For Bitcoin, is being a store of value more important than a payment system?

The drama surrounding Bitcoin in recent times has almost entirely revolved around conflicting opinions on how the network should scale block sizes to accommodate increasing demand and reduce transaction delays. There are two main theories on how this might be achieved; one is to raise the size limit of Bitcoin blocks and the other is to use third-parties such as the Lightning Network or Sidechains to increase efficiency. The recently canceled Segwit2x fork attempted to raise the block size to 2MB, more on that here.

On one hand, raising the size limit of the blocks would be a quick fix, resulting in instant relief for Bitcoin’s current problems of high fees and delayed payments. However, the development community has repeatedly warned that the relief would be temporary, and Bitcoin would have to go through a risky forking process to achieve it. Worse yet, the larger block sizes would add a greater expense to running a full node of the Bitcoin network, which would potentially cause many node users to stop running the software.

After more than three years of public debate, the two sides seem to have cemented ideological differences; those that believe Bitcoin to be a digital cash-like payment system, and others who primarily view it as a store of value, like gold. Those calling for the block size increase have become the ‘payment system’ camp because raising the block size gave Bitcoin a way to quickly become such a system, at least for a while.

The group fighting against the block size raise has taken on the mantle of the ‘store of value’ camp, because even if the fees become too expensive for payments, Bitcoin would still work great as a store of value like physical gold, with fees that are relatively still cheap in the world of mainstream investments.

“Bitcoin’s utility plus its scarcity ultimately determines the price. If you damage bitcoin’s usefulness in commerce, you damage its price.
—  — Roger Ver, owner, Bitcoin.com

Bitcoin-forked altcoins like Bitcoin Cash and the now canceled Segwit2x were among the many attempts designed to give Bitcoin larger block sizes, and therefore deliver an inexpensive solution to Bitcoin’s congestion issues. However, many on the block size-raising side of the debate are unsatisfied with using the less popular and therefore less expensive cryptocurrency, and still want to see their desired changes applied to Bitcoin.

On the surface, there seems to be no question of what Bitcoin was originally designed to do. Satoshi Nakamoto’s original whitepaper was titled ‘Bitcoin: A Peer-to-Peer Electronic Cash System,’ which obviously references the payment system without mentioning a store of value in any way. The document makes a strong case for “A purely peer-to-peer version of electronic cash” which “would allow online payments to be sent directly from one party to another without going through a financial institution.”

There are many strong arguments out there that assume the payment system in Bitcoin is more important than the store of value attribute. “Bitcoin’s value comes primarily from its usefulness as a payment system. If that system ceases to be useful, it will cease to be valuable,” tweeted Bitcoin.com owner and large block size supporter Roger Ver. His argument, which has been popular since the scaling debate began, is that the payment mechanism is its main source of utility, and without it, there is no value for bitcoin to store.

However, several recent events have begun to show that Bitcoin is becoming more important as a store of value. At the end of October, Paypal co-founder Peter Thiel spoke at the Future Investment Initiative in Riyadh, Saudi Arabia, where he told the audience that he believes “people are underestimating bitcoin especially because … it’s like a reserve form of money, it’s like gold, and it’s just a store of value. You don’t need to use it to make payments."

“It’s like gold, and it’s just a store of value. You don’t need to use it to make payments.""
— — Peter Thiel, speaking at the Future Investment Initiative, Riyadh, Saudi Arabia

The statement was taken as wildly bullish by many in the store of value camp, although it was overshadowed somewhat at the time by the looming Segwit2x launch. Then last Tuesday, Square — the company behind the highest-ranked finance app in both the Apple and Google Play app stores, Square Cash — started allowing a beta test group of users to try a new feature that enables buying and selling Bitcoin using their app.

Square’s CEO Jack Dorsey told Forbes that he’d noticed that many of his users and some of his friends and family had been searching for a way to buy Bitcoin as an investment. “Someone said it’s like digital gold… It is just amazing how mainstream the brand is," Dorsey recalled. The app only allows the use of bitcoin for investment and doesn’t include any form of Bitcoin payments. With this one move, therefore, Square has neatly positioned Bitcoin is a store of value for the millions of users of its ironically-named “Cash” app.

Meanwhile, many bitcoin users, especially among the libertarian demographic, have always seen the underlying choice between store of value and payment system as an economics debate. Bitcoin’s monetary theory comes directly from the Austrian School of Economics, which was used by Satoshi Nakamoto to design Bitcoin as deflationary, sound money and a store of value — as described in Menger’s Regression Theorem.

The often-overlooked theorem states that ‘real’ money, such as gold, came into use by first being a store of value. Without being valuable first, it could never have been used as money, or as a payment method, as it would not have been accepted.

“People valued gold for its own sake before it became a money, and thus a satisfactory theory of the current market value of gold must trace back its development until the point when gold was not a medium of exchange.”

— Mises Institute

Assuming the Austrians are right, if the purpose of bitcoin is to ever become money, then it is vital to protect its digital gold qualities above all else.