4 minute read
May 18, 2020
Let’s set the scene: An oil crisis erupts, sending ripples through global markets.
Central banks fire up the money printers in a bid to stimulate job growth and kickstart the economy, yet the relief is hardly felt by ordinary citizens whose wages remain stagnant.
Attention shifts to scarce commodities like gold as investors look to hedge against the risk of rising inflation.
This description fits the current events quite nicely, but not only. Seasoned investors with a keen eye are noticing similarities between today’s macroeconomic climate and the 1970s.
Back then, the decade began with Richard Nixon unpegging the dollar from gold, creating the first true fiat currency.
It would end with 13.3% inflation in 1979, a year that also saw the price of gold double.
Hedging against inflation
While we have yet to see that sort of inflation, institutional investors have started hedging against the risk of inflation by purchasing gold. And now, Bitcoin.
Bitcoin received yet another moment of validation when Paul Tudor Jones, one of Wall Street’s most successful hedge fund managers, announced the inclusion of BTC into his portfolio as an inflation-resistant asset.
According to Jones, “Bitcoin reminds me of gold when I first got into the business in 1976”.
Jones is not alone in his Bitcoin hedge. Most recently he has been joined by the likes of Jack Dorsey, Michael Saylor, Stanley Druckenmiller, and Bill Miller. Alongside this juggernaut group of investors, many publicly-listed companies have added bitcoin to their treasuries in recent months.
Not all gold bugs are warming up to Bitcoin. Peter Schiff is an example of old-school gold investors that fail to see the correlation between the properties of Bitcoin and that of gold.
Similarities between Gold and Bitcoin
Scarce, Predictable Supply: Unlike fiat currencies that can be printed at whim, giving them a supply that is effectively limitless, there is only so much gold and Bitcoin on Earth.
According to the World Gold Council, 190,040 tonnes of gold had been mined from the beginning of time up until the end of 2017. Gold mining adds an additional 2,500-3,000 tonnes in supply each year.
The supply of Bitcoin, on the other hand, increases by 328,500 annually and will never exceed 21 million.
Durability: Both gold and Bitcoin can last forever, provided some basic measures are put in place to take care of their storage.
Gold can still lose its weight, and therefore some of its value, due to wear and tear. Bitcoin is immune to the ravages of time.
Utility: Gold has a range of use cases outside its primary utility as a value store. Small amounts of gold, which is a highly efficient conductor, can be found in electronic devices, computer circuits, and even in space vehicles.
While the focus still remains firmly on BTC’s role as a superior store of value, the Bitcoin community is taking steps to enable richer functionality, like the most recent upgrade to the protocol, Taproot.
Other notable upgrades to Bitcoin's protocol include Merklized Abstract Syntax Trees and Schnoor signatures, combined with Taproot, are pushing Bitcoin in the direction of more expressive functionality, such as smart contracts.
Differences between Gold and Bitcoin
Counterfeiting: You can get fake gold, but you can’t get fake BTC. Forgers can coat other metals with a thin layer of gold and pass it off as solid gold.
According to Reuters, $50 million worth of counterfeit gold was discovered in JP Morgan’s vaults between 2016 and 2019.
The Bitcoin you own, on the other hand, lives on a distributed, digital ledger such that you can use your keys to prove that the Bitcoins are yours and real at any time.
Divisibility: 1 Bitcoin is divisible into smaller denominations (A bitcoin can be divided down to 8 decimal places), whereas 1 bar of gold is really hard to divide effectively.
Divisibility is a crucial characteristic for a medium of exchange to have. When it comes to Bitcoin, the same asset that can be held in large quantities as a store of value can also be used in tiny pieces to purchase goods and services.
Portability: If you wanted to send $10 million worth of gold across the world, you would have to figure out a safe way of transporting 179kgs of the luscious metal to its final destination.
All you need to transfer Bitcoin is the recipient's wallet address.
Another area where portability comes in handy is with regards to transferring personal wealth across physical borders. For immigrants and refugees, gold is a poor store.
Self-sovereignty: No one ‘owns’ the bitcoins that are yet to be mined. The protocol is open-source and the network is decentralized, which means they ‘belong’ to all of us equally.
Meanwhile, the gold that is still in the ground belongs to whichever nation-state owns that piece of land.
In 1933, President Roosevelt actually made the owning of gold illegal, a law that stood for 43 years.
A safe haven from shaky economies
If you’re in Lebanon, Venezuela, Argentina, South Africa, Zimbabwe or any other economy that has either failed or stands on shaky grounds, chances are you’re working hard to get whatever money you have into an asset that can preserve its value.
Both gold and Bitcoin can serve you in your quest to transfer some of your net worth into a universally-accepted asset that isn’t subject to the same geopolitical shocks as fiat currencies.
Yet, for all its similarities to gold, Bitcoin scores higher on a number of metrics that a store of value should have.
It is more portable, making it easier to transport across borders for remittances. It can’t be counterfeited, and its infinite divisibility means that you can use Bitcoin to purchase goods and services - no matter the amount.
Bitcoin is digital gold, and so much more.