After two years of turmoil, money printing, and government authoritarianism, it’s time to revisit an old narrative—the one about gold and Bitcoin.
First, there was gold, and then there was Bitcoin.
Then Bitcoin was digital gold.
Gold looked like it was making a comeback as it rose about $2000 before settling back into a sideways pattern.
This despite a world seeming more random, broken, and tyrannical.
And yet, Bitcoin has increased adoption and risen to new highs a couple of times. It has provided numerous significant trading opportunities up and down.
As time passes, Bitcoin continues to confirm its staying power. And with it, the staying power of cryptographic assets generally.
In 2021, when it comes to the gold and Bitcoin debate, what does it look like now?
Let’s have a look.
Gold has a long history versus Bitcoin
Gold is the stuff of legend. It has graced the halls and clothing of kings. It has been used as tributes to gods. Gold adorns many great cathedrals around the world.
Gold has been used as currency and has a long history as jewelry. It has even been used to make the occasional toilet and heat shields in supercars.
The metal is permanent, indestructible, and remarkably versatile. As a result, it also holds a powerful sway over the human imagination.
So it should not be surprising that a brilliant marketer somewhere made Bitcoin images look like a gold coin. No wonder Bitcoin has been referred to previously as digital gold.
The comparison of the two assets goes something like this: for gold, there’s been x amount mined, it fits in such and such a room, every bit mined is still around yada yada yada.
And because you can only mine 21 million Bitcoin, it’s kinda sorta like gold.
The cult of gold
When I say indestructible, cult-like, money, transferable and valuable, am I talking about gold or Bitcoin?
Maybe I’m talking about both.
Gold has the unique quality of being genuinely indestructible. Every ounce of gold ever mined still exists.
It has been found on every continent on earth.
In addition to being indestructible, it is also malleable, a great conductor of electricity, and doesn’t tarnish or oxidize.
You can also use it for effective heat dissipation.
Some refer to gold as immutable, but this term isn’t entirely accurate.
All mined gold may still exist, but you can shape, modify and mix it with other metals to adjust purity.
The price of gold reflects both physical and psychological properties.
In the physical realm, the price of gold represents the cost to find, produce and store the metal. The price also represents the numerous digital and paper derivatives as part of a wider global financial system.
On the psychological side, gold is priced, in part, based on the perception of gold as a safe-haven asset. It is often viewed as a hedge against financial disaster with a long tradition as a form of money.
The gold price also reflects the ongoing supply and demand from different types of consumers. These include buyers in India on a seasonal basis as well as commercial and industrial buyers.
Other gold lovers include hedge fund managers and the various insufferable gold bugs around North America.
Dollar up, gold down
Because most commodities are priced in dollars, even gold will move inversely to the US dollar in times of stress. A core assumption is that gold is a hedge against the inevitable failure of the US dollar.
And yet, during the recent Great Financial Crisis, dollars and US treasuries went bid while every market and commodity, including gold, were sold.
In 2020 gold found some buyers to take it to a new high amid a global crisis. It has pulled back into a sideways pattern as money printing has taken on new meaning.
Fiat currencies grew out of banking developments facilitated by trade. Banknotes are promises and ephemeral psychological concepts decreed legal by the government. By adding gold as a foundation and using fiat as a derivative, governments facilitated greater global trade, exchange, and economic development.
Kings and governments have decreed various metals and pieces of paper as legal currency across history. One day it’s silver, the next it’s gold. One day gold is illegal to hold. Another day, you can keep it legally. But it was also illegal for Americans to hold by their government until the 1930s. In gold-hungry China, it was illegal for citizens to own gold until around 2003.
A £1 coin is legal one day and worthless the next replaced by a new design.
Which sounds perfect for the government but hazardous for individuals.
Gold costs money to hold
Gold is primarily a capital gains asset. Storage and insurance costs eat into the returns of gold. Gold, generally speaking, generates little if any income in storage.
What income can be derived will be from lending for collateral. By acting as collateral in a heavily leveraged financial system, one could argue that gold effectively undermines its core identity as a safe haven.
Then there is the paradox of storing your gold at a bank. It may be safe, but what happens during financial stress?
What if the institution holding your gold fails or is closed for a special (unannounced) “bank holiday.”?
What if they restrict access?
Your safe haven asset then becomes so safe it can’t help you.
Or what if the country where the storage facility exists is invaded or taken over by a despot?
Your gold may no longer belong to you.
The entire western legal structure and its protection of property rights define your ownership of your gold holdings. But, of course, you wouldn’t start to worry about that unless, say, governments shut down your business, locked you in your home, and required you to take an experimental therapy. And then started printing trillions of dollars.
To paraphrase a comment about Bitcoin, not your rights, not your gold.
Is it real gold or paper gold?
In a modern financial system, there are various ways to participate in gold without actually owning it. So when you “invest” in gold, you aren’t always talking about direct access to the physical asset. Instead, your ownership is often indirect.
You can own gold stocks with various valuation metrics based on their project. They may actually go down in a crisis even if gold goes up.
You can own an ETF like the GLD or buy gold futures or options on gold futures or forward contracts. All of these rely on contract law and a sophisticated financial system of verification and delivery. Most of this is just paper trading unless you take physical delivery.
Then there is the need for specialized verification of gold.
How pure is it?
How much does it weigh?
Is it actually gold or some other substance?
If your counterparty doesn’t know how to value and verify your gold, it has little or no financial utility.
Now Bitcoin has some similarities to gold and, of course, some important differences.
Bitcoin isn’t really like gold
The term immutable is tossed around in crypto generally and Bitcoin specifically. Immutability refers to the record of transactions on the blockchain. And, of course, the blockchain is a part of the Bitcoin protocol.
With Bitcoin (or any cryptocurrency), if you lose your key or forget your password, your Bitcoin is sort of gone. At least to you.
Remember, not your keys, not your Bitcoin.
Due to its digital nature, Bitcoin is comparatively cheap and easy for an individual to store, transport, and exchange internationally versus gold. As a result, Bitcoin does not suffer from negative carry like gold.
Of course, the most obvious fact about Bitcoin is that it’s not a physical asset but rather a purely human “product of imagination” type of asset.
Bitcoin is active. Gold is passive
Bitcoin has gained acceptance amongst proponents due to opposition to authority. In contrast, government or sovereign decree has traditionally defined gold’s monetary authority.
If the king said it was money, well, it was money.
Bitcoin has become a form of money by sheer acceptance amongst believers and proponents. Bitcoin is at its core both community-based and anti-establishment.
The idea behind Bitcoin is one of defiance and opposition, where gold is more defensive and practical.
It could be argued that Bitcoin is biased towards personal responsibility, where gold is a tool of authority.
Verification in Bitcoin uses math, the language of the universe. Verification or “mining” of Bitcoin is algorithmically and technologically demanding.
Gold, on the other hand, requires human experts and scientific properties to determine the validity of the physical asset. And gold mining is logistically and geologically challenging.
However, both the physical and mathematical forms of mining are energy and capital-intensive.
Bitcoin is for the individual. Gold is for the sovereign
Bitcoin, unlike gold, cannot be controlled by sovereign states, at least not easily. Bitcoin can be made illegal (Hello China), but it cannot be controlled as a distributed global asset.
Every aspect of gold is heavily regulated by one government or regulatory agency. There are many layers of regulation to gold from its extraction, processing, refining, transportation, storage, and exchange.
While gold will trade inversely to the US dollar on many occasions, Bitcoin doesn’t seem to have a trading pattern versus the US dollar. Although as time passes, it has acted more as a risk-on asset while being defined as a disaster protection asset.
Your Bitcoin isn’t held in a system or an institution where the failure of the system or institution can prevent you from accessing it. Instead, you can hodl it in your pocket in a digital wallet. Or even on a piece of paper. If the financial system fails, you won’t have to worry about your Bitcoin.
Your gold, well, good luck getting that back until the lawyers get it sorted out.
Bitcoin remains a somewhat undefined idea. It is part protest, part financial system hedge, a payment system, a foundational financial system, a cult, a network, an asset, and money.
What do gold and Bitcoin have in common?
Gold and Bitcoin do have a few similarities.
Bitcoin and gold are both considered hedges and money to their most prominent proponents.
They both have their cult followings, Gold Bugs, and Bitcoin maximalists.
Both gold and Bitcoin are limited. Bitcoin is limited by design. How much subsurface gold is still available is unknown.
Like gold, Bitcoin is expanding beyond its complex closed system into more traditional financial products. There is lending, futures, options, ETF’s, funds, custody, and insurance for Bitcoin, just like gold.
And there is even an association with supercars. A thin piece of gold foil sits inside the Mclaren F1. And the Lam-Bro-Gini has become associated with the gauche elements of the Bitcoin movement.
But the problem with the narrative about Bitcoin being the new gold is that it fails to understand what the greatest financial hedge of all is.
Bitcoin transforms an idea into endless possibilities
The effort to elevate Bitcoin to gold status is an exercise of self-interest. Yes, it can act as some sort of hedge, and it can be used as a form of currency. And yes, it is limited and, therefore, potentially valuable due to scarcity.
This narrative misses that the power of Bitcoin, is in fact, a conversion from the physical world to the world of human ideas.
Gold will never spawn a whole new industry.
It will never be programmable.
It will not provide the foundation for fresh thinking and numerous new economic ideas.
It’s the old way.
Gold will not generate a payment system connecting people worldwide in a fast, efficient way. Nor will it inspire the development of a diverse, almost $3 trillion industry in under two decades.
Bitcoin demonstrates that the combination of several ideas and the vast proliferation and unlimited potential of those ideas is the ultimate hedge. Think Ethereum, Uniswap, XRP, Cardano and ten thousand plus more projects.
Money can be made and lost.
Capital expands and contracts.
But innovation provides infinite opportunities to build and redefine.
So no, Bitcoin isn’t the new gold. It isn’t digital gold. Why can’t Bitcoin be Bitcoin and gold be gold?
Gold represents a physical representation of our deepest connection with the earth.
Bitcoin represents a capacity to reimagine and create new assets, industries, relationships, and opportunities.
Which brings us back to the marketing genius of the golden Bitcoin. It pays tribute to the past and the future, and it could be a metaphor for the Bitcoin vs Gold debate.
Because together they represent the ultimate hedge in an increasingly unpredictable world.
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