by Dan Clarke, CMO of MAX Digital Asset Exchange
DISCLAIMER; This post and its contents should in no way be considered investment advice.
Why am I re-visiting the digital gold narrative? Like most people involved in the digital asset space, I am frequently asked about the investment case for Bitcoin & digital assets more broadly. In my experience over the last few years, the digital gold narrative above all others has resonated best with individuals new to the space. With the advent of Bitcoin we now had a digitally scarce asset akin to varying degrees of scarcity in other commodities, with inflation similar to gold and who’s supply was released through the process of mining.
This is not meant to detract from Bitcoin’s use case as a digital peer-to-peer electronic cash system as described in the original white paper, which may resonate more strongly in a country of largely unbanked individuals, however above all I think it’s important we share our experiences of engagement with those currently on the fence of this space, in order to better understand their position and to test our own.
Before starting, I want to thank Saifedean Ammous for his book ‘The Bitcoin Standard” which was a true inspiration for this piece. I also want to thank @realvision for their 2 part series “GOLD: The Story of Man’s 6000 Year Obsession”. Grant Williams @ttmygh does a fantastic job of taking the viewer through history to understand why gold has stood the test of time. I have used themes, snippets & some quotes from both these pieces below given the effectiveness of their original messages.
Bitcoin As Digital Gold
Whilst there are many purported reasons to invest in Bitcoin, Bitcoin as “Digital Gold” is one of the leading narratives that continues to dominate initial investment decisions. Renowned crypto hedge fund Pantera noted in a recent Blockchain Letter “ 10% of gold’s market share would imply Bitcoin rallying 700%~ from current levels”.
This narrative’s dominance has been stoked by what many see as reckless Central Bank policy globally post the 2008 Global Financial Crisis. As recently noted by Stanley Druckenmiller in his @realvision interview with Kiril Sokoloff “You know, intuitively, you can make a case that we’re going to have a financial crisis bigger than the last one, because all they did was triple down on what, in my opinion, caused it” <More debt>. This has led many investors seeking haven in hard money alternatives such as gold and it’s digital cousin Bitcoin, who’s value unlike FIAT currencies cannot be theoretically inflated away.
The World Before Bitcoin
Prior to Bitcoin entering the world, gold had acted as the de facto hard currency & safe haven of choice for thousands of years & has to this day maintained a universal faith or acceptance in its value. For this reason it has backed many currencies throughout history, including the longest running currency the Solidus, which survived for seven centuries. Despite this history, and the fact that more than 56~ non gold backed currencies have thus far seen their values hyper inflated away, there is not a currency on planet earth today that is backed by gold according to Saifedean Ammous!
The Gold Standard had tied political leaders to a reality that limited their power. Saifedean Ammous in his “The Bitcoin Standard” notes that it’s hardly a surprise that governments have been shown over time to succumb to the temptation of inflating their money supply for “national emergency” or an infestation of inflationary schools of economics (Keynesian) which expands government power whilst reducing the value of the debt and eroding wealth of the currency holders!
Bitcoin & Comparisons With Gold
- Scarcity with Comparable Inflation Schedules.
On a fundamental level, gold & Bitcoin currently have similar inflation schedules with gold having a long term annual supply & growth rate of 1.5–2%~ with very little fluctuation. Bitcoin, the world’s first example of a digitally scarce commodity, with a supply capped at 21mn coins has a current annual inflation rate of 3.87% and is scheduled to drop to 1.8% by May~ 2020 at the next halving event (When block reward drops to 6.25 Bitcoins vs the current 12.5). Bitcoin’s annual supply according to Saifedean Ammous will increase by 27%~ in next 25yrs vs gold 52%~ . This compares to the the USD which is estimated to see supply grow by 272%, Euro by 286% & British Pound by 429%!.
2. Comparable Environmental Costs?
Watching the @realvision Gold series it’s also hard not to draw parallels between Gold mining & Bitcoin mining in its early years. Both somewhat environmentally damaging, but both arguably acceptable in the quest to produce hard money?
In “The Bitcoin Standard”, Saifedean Ammous discusses the computing power backing the Bitcoin network, asking if it’s a waste? He goes on to describe Proof Of Work, the algorithm used in Bitcoin mining as the only method “so far discovered” for making the production of a digital good reliably expensive & thus allowing it to be hard money. By ensuring the process consumes large quantities of processing power and electricity, nodes who expend that processing power have a very strong incentive to not include any invalid transactions in their blocks to receive the block reward.
@realvision in their 2 part Gold series introduces us to the history of gold mining. As the industry developed it utilised lots of destructive technologies starting with dynamite, then hydraulic drills & eventually high pressure water. Valleys were in some cases flooded creating huge political & environmental issues not to mention the use of cyanide since 1880’s used to extract gold from low grade ore & still used in many cases today. In the past 25 years, more than 30 major accidents involving cyanide have occurred worldwide.
According to LongHash, every year, more than $87.3 billion is spent on mining gold. In contrast, less than $4.3 billion is used to mine Bitcoin. If we adjust this for the economic value extracted at today’s prices, Bitcoin would certainly look more wasteful, however history may likely take a more favourable view should Bitcoin price appreciate, not to mention the countless mining projects that now utilise green energy & the fact that mining operations & algorithms are likely to be more efficient & change over time.
3. Storage Costs?
One of the best parts of the @realvision series on gold, was the insight into one of the world’s largest gold vaults in Switzerland. Buried deep in a mountain with multiple levels of security, many of the world’s wealthy purportedly are willing to pay high storage costs to protect their gold in this impenetrable fortress.
Now compare this to Bitcoin. With a simple hardware device (Trezor, Ledger) anyone on the planet can store their Bitcoin & other crypto currencies, with loss of the device protected by a simple seed recovery phrase or series of words. Its very hard to argue that this near zero cost storage solution other than the cost to purchase the device (A few hundred $$), is not a huge selling point for digitally scarce commodities such as Bitcoin.
Saifedean Ammous notes “History shows it is not possible to insulate yourself from the consequences of others holding money that is harder than yours” in reference to countless examples over time where holding “easy money” has led to wealth destruction. Their is an ominous inevitability to this that his hard to ignore.
There are very few people I know today that believe that the tripling down on debt, that our central bankers for right or wrong saw as an answer to the 2008 global financial crisis, will end well given previous examples through history. These same people can fully resonate with the idea of holding some gold as an insurance policy of sorts, to hedge against the world order breaking down or some degree of unknown systemic risk . Some of these people naturally as an extension of that belief, find their way into taking a small Bitcoin position for the very same reasons.
Bitcoin is the canary in the Central Banks coal mine of mounting debt & yet in this case, the fact the canary is still alive is as strong an indicator as any, that the problems which led to bitcoin’s creation, continue to percolate just below the surface of the economy. You would think that after 10 ~Years of almost unbroken recovery and near record unemployment, that the demand or use case of Bitcoin as digital gold would have subsided, interest rates normalised and at the very least any threat to the FIAT based system would have been shut down by governments, one of the key pushbacks given by those choosing to avoid Bitcoin over these last few years.
Bitcoin should be dead and yet 313 Bitcoin deaths later
( https://99bitcoins.com/bitcoinobituaries/ ) it not only survives but flourishes, as we see household names across the investment landscape investing heavily into crypto during this latest downturn.
It’s easy to forget to that currencies in their current form, backed by little more than faith in a government, have been in existence for less than 50~years. In comparison to gold, this is little more than an experiment that has so far overseen an expansion of global debt to near US$250tn~ (See chart below taken from Bloomberg ).
When we compare Bitcoin to gold, it is understandable that many gold bugs refute that narrative given the comparison to an asset that has proven to hold its value over thousands of years vs Bitcoin for just a short 9Yr period. In this regard let’s not forget that Bitcoin has been up & running 24hours/day for 9Yrs & 9months. That’s back of the envelope 85,000+ hours of trading history. To compare that to my country of residence Taiwan, that’s the equivalent of 77~ years of comparable trading time in the equity market given the 4.5hrs/day the market is open for.
Taking us back to the concept that Bitcoin, like gold can be seen as an insurance policy against global systemic risk, and reverting to the idea from an earlier post that you should only ever invest what you can lose, even investing 1%~ of your net worth today in Bitcoin, could make a material difference to your total net worth assuming its asymmetric risk/reward profile continues for the next few years. If your’e wrong, then you lost 1%~ of your net worth on an insurance policy of sorts, that thankfully you never needed to make a claim on.
DISCLAIMER; This post and its contents should in no way be considered investment advice. We may individually hold positions in some of the assets we discuss. Any projections, conclusions, analysis, views are to be considered hypothetical & for informational purposes only & not meant as recommendations for investment. Anyone considering an investment in crypto should only invest what they can afford to lose. You alone are responsible for evaluating the risks & merits of our content.