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Bitcoin Is Not A Suitable Store Of Value, Says European Central Bank

While institutions and countries alike learn to embrace Bitcoin, the ECB remains opposed to the asset as an investment option. An executive board member recently deemed Bitcoin “unsuitable” as a store of value, implying the bank would never buy it. Her remarks mirror Christine Lagarde, Jerome Powell, and other monetary authorities regarding Bitcoin.

A Speculative Asset

The board member – named Isabel Schnabel – made her remarks in a Q&A session on the ECB’s behalf this Wednesday. When asked when the central bank would choose to buy Bitcoin, she dismissed the idea as “unsuitable”.

“Bitcoin is a speculative asset,” she said “The high volatility of its price makes it unsuitable as a store of value.”

The criticism is as old as time: Bitcoin’s erratic price makes it fail at effectively mimicking any property of money. These properties include the store of value, the medium of exchange, and the unit of account.

Though Bitcoin rarely serves the latter two functions, its “store of value” use case is increasingly popular. Many corporations and hedge fund managers have begun adding Bitcoin as an inflation hedge asset to their balance sheets.

Nevertheless, Bitcoin’s volatility makes its value-storing effectiveness largely dependent on when one bought in and how long he holds. For example, MicroStrategy initially invested in Bitcoin as a “defensive strategy”, shielding against currency devaluation. Whereas the company’s Bitcoin investment is still mainly in the green, it’s lost money if exclusively examining its 2021 Bitcoin buys.

Theory VS Present Reality

Bitcoin was theoretically designed to mimic fundamental properties of gold that historically made it an effective form of money. These include fair and competitive issuance through “mining”, and a scarce supply that isn’t inflated easily. As a result, the asset is frequently referred to as “digital gold” and pitted alongside gold as an inflation hedge asset.

But present reality says otherwise. For example, a recent report from Bank of America found a near-zero correlation between the prices of Bitcoin and gold. Instead, Bitcoin correlates far more strongly with the S&P, demonstrating the behavior of a risk asset.

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Both ECB President Christine Lagarde and Federal Reserve Chairman Jerome Powell have dogged Bitcoin for this volatility. It has caused them to disregard its utility as a currency, with Lagarde preferring her board member’s “speculative asset” label.

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