Bitcoin as a “Savings Technology”

Part IV of The Value of Financial Products and Assets

Previous Parts

• Introduction
• Part I - The Value of Short-Term Savings Products
• Part II - The Value of Long-Term Savings Products and Assets
• Part III - Gold

As mentioned in the introduction of this series, bitcoin has been often described as a “savings technology”, so let’s see how bitcoin holds up as a savings product in relation to what has been discusses in Part I - The Value of Short-Term Savings Products.

Following the true ethos of what bitcoin stands for, individuals and households holding bitcoin are typically empowered to hold their own bitcoins in their own custody via their own bitcoin wallets. “Not your keys, not your bitcoin” is the saying. In that sense, bitcoin as a “savings technology” reflects the archetype image of savings: a piggy bank. It can be argued that bitcoin wallets are better than a traditional piggy bank, though, because it is more secure due to the embedded technology baked in, does not have a limited capacity in how much can be stored in it, and is easier to travel with compared to a piggy bank. In that sense, one can securely carry one’s savings around wherever they go. Given those features of bitcoin wallets, the saying is that bitcoin allows you to become your own bank; meaning that with bitcoin, one does not need the service of the bank to store and secure their savings. Additionally, this essential feature of bitcoin allows individuals and households to send and transfer value (i.e. bitcoins) to others without a need of a middleman and without restrictions. This is beneficial because it empowers individuals and households to have their own sovereignty over their assets, and their “money” won’t be susceptible to being confiscated due to governmental actions, bank runs, or abuse and mismanagement from banking officials. That said, it must be highlighted that holding one’s own bitcoin in one’s own wallet is vulnerable to being either lost, stolen, or hacked if not properly managed. Furthermore, in practice, most bitcoin buyers, especially retail holders of bitcoin, typically have their bitcoin held in the custody of the exchange that they purchased it from or with another central entity as opposed to holding it themselves via their own wallets. Nevertheless, the first point here that can be raised regarding bitcoin as a “savings technology” from a value-add perspective is that it can literally resemble an enhanced piggy bank; a piggy bank which effectively scales in a way that allows one to custody and travel with their own assets easily. Yet, does that feature alone make it an effective “savings technology”?

As outlined in Part I, an important feature of savings products is that they allow one to maintain the value of their savings, and they act as a cushion for rainy days when money is needed. In other words, such savings products allow one to access and withdraw funds when needed without the uncertainty or volatility of the value of the money held in these accounts. Savings products provide a form of financial security in the sense that one knows that when they need money in times of need, the savings account holding the money is there for them due to the low risk and stability of such products – there is no risk in terms of volatility or uncertainty of the value and the amount of money in the account. Sure, due to inflation the purchasing power might decrease (ignoring interest earned on savings), but the weakening of purchasing power is relatively not that significant and is usually in a reasonable range that does not result in a huge change to one’s net worth. To be clear, this is not to downplay inflation; inflation is a serious problem that impacts many in a negatively; however, the point here is that money in a savings account has no significant volatility from day to day or in the short-term. Hyperinflation, of course, does result in significant impact on one’s savings, but the focus here is on normal times as opposed to extraordinary times and crisis. Bitcoin, on the other hand, fluctuates in price significantly. Holding an asset that can fluctuate 20% up or down in one day is not ideal as a savings product in the pure sense of the term. If faced with a situation in which one needs cash to revert to, they hope to access saved cash that is of same worth as when they deposited it in their savings account. Bitcoin does not provide the stability and assuredness to fulfill that feature of savings products since bitcoin is extremely volatile, uncertain, and not a stable asset. It is clearly not reliable as a savings product for things such as an emergency fund or any type of savings that act as a cushion in times of need.

To reiterate, yes, one can store and save bitcoin as if it’s a piggy bank, but being able to store and hold one’s own assets is not sufficient to constitute a valuable savings product. Bitcoin does not provide the stability needed to be considered a savings product. The holdings in the bitcoin piggy bank are not stable and have wide swings which does not provide the financial security sought from savings products. It must be highlighted that someone can dismiss this argument by saying that bitcoin is a long-term “savings technology”. If we are talking about the long-term, then using the term savings can be misleading. A more suited term would be an “investment technology”. Additionally, bitcoin’s potential and value are deeply rooted in a belief and vision, and its price is purely based and vulnerable to market and trading dynamics, which are also contrary to an effective savings product in the pure sense. That said, we’ll evaluate bitcoin as a long-term “investment technology” in the following part.

Finally, based on our analysis, we found that a common theme in short-term savings products is that they put idle cash to use for productive means, or they enable the proper functioning of financial markets. This is an essential feature that fills a gap in the market and provides a valuable service. Mismanagement, excessive risk, and abuse can occur by actors providing such services, but the point here is that savings products provide utility and contribute to productive use cases. Bitcoin does not provide such a service. If using a personal bitcoin wallet, bitcoin just sits there while the value either goes up or down based on trading activity. Bitcoin in one’s wallet is not being used to lend out money for productive use cases, and bitcoin is not earning interest that typically comes with savings products. That said, there are centralized bitcoin companies that act as fractional reserve banks and that lend out bitcoin to users. However, in that case, lending is extended to users who’ll have to overcollateralize their positions, and most of the lending use cases by bitcoin companies are for speculative trading practices. Moreover, centralized bitcoin companies providing such services are even more susceptible to all the vulnerabilities and issues that bitcoin advocates argue against about the traditional banking system and fractional reserve banking.

Overall, bitcoin does not fulfill the intrinsic or instrumental valuable attributes and functions that financial savings products typically offer. While bitcoin can be stored in one’s own scalable piggy bank, the value of the bitcoins in the piggy bank are not stored in a stable, low risk way – the value of bitcoin is uncertain, vulnerable, and volatile – and bitcoin does not act as a vehicle that puts idle cash to productive use or enables the operations of financial markets. In that sense, bitcoin does not fulfill the instrumental and intrinsic values that short-term savings products achieve, which were discussed in Part I, and so, categorizing Bitcoin as a “savings technology” is clearly a misnomer.