US dollar. In this way, it provides merchants a way to convert or cash in on these funds regardless of location.

However, the US dollar is not accepted everywhere, and its acceptance rate has seen a considerable decline over the last five years. This decline can be attributed to many factors. Primarily, the government’s decision to begin weaponizing the dollar via sanctions has driven other major market contenders away. It has also helped fuel the rise of other internationally accepted fiat currencies such as the Chinese Yen.

How Bitcoin Functions as an MoE

In its early days, Bitcoin was the ideal MoE. Bitcoin functions as a peer-to-peer network, so it was free from censorship. The coin was completely fungible, meaning that any two Bitcoin held the same value, and there was no way for anyone to create more Bitcoin to satisfy their personal needs.

As Bitcoin’s popularity rose, some of its early technical limitations began to come to light. The network was not as scalable as many first believed, nor was it anonymous. Around 2015, Bitcoin’s network began to experience delays and rising fees due to congestion. These issues hit a fevered pitch in 2017 when Bitcoin reached a new all-time high just short of $20,000.

At that time, Bitcoin’s scalability concerns were unavoidable. The network’s fees had become unbearable, with many people complaining that Bitcoin’s fees were beginning to become higher than the balances they were attempting to send. These high fees and slow transaction times, coupled with the coin’s volatility, effectively halted Bitcoin’s MoE status for the time being.

SoV – Store of Value

Years before, some innovative developers introduced technologies that breathed new life into the coin’s capabilities to function as a daily currency. It was at this time that Bitcoin began to see real progress as a viable SoV. Think of an SoV as an asset designed to hold and even appreciate over time. For example, the world’s most famous SoV is gold.

In the old days, gold functioned as both a Moe and SoV, as many currencies do at times. However, as an MoE, it wasn’t practical. It’s heavy, hard to secure, and not readily available to the masses. Additionally, it is easily faked, with records showing multiple gold bars being smelted down and their cores being diluted.

Things to consider of SoV

Some aspects make an SoV. For one, it has to be rare. Gold isn’t necessarily rare because we don’t know how much gold there is in the world. However, there isn’t that much available in the market at this time. Reports put the total amount of gold in the world at about 244,000 metric tons. This scarcity adds value to the asset over time.

People who invest in gold expect the price to increase as time goes by. They are not wrong in this belief, as gold has seen considerable growth in terms of value since its inception thousands of years ago. This appreciation leads to another core SoV trait, and people don’t want to spend SoVs because they lose out on the long-term profits.

How Bitcoin Functions as a Store of Value

Bitcoin functions as a sort of “digital gold” at this time. The world’s first cryptocurrency was embraced as a store of value in 2017 when it became evident that spending your Bitcoin could lead to remorse as the coin’s value rose to new heights.

It can be argued that Bitcoin functions as a better SoV than gold for many reasons. Primarily, Bitcoin has verifiable scarcity. There is no chance that anyone will discover a new Bitcoin mine that will suddenly kick the coin’s total amount over 21,000,000. There are many aspects Bitcoin shares with the world’s original SoV. Mainly, it’s not beholden to any government.

Gold – The World’s Oldest SoV

In the early days, gold made for an excellent SoV because people accepted it globally. Whenever a huge war broke out between countries of equal strength, it was common for the wealthiest individuals to place their gold assets. The understanding fueled this decision that if Sov lost the side it held your currency in, it was very likely your fiat currency would no longer hold any value.

The same goes for Bitcoin. It functions as a truly international store of value that allows anyone to protect their wealth from sudden losses in value due to war, inflation, or other factors outside of their control. Unlike gold, Bitcoin is easily accessible to the population. You can buy $10 in Bitcoin using nothing more than a mobile app.

Bitcoin – A Better SoV

Additionally, it’s much easier to transport and secure your Bitcoin versus gold. The average consumer a hundred years ago would be hard-pressed to make a major purchase with gold. Traveling with the precious metal was extremely dangerous, and history is filled with stories of daring gold robberies that left the owner broke and, in many instances, dead.

We can store Bitcoin in a variety of ways. Its digital nature makes it ideal for cross-country travel. Also, making major purchases with the coin is nearly identical to making a regular-sized purchase in that you need to send the coins to the address requested. Of course, there are still thieves attempting to relieve Bitcoin holders from their prized possessions. However, nowadays, most of these thefts come in the form of scamsters and hackers.

It’s sporadic to hear about Bitcoin holders getting physically attacked while transporting or storing their coins. It’s not impossible, but since it’s easier to hide your wealth using Bitcoin, it takes a lot more research or carelessness for thieves to decipher where or who may hold Bitcoin deposits worthy of their schemes. Recently, most Bitcoin heists have revolved around the network’s centralized weak points, such as centralized exchanges.

A Brief History of the SoV vs. MoE Debate

The Bitcoin SoV vs. MoE begins in 2015. It was at this time that Bitcoin’s community began to experience rising fees and slower transactions. While there were some heated debates on both sides, nothing compared to the ruckus that was to take place in 2017. The sudden and unexpected growth in popularity of the network left Bitcoin unusable as an MoE.

Vendors had become scared to embrace the digital currency out of fear of losing profits during the slow transaction times. They were right to feel this way. Imagine you just sold an item to a customer at a set price, and they paid with Bitcoin. As transaction times could take a day during this period, and the market was extremely volatile, you could find that you had lost all of your profit by the time your funds hit your Bitcoin wallet. You could have even lost the funds spent on procuring the product.

A Riff in the Community

These issues led to many publicized debates on Bitcoin’s true nature. These debates broke down into two main factions. There was one side that argued that Bitcoin, in its current state, would never be able to serve as a viable MoE. The delays and overall congestion of the network were too much. They explained that Bitcoin’s adoption was just at the tip of the iceberg and that as even more people joined the network, these delays would increase.

This side of the argument argued that the main problem involved Bitcoin’s 1MB block size limitation. They insisted that 1MB was not enough to put the coin on par with other major payment processors.

For comparison, Bitcoin can handle around 7 transactions per second in its core state. Major processors such as VISA claim to be able to process over 30,000 tps. This party held firm that it was necessary to increase Bitcoin’s block size if they ever ushered the coin back into vendor’s and everyday users’ good graces.

Bitcoin Core

On the other side of the debate stood those who believed that Bitcoin could regain its MoE characteristics without altering its core specifications. This side of the debate didn’t see the 1MB blocks as a hindrance but rather as one of the core aspects of Bitcoin’s open nature. They believed that Nakamoto, Bitcoin’s anonymous creator, chose 1MB blocks so that anyone around the world could participate in the network.

They postured that it made more sense to expand on other technologies that enabled Bitcoin more scalability without altering its core coding. Instead, they proposed innovative ways to reduce the congestions and overall transaction sizes on the blockchain.

This team argued that increasing the block size was not wise because it could start an endless blocksize growth cycle where every time Bitcoin got congested, the block size would increase. Their arguments helped to create some new ways to reduce blockchain congestion.

Increase Block Size vs. New Tech

Eventually, Bitcoin’s community split after irreparable slanders had been lodged against both parties. Those in favor of larger block sizes went on to hard fork from Bitcoin’s blockchain and created Bitcoin Cash. This coin had a larger block size that it could increase if the need arose in the future.

Interestingly, Bitcoin Cash’s community met a similar fate as its predecessor when congestion issues on the blockchain caused the coin’s community to engage in heated debates about another blocksize increase. This eventually led to the creation of another hard-forked coin, Bitcoin SV. Today, both coins are popular amongst their respective followers.

The Debate Today

It’s been 4 years since the Bitcoin blocksize debates rocked the crypto community, and today is almost insignificant as the advent of some new technologies has given Bitcoin, once again, a viable MoE stance.

How Second Layer Protocols and Other Inventions Help the MoE Argument

One of Bitcoin Core’s first things to alleviate congestion within the network was integrating the Segregated Witness (SegWit) protocol. This coding removes some aspects of Bitcoin transactions during processing and later re-adds them back. This update also opened the door for what many consider Bitcoin’s best hope for squashing scalability concerns for good, the Lighting Network.

The Lighting Network differs from the SegWit upgrade in that it’s a second-layer protocol, meaning it doesn’t exist on Bitcoin’s blockchain directly. Instead, the Lightning Network introduces off-chain payment portals to reduce network congestion. When someone makes a payment on the Lightning Network, they must first fund a payment portal or select one hosted by another party. These portals allow direct P2P transactions to occur off the blockchain.

Payment Portals

Users can make as many payments as they like within these portals’ constructs without fear of bogging down the blockchain. Only once the portal is closed do these transactions add to the permanent ledger. Additionally, the Lightning Network makes it possible for Bitcoin users to send micropayments. Micropayments are a critical aspect of MoEs for many reasons.

It’s the lack of micropayments that made gold eventually fall to the wayside as a viable form of daily currency. Imagine pulling up to a fast-food restaurant and ordering an item from their value meal. Now imagine pulling up to the take-out window and chiseling off $3.99 of gold. If this scenario seems ridiculous, it’s because it is.

How Payment Processors Help Bitcoin function as an MoE

Another major development that has furthered Bitcoin’s MoE argument is the introduction of more Bitcoin payment processors. These new systems allow users to spend their Bitcoin like regular credit cards. These innovative systems convert your Bitcoin to fiat at the time of purchase. This approach is ideal because it allows vendors to accept Bitcoin without any fear of lost funds.

Bitcoin – The First Currency with the Potential to be a True MoE and SoV

When you consider these technological advances, it can state that Bitcoin has the potential to become the world’s first true MoE/SoV hybrid. Vendors are now open to the idea of accepting Bitcoin in record numbers. Even the world’s premier electric car producer, Tesla Motors, announced accepting Bitcoin moving forward.

Additionally, Bitcoin has proven to be a remarkable store of value. The coin has dwarfed its 2017 all-time highs, and with no top-end value insight, more traditional financial institutions are converting their reserves into Bitcoin.

The Future of Bitcoin

When you examine the overall stance of Bitcoin in its current state, there are plenty of reasons to believe that Satoshi Nakamoto’s will fulfill satoshi Nakamoto’s dream and Bitcoin will rise to the occasion on both fronts. As the world’s first cryptocurrency and largest blockchain, there is endless potential and reasons why developers will continue to create unique and ingenuitive ways to fuel further adoption moving forward. For now, stacking your sats helps the rest of the market to understand the true value of this remarkable coin.

David Hamilton aka DavidtheWriter is a long time Bitcoinist and cryptocurrency journalist. Currently, he has over a thousand articles published on blockchain technology. His expertise and experience makes him one of the most reputable writers in the sector.