Those of you who’ve been following crypto for a few years will remember back in March of 2017, when bitcoin achieved parity with gold. It was a huge moment for the new digital currency.
For the first time in its history, one bitcoin was worth the same as one ounce of gold. The rest is history. By August bitcoin was worth three times as much as an ounce of gold and at its peak in December of 2017, it was worth about fifteen times an ounce of gold. Even at the very bottom of its recent price crash, bitcoin never came back to parity with gold.
But what exactly is this strange new asset? At one point, earlier in its history, it was known as digital cash. Then when it became clear that it wasn’t scalable enough to let everyone on the planet buy coffee with it (at least on the base layer of the Bitcoin blockchain), the story changed again to it being a digital store of value. This year specifically, as more ways for institutions to buy, store and trade bitcoin are coming online, the bitcoin-as-digital-gold-story seems to holding strong. But is bitcoin any of these things? Or all of them? Or none? Furthermore how does it stack up against gold?
The stories we tell ourselves determine what we value and hold true. Money is no different. When President Richard Nixon put an end to the convertibility of the US dollar to gold in 1971, the idea of fiat money being backed by something tangible also came to an end.
It was a time when gold’s purpose was thrown into question. If it couldn’t be used to back a global financial system, then perhaps it really was a “barbarous relic”, as John Maynard Keynes is often quoted as saying (he actually only referred to the gold standard as a barbarous relic).
Then again, perhaps it was precisely when gold lost its convertibility at the fixed exchange rate of $35 per troy ounce, that it truly came into its own as both a store of value and a hedge against the existing financial system. Without the artificial price suppression of a fixed exchange rate, gold was able to soar to new highs.
And indeed the 1970s were the best decade gold ever had as far as returns are concerned. Many forget that Gold went from a low of around $36 per ounce in 1970, to a high of $677 in January 1980. That’s a 1780% increase! Not at all how you’d expect a humble store of value to behave. In fact, come to think of it, that’s much more how you’d expect a cryptocurrency to trade.
In recent years things have calmed down a bit for gold, aside from some volatility during the 2000s. We generally teach people that gold is a safe haven asset with many thousands of years of history. That it’s used as a store of value, particularly during economically uncertain times. That it’s inversely correlated to the US dollar, thus acting as a hedge against dollar weakness, and even though it doesn’t yield anything, its stability makes it an attractive addition to any portfolio.
We also have the libertarian, hard money story that sees gold as the only true money, holding that it has intrinsic value due to its scarcity and warning that when the financial system inevitably collapses, everyone will be trying to get their hands on gold.
Bitcoin has undergone a similar process of shifting stories in its short lifetime. When it first came on the scene and was the exclusive preserve of hackers and cypherpunks, it was considered a decentralized currency that was adversarial towards the existing financial system.
As it grew in popularity (and value) the story changed to something a little less confrontational. It became a global payments network that was safer, cheaper and more efficient than our existing payments systems.
It could benefit the poorest among us, who pay extortionate fees for sending remittances back home. It could allow for peer-to-peer micropayments that would revolutionize how we transact with one other.
This was followed by a few phases of early institutional interest. “Blockchain not bitcoin” became a thing as companies explored the possibility of using blockchain for their own ends without having to deal with bitcoin itself.
Then, when bitcoin soared in 2017 and transaction fees spiked, suddenly the remittances and micropayments narrative was dropped like a hot potato.
After that we had the “Bitcoin not blockchain” contingent changing the story back to the idea that everything interesting about blockchain is already there in bitcoin itself.
Bitcoin also has its own version of the libertarian gold bugs I mentioned earlier. They are the bitcoin maximalists and they believe that one coin will eventually rule them all and replace the global financial system.
The past couple of years it’s been all about bitcoin as a global store of value for the modern age. The idea of digital gold is all the rage now, especially as more institutions begin to show interest.
As you can see, it’s been quite a strenuous tug of war. However, investors want a simple story to follow and the digital gold narrative is by far the easiest to understand at the moment. We already “get” gold. Well, bitcoin is like gold 2.0. Simple.
How does bitcoin measure up?
When people discuss the properties of money, they usually refer to three central features. Money is a medium of exchange, in other words, a good that can be used in exchange for all other goods. It is also a unit of account because it lets you know what everything is worth in a common measure of value. Finally, it’s a store of value, in other words it keeps its purchasing power even when you don’t spend it.
Beyond these three central features there are a number of other properties that all good money should have. These are as follows:
Divisibility: It should be subdividable into smaller units so that transactions of lesser value can be made.
Portability: It should be easy to carry
Durability: It should be able to be used repeatedly without degrading
Fungibility: Any one unit should be interchangeable with any other
Verifiability: It should be quick and easy to tell whether it’s authentic or not.
If you consider that Gold must be melted down into smaller weights in order to be divisible and you can only get a hundredth of a US dollar, then bitcoin, which can be divided into 100 million units (8 decimal places) is far more divisible than either gold or dollars.
As far as portability goes, US dollars may be more portable than gold but neither compares with bitcoin. One private key gives you access to as little as a fraction of a cent all the way up to hundreds of billions of dollars, and you can take it with you anywhere.
Durability is one feature that gold has covered. After all, it’s an element. It’s impossible to forge, has a limited supply that’s been here for as long as the earth itself and it’s not going anywhere unless we ship it off into space.
Now, fungibility we may have to give to fiat money over bitcoin. A US dollar comes more or less as a clean slate, you have no idea what it was involved in before you accept one as payment. By contrast every bitcoin carries with it the history of every single transaction that it has been part of. Bitcoins may be perfectly interchangeable but their history could one day be used against them. Gold has its issues too, with all sorts of different grades and no easy way for laypeople to tell them apart.
Finally we come to verifiability. Here bitcoin wins hands down. There is no way to counterfeit a bitcoin and the proof that you were able to move it is the proof that it’s yours. Dollars, on the other hand, are easy to counterfeit and gold suffers in this respect too. It may not be easy to counterfeit as such, but with no easy way to determine authenticity and quality, at least for ordinary people, you can’t call it particularly verifiable either.
Bitcoin is still young
Bitcoin certainly has all the properties of money. But it also functions as a store of value. Its fixed supply and deflationary economics mean that the longer it’s around, the higher the price should theoretically go. Its volatility doesn’t take away from its usefulness as a store of value. As we’ve seen, gold also experienced some wild volatility in its younger days.
The issue is that it’s still too new. If you think about it, bitcoin launched just as the 2008 financial crisis was getting into full swing. Bitcoin (or crypto in general for that matter) hasn’t seen a real recession yet, so we don’t know how it will react when the tide goes out.
Perhaps it becomes a valuable release valve on the global economy, allowing capital somewhere other than gold to flee too. Or perhaps the opposite occurs, perhaps the speculative money already invested in bitcoin exits immediately to keep real world assets afloat. We just don’t know.
Which to own?
This all depends on why you’d be investing in something like gold or bitcoin. Are you buying something risky that you hope will multiply in value? Or are you trying to keep your money safe and allow it to hold its existing value? If it’s high risk and high reward that you’re after, then bitcoin’s historical price action suggests that it’s the better candidate. This leaves safety and stability to gold, which has historically acted more as a store of value than a speculative asset.
Gold soared to the heights it did back in the 70’s because of uncertainty. Suddenly its status had changed and no-one really knew what it was anymore. Similarly, we still don’t really know what bitcoin is, and that’s the extra risk that you’re taking when buying it. If we don’t know what it is, then we certainly don’t know where it’s going. That’s also why the returns are also outsized.
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