Bitcoin is much more than digital gold
Gold is the stuff of legend. It has graced the halls and clothing of kings and been used as tributes to gods. Gold has been used as currency and has a long history as jewelry. It has even been used for heat shields in supercars.
The metal is permanent, indestructible and remarkably versatile. As a result, it also holds powerful sway over human imagination. So it should not be surprising that a brilliant marketer somewhere created a gold coin with a “B” on it as a visual representation of Bitcoin, an entirely digital asset.
The narrative about Bitcoin in advance of the upcoming halving is that it is the new gold, the digital version. The commentary goes something like this: 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 Bitcoin is limited, it’s kinda sorta like gold.
What if Bitcoin is the ultimate disaster hedge?
The core assumptions are that gold is a safe haven asset in the modern world, and that the power of Bitcoin revolves around its scarcity.
But what if Bitcoin isn’t digital gold?
What if it is more significant than the yellow metal?
Could Bitcoin really be something far more advanced and substantial than it’s golden albatross?
What if the ultimate hedge against disaster is not protecting existing assets, but rather, the ability to produce new ones.
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.
Let’s start with gold.
Gold has the unique quality of being genuinely indestructible. Every ounce of gold ever mined still exists, and it has been found on every continent on earth. In addition to being indestructible, it is also malleable, a great conductor of electricity, doesn’t tarnish or oxidize, and can be used for effective heat dissipation.
Some refer to gold as immutable, but this term isn’t entirely accurate. All mined gold may still exist, but it can be shaped, modified and mixed with other metals to adjust purity.
Gold prices are a reflection
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.
On the psychological side, gold is priced 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, commercial and industrial buyers, hedge fund managers and the insufferable gold bugs.
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.
Gold has been decreed money by kings and was made 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.
And if you live in places like Vancouver, you are also aware of one other aspect of gold, the soapbox preaching of your average “gold bug.” For this cult, everything is always going to hell all the time. The solution? Buy some lovely, lovely gold.
But here’s the catch, they all own lots of gold and will be happy to sell you their holdings as the price climbs higher.
Fiat currency as a derivative
Now, fiat currencies grew out of banking developments facilitated by trade. Banknotes were and are promises, ephemeral psychological concepts decreed legal by the government. By adding gold as a foundation and using fiat as a derivative, governments were able to facilitate greater global trade, exchange and economic development.
But government has also 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.
Which sounds perfect for the government but potentially hazardous for individuals.
Gold has negative carry
Gold also has costs associated with it known as negative carry. Storage and insurance costs eat into the returns of gold that are based solely on capital gains. Gold, generally speaking, generates little if any income in storage. What income can be derived will be from the process of lending for collateral, which undermines the core idea of gold as a safe haven.
Storage of gold presents some significant challenges in financial stress. For example, if the institution holding your gold fails, or is closed for a special (unannounced) “bank holiday” or restricts access, your gold can’t help you.
Or 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 their protection of property rights have a lot to do with the safety and validity of your gold holdings.
Is it real gold or paper gold?
In a modern financial system, there are a variety of 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. This ownership is often indirect.
You can own gold stocks, which will have 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 really just paper trading.
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. Although, if you can hard fork the software, that could be interpreted as Bitcoin being mutable.
On the other hand, if you lose your key or forget your password, your Bitcoin is gone and perhaps truly immutable in that case.
Bitcoin does not suffer from negative carry like gold because it doesn’t require a fee to store. Due to its digital nature, Bitcoin is comparatively cheap and easy for an individual to store, transport and exchange internationally versus 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. Don’t let that golden coin with a “B” on it you see everywhere fool you.
Bitcoin is active, and gold is passive
Bitcoin has gained acceptance amongst proponents due to opposition to authority, where gold’s basis has traditionally been defined by government or sovereign decree. If the king said it was money, well, it was money. Bitcoin has become a sort of money by sheer acceptance amongst believers and proponents. It is at its core anti-establishment.
The idea behind Bitcoin is one of defiance and opposition, where gold is more defensive and practical.
Verification in Bitcoin uses math, the language of the universe. The verification process or “mining” of Bitcoin is an algorithmic and technologically demanding process.
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.
Both the physical and mathematical forms of mining are energy and capital intensive.
Bitcoin is for the individual, gold is sovereign
Bitcoin, unlike gold, cannot be controlled by sovereign states, at least not easily. It can be made illegal, but cannot be controlled. Gold has the potential to be more anonymous than Bitcoin, where Bitcoin has an immutable public record.
While gold will trade inversely to the US dollar on many occasions, Bitcoin doesn’t have a trading pattern versus the US dollar.
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. 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 is still a largely undefined idea. It is part protest, part financial system hedge, a payment system, a foundational financial system, a cult, 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. And they both have their cult followings in the form of Gold Bugs and Bitcoin maximalists. Both gold and Bitcoin are apparently limited. Although Bitcoin is actually limited by design while the limit of 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, while 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.
Transforming the physical into an idea
The effort to elevate Bitcoin to gold status is an exercise in self-interest. Yes, it can act as a 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. Gold will not generate a payment system connecting people across the world in a fast, efficient way. Or inspire Central Banks to embrace an unknown suite of technologies, so they don’t lose power and authority over their sovereign duties.
Bitcoin demonstrates that the combination of several ideas and the wide proliferation and unlimited potential of those ideas is the ultimate hedge. Money can be made and lost. Capital expands and contracts, but innovation provides infinite opportunities to redefine
So no, Bitcoin isn’t the new gold. It isn’t digital gold. It is far more powerful and significant than either narrow definition.
Bitcoin represents a capacity to re-imagine and create new assets, industries, relationships and opportunities. This is the ultimate hedge in an unpredictable world.
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