Rethinking cash: Bitcoin vs. Gold is a battle of tales

Part of the reason I feel privileged to write about digital money is because the ideas and technology it tries to disrupt aren't just a few years or decades old. They come from centuries, even millennia.

Like gold, for example.

As the price of Bitcoin has soared to new highs and a parade of notable investment professionals like Larry Fink, CEO of BlackRock, and hedge fund legend Stanley Druckermiller have expressed their prospects as a demonstrably scarce store of value, as a war of, between gold bugs and Words surfaced for Bitcoin fans.

Peter Schiff, one of the loudest proponents of gold both as a store of value and as a global standard for supporting currencies, was particularly unleashed. Over the past week, there has been a spate of tweets from Schiff referring to Bitcoin as a speculative instrument that lacks gold's physical properties as a safe haven, and complaining about the lack of airtime given gold lawyers to Bitcoiners. (Check the answers for colorful answers from Bitcoin fans.)

This fight reflects something much bigger than a spat Twitter troll. It relies on a bold effort by the crypto community to rewrite an old narrative.

Ultimately, in this competition, winning the narrative will come down to it. As mentioned earlier, a currency can have a variety of valuable properties. However, if there is no belief in it and the story does not resonate, it will not be accepted as money by a user community.

(Nick Fewings / Unsplash)

Gold: Of kings and conquests

Proponents of gold often mention the properties that make it a solid store of value that it can use to hedge against devaluation of the fiat currency. Let's go through them:

It's long lasting. Gold cannot be destroyed.

It's fungible. In its pure state, regardless of which bar you have in hand, gold bar has the same value, which enables its acceptance as both a medium of exchange and a store of value.

It's divisible. Once melted, gold can be broken down into coins and bars of any size.

It's portable. You can move gold from one place to another within certain limits.

And most of all, it's rare. Aside from sustainability or the opposite of asteroid mining, the slow and expensive pace at which the world-famous gold reserves can be mined means that unlike fiat paper currencies, the supply cannot be expanded at will.

Note that these properties are also attributed to Bitcoin – rightly in my opinion and with an advantage over gold. (Bitcoin is certainly more portable and easier to share, and its scarcity is arguably more reliable.)

Durability, fungibility, divisibility, portability and scarcity are necessary prerequisites for solid money without fiat, but they are not enough on their own. There are other precious metals like silver and platinum with similar properties. And there are altcoins that were created from literally the same code as bitcoin. Ultimately, what sets both gold and bitcoin apart from their competitors is the broad collective belief in their common value.

For gold, this belief is not only widespread. It goes deep. Very deep.

Gold is the stuff of fairy tales like the one about King Midas. It drove the conquest of America, encapsulated in the search for El Dorado. It became synonymous with wealth and power.

And with beauty – to the point where we speak of gold's beauty as if it were innate or inherent. But beauty is culturally constructed. While evidence suggests that gold's use in jewelry preceded its use as money, there is a circular, reinforcing logic to the aesthetic idea. Centuries of gold's association with wealth and power have increased its beauty in our minds.

In other words, there is a powerful feedback loop that emerges from the story “All that glitters is gold”. It strengthens its cultural power – a short-lived, intangible concept that is actually more important than the five physical properties mentioned above to give gold its long-standing status as a universal store of value.

Bitcoin: math for the masses

As you can see, those driving the Bitcoin narrative are facing a daunting competitor, a phenomenon with millennia-old cultural strength.

However, this moment feels ripe for a new story. We have entered a digital age in which the physical world is increasingly shaped and managed by a separate computer world. This world needs "digital gold", not physical gold.

Bitcoin value rises and falls

(Sean Gallup / Getty Images)

And it turns out that the way to create this digital gold is to combine the power of math – another ancient, all-powerful human invention that rules our lives – with the power of collective human activity. This combination is what makes Bitcoin history so exciting.

The proof-of-work consensus model (which allows us to trust the transactions recorded in Bitcoin's distributed blockchain ledger) essentially depends on the fact that it is really, really, mathematically very, very difficult to get a random number in a data set to find the quadrillions of includes other numbers. There is something quite universal in that – literally the universe.

Bitcoin's claim to verifiable scarcity, however, which is fundamental to the store of value narrative that institutional investor big shots are now focusing on, doesn't just depend on its math – which can and eventually be replicated in altcoin forks of the code. It also arises from mass human engagement and investment (time, money and energy).

Bitcoin's predictably scarce money supply depends on the fact that it is prohibitively expensive for anyone to take control of the network and that there is a sufficiently large, dedicated international pool of developers working to keep the code secure.

This is where the growing resonance of the story is fulfilled. As more and more people believe in Bitcoin, more and more will invest in Bitcoin, which makes it more and more expensive to attack. In the meantime, a wider belief means that more and more developers are concerned with protecting Bitcoin's value. Both factors make it increasingly safer, which in turn increasingly strengthens its scarcity claim.

To me, this is what makes the Bitcoin story more appealing than that of gold. Instead of tales of kings and conquests, it is about human engagement guided by universal mathematical principles.

This epic narrative battle has a long way to go. I look forward to recording its development.

Central bank gold buying frenzy

Speaking of gold, I noticed this graphic in a story by the financial news agency Finbold. In a survey of the 12 largest economies in the world, Finbold found that the central banks of the United States, China, Russia and India had amassed a whopping 208.34 tons of gold between March and early December this year. Their combined balance dwarfs total liquidation of 12.78 tons by the eight other countries on this list. It is not clear where Finbold got his data from, and it should be noted that it is known to be difficult to confirm information about the central bank's gold reserves. With that in mind, however, the numbers are worth exploring.

Screenshot-2020-12-03-at-10-33-35-amSource: Finbold

Why has the huge surge in gold inventories in these four countries since the COVID-19 pandemic turned into a global crisis? The natural answer is that governments, like people, view gold as a hedge against economic and monetary stress, and the crisis has increased the risk of this. Thinking about each country, however, offers several different hypotheses.

The US and Indian numbers are a bit self explanatory. For the US Federal Reserve, its massive monetary expansion in the midst of the pandemic inevitably required building a huge balance sheet of financial assets, which included gold. And India has always been a huge gold buyer, mostly for cultural reasons, so maybe these numbers are just an extension of that.

The Chinese and Russian stories are possibly more interesting. Typically, these two countries buy dollars held in US Treasuries as reserve assets. That they are also accumulating gold could indicate a loss of confidence in the dollar. Even more important is the question of what they could do with this gold in the future.

And here's an insight from Jennifer Zhu Scott, Executive Chairman of The Commons Project, that makes this interesting. During a podcast episode of Money Reimagined, she noted that while it is clear that China has increased its gold reserves significantly, no one knows exactly how much it holds. She speculates that this could put China in a strong position to give the digital yuan a clout in the international market.

“When the digital (renminbi) is rolled out, China doesn't even have to say it is backed by gold. China could only make one announcement: "Oh, by the way, our real gold reserve is actually 4,000 tons." (According to Finbold, China's total inventory is currently 2,196 tons.) This would give the new digital currency a solid base, which could encourage other countries to use it. At the same time, it would allow China to avoid the volatility it would otherwise be exposed to if it ended capital controls. This is a step it needs to take to achieve wider international use of the yuan.

What about Russia? Well, like in China, one of the reasons for creating a digital currency is seen as a mechanism to reduce dependency on the dollar – in this case to achieve the stated goal of avoiding US sanctions. A strong gold reserve could also help.

The bigger question, according to the column above, is whether these countries are ultimately better off accumulating Bitcoin than gold as a setback for their currencies.

Global City Hall

THUMBS DOWN. A column by Sarah Frier in Bloomberg's daily "Fully Charged" newsletter this week highlighted the excessive power Facebook wields over advertisers and the audiences they seek. Small businesses that rely on Facebook ads for lead generation are now frustrated in “Facebook prison” – locked by the platform through an algorithm designed to monitor inappropriate content among 3 billion users. The problem, Frier writes, is that “tiny glitches or dropouts in this system can kill innocent users who then have to hope that a real person will see the bug and fix it. This can take days, if at all. "


(Barefoot communication / unsplash)

The article is another example of the growing recognition that large centralized internet platforms like Google and Facebook have de facto monopoly powers that can harm the economy. This mindset adds to the increased risk of antitrust actions against them. As Frier writes, "For a company fervently trying to convince lawmakers, it's not a monopoly, advice: it is usually a bad thing when an entire industry depends on your service to survive."

What is missing in the mainstream conversation about these issues is a discussion of how more decentralized models of media control could better address them. Regardless of whether it is a blockchain solution or something else, we need to recognize that the centralized architecture of internet platforms is the root of their gatekeeping capabilities. Regardless of the solution, that context is critical to how society feels about reshaping the social media and digital content industry.

STABLECARD. The expansion of stable coin payments was pushed again this week when Forbes' Michael Del Castillo published a story that said the Visa card network would give its 60 million merchants worldwide access to USDC, that of Circle Internet Financial and CoinBase developed stable coin tokens. The interesting thing is that as a bearer token, USDC can move from one party to another across borders without the need for an intermediary. What didn't exist was the network of users that Visa offers. This appears to be a solution for international money transport without using correspondent banks and the SWIFT messaging system. Another step towards disintermediated global finance.

BTC INCOME. Dan Held, who heads growth at Crypto Exchange Kraken, has done a favor for anyone interested in turning their otherwise static Bitcoin into an interest-bearing asset. There are a multitude of ways to generate income with your Bitcoin these days and Held, who has experimented a lot with them over the past year, put together a summary of the experience and results in a useful tweet thread.

What I find interesting is that Held's thread gives you a taste of the DIY nature of an emerging, decentralized financial system. In this system, Bitcoin becomes a universal reserve asset, a form of collateral against which loans and speculative positions are formed.

Note: Interest payments in Bitcoin markets are mainly derived from speculators who borrow Bitcoin from companies like BlockFi to make short sales. As Held points out, one way is to play the arbitrage between spot market prices and those listed on derivative assets such as the Grayscale Bitcoin Trust's CME Bitcoin futures or GBTC. (Grayscale is owned by the Digital Currency Group, which is also the parent company of CoinDesk.) This is very different from, say, earning interest on your dollar deposits at a bank, but it looks like there's a lot of money in the Interbank happens market. Banks obtain short-term funding by borrowing treasury stocks and other collateral that are then used to sell short.

At least for now, it is the people, not the institutions, who provide the collateral and liquidity requirements for the back office aspects of a capital market system.

Relevant readings

Why Ethereum and Bitcoin are very different investments. Messages you can use. The rising price of Bitcoin has coincided in recent weeks with simultaneous gains in ether and other tokens. This gave the impression that retail investors were simply buying the latter as a replaceable alternative to the former. Here, CoinDesk's Muyao Shen explains why this assumption is wrong.

Bitcoin's price is a poor proxy for its usefulness. As Bitcoin investors celebrate their new highs, CoinDesk columnist Jill Carlson is here to tell you to relax and focus on what matters most. Crypto, she reminds us, is supposed to be about expanding access to money, payments and finance and not making profits denominated in currencies.

U.S. lawmakers introduce bill requiring stablecoin issuers to obtain bank deeds. This bill, introduced by Rep. Rashida Tlaib (D-Mich.) And others, can be a well-intentioned measure to protect consumers. But the overwhelming backlash from crypto experts, including many who agree with Tlaib's interest in curbing the common man's abuse and improving financial access, shows how poorly it was thought out. Introducing high compliance costs to innovative startups trying to improve access to finance will ultimately benefit banking giants who have not been able to adequately serve the poor. We need better informed legislators. Nikhilesh De & # 39; s copy-through addresses some of the aftermath.


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