August 26, 2019
Bias Disclosure: Despite this being a Crypto centered blog, I own both Gold and Bitcoin in similar value and make no effort to disparage the validity of either asset.
If you've been paying attention to financial headlines recently you probably have noticed a recent rise in Gold valuation that has been making a lot of noise. To an inexperienced investor the reasons behind this increase may seem like a mystery. However, if you look closely at our current GLOBAL financial climate you may begin to see the red flags that have institutional investors worried about the future stability of the economy. Despite American historic lows in unemployment and a stock market sitting at all time highs, several indicators may point to a near future recession. Recently news of an inverted yield curve, Federal Reserve rate cut, and a global currency crisis causing fiat currency to lose all stability in several European and South American markets have been reported. Combine this with an overdue correction in equities and fears over President Trumps trade war with China, a perfect storm could be brewing for a long lasting economic pullback.
Historically, Gold has been the safe haven for panic scenarios such as these, but with the introduction of digital currencies, a new financial guardian has entered into the portfolios of many who think storing their hard earned wealth onto the Bitcoin blockchain has its benefits. To understand why this is happening, first we need to understand what features Gold possess which made it the go to store of value for humanity leading up to this point.
Gold has been highly regarded ever since its discovery thousands of years ago. Every great civilization of the past has used the powerful effect of its allure to develop and mature its economies. But how come no other rare commodity of the past gained the same reverence? The answer lies within the fantastic properties of Gold. It does not tarnish, it’s very easy to work, can be drawn into wire, hammered into thin sheets, it alloys with many other metals, can be melted and cast into highly detailed shapes, has a wonderful color and a brilliant luster. All of these properties could be harnessed since ancient times, like today, just by heating gold nuggets at high temperatures and using simple tools like hammers or molds. It is because of these wonderful physical properties that gold stems most of its value and use in the creation of jewelry. At least 50% of all gold mined is used to manufacture jewelry rather than stored.
On top of Golds unique properties, perhaps even more important to the value is its rarity and perceived scarcity. The origin of how the element of Gold came to exist on our planet cannot be overlooked. "Gold, like most heavy metals, are forged inside stars through a process called nuclear fusion. In the beginning, following the Big Bang, only two elements were formed: hydrogen and helium. A few hundred million years after the Big Bang, the first stars were blazing away with their nuclear fires. These nuclear fires forced lighter elements together to make slightly heavier elements, and these nuclear reactions released a huge amount of energy.
Gradually, these early stars began making elements such as carbon, nitrogen, oxygen — working their way up through the periodic table towards iron. But there was still no gold in the Universe. Once these earlier stars ran out of light elements to burn, they kicked in on the heavier ones.
Finally, as they burnt silicon to make iron, they exploded as a supernova, and for a few short moments, each star would release as much energy as all the regular stars in that galaxy put together. In that cataclysmic explosion, for the first time, atoms of gold were manufactured — and then hurled out into the Universe, along with the other debris from that explosion.
On Earth, gold finally reached us some 200 million years after the formation of the planet when meteorites packed with gold and other metals bombarded its surface. During the formation of Earth, molten iron sank to its center to make the core." (https://www.zmescience.com/science/how-gold-is-made-science-064654/)
It's safe to assume after knowing how Gold was created and deposited onto our planet, the likelihood of increasing its supply is low, thus creating the scarcity needed to ensure the value of the commodity will remain stable. In order to gain access to a larger supply of Gold humanity would need to develop the technology enabling the extraction of it from other sources throughout the galaxy. However unlikely this scenario is, it is not an impossibility, so Gold cannot claim to have a finite supply if you take into consideration its availability outside earth. It is estimated about 190k tonnes have been mined to this point with a remaining 57k tonnes to go.
Today Gold has found many more applications in the manufacturing of consumer electronics, medical equipment, and industrial equipment. It's clear Gold has objective value and use, but perhaps it's most important use case is its non correlation to other traditional assets. Gold historically has an inverse relation to the performance of traditional equities and bond markets which make it a perfect hedging tool to balancing any investor portfolio. This is mostly due to the multi millennia history of Golds acceptance as a means of exchange and store of wealth. In the event of a central banking collapse or fiat currency crisis where people no longer have trust in institutional finance, money is likely to revert to a Gold standard as it has throughout all of history since Gold has no central authority or government determining its value. An example of this has happened as recent as the 2008 financial collapse where Golds value rose from $700 per ounce to an all time high by 2011 of $1,800 per ounce. The housing bubble which created the 2008 collapse not only caused the explosive growth in Golds value, it also birthed the creation of Bitcoin as a response to finding an alternative monetary system which isn't so easily manipulated and controlled by the hands of a few institutional players.
Originally Bitcoins purpose according to it's white paper was to create a peer to peer electronic cash system where users could transact and send each other value as easy as sending an email. With no middle men or bankers necessary to facilitate this financial network, Bitcoin seemed to be the antidote we needed to ensure a fair, open, and decentralized way of transacting. However, due to scaling limitations, the Bitcoins main use case as of today is a digital store of value. Bitcoin proponents believe once the network reaches maturity as Gold has, it will provide the same non correlation benefits and ultimately be a trust-less asset beyond the control of government or institutional interference.
Being that Bitcoin has only existed for about a decade and has much more maturity remaining in its growth cycle, there isn't as much historical data to look back on to evaluate just how successfully the asset performs in comparison to other non digital assets. Recently there has been increased purchasing volume from Chinese investors who are actively using Bitcoin as a safe haven asset in response to the uncertain outcome of the U.S. and Chinese Trade War. President Trumps tariffs being imposed on Chinese imports is putting an economic strangle that has many Chinese citizens fearful of the impact it will have. Not surprisingly this increase in volume has resulted in an increased BTC valuation from $3,000 per Bitcoin to a high of $14,000 over a 6 month period. Bitcoin proponents are claiming that this price increase is evidence of successful use case as a store of value similar to how Gold performs in times of economic uncertainty.
So why would someone who fears for their wealth turn to Bitcoin as a safeguard? Besides, in the minds of most people, it doesn't even really exist. We're so used to handling our money physically whether its through paper currency, plastic bank cards, or metal bars, it must be tough to imagine how some people are willing to convert their trusted fiat currency in for digital currencies.
Bitcoin has many of the properties that make gold valuable while shedding the properties that make it inconvenient. Just as Gold claims its value is upheld by its scarcity due to a finite mineable supply, Bitcoin as designed by Satoshi Nakamoto has a fixed supply of 21 million Bitcoins that can ever be mined into existence. On top of this, mining Bitcoins share difficulty properties with Gold in that the process by which a Bitcoin is created requires massive amounts of computing power which only increases in difficulty as the network continues to grow. A feature that makes Bitcoin unique is its ability to be sent to anybody on the planet and forever recorded publicly on the blockchain network underpinning the digital coin. Gold transfers can sometimes take days to complete in larger quantities and due to its physicality, and requires special means of protection throughout its movement. The security of storing your money in Bitcoin is the decentralized network of nodes operating to uphold the integrity of the distributed ledger making it impossible to hack. This digital means of storing wealth means you don't have to trust a third party entity to protect your assets for you. So long as you keep your own private keys safe and away from hackers grasp, your digital assets will always be in your control and never at the mercy of a governing body.
When it comes to the stability of Bitcoins value, it is nowhere near the maturity stages needed to maintain a level of low volatility which is to be expected from a true store of value. However, its no mystery why Bitcoin is in such a volatile state. The difference in market caps between Bitcoin and Gold is significant. BTC as it sits today has a $182 Billion market while Gold is more than an $8 Trillion. Bitcoins smaller market allows for easier price manipulation since it doesn't require as much capital to move order books for the asset. This is perhaps the best argument against Bitcoin as traditionally one expects their money to either maintain its value or increase overtime in order to be called a store of value. However, All new assets go through this early phase of volatility as markets take the time to adjust and adopt them within their portfolios. Junk bonds which were created 40 years ago experienced similar volatility that cryptocurrencies experience today. Back then most institutional investors claimed them to be a scam but today many consider worth the high risk due to their high yield returns. Bitcoin can surely follow a similar path for the future.
I've watched countless Bitcoin vs Gold debates in an effort to gauge the acceptance of Bitcoins case for adoption. Both sides do a pretty good job of stating their key talking points in relation to the financial significance both assets fulfill, but in my opinion the Bitcoin side misses a key emphasis that needs to be made to help overcome its lack of tangibility Gold backers cant seem to accept.
Nothing against the old heads but lets be real, if you were forced to choose an age group to pitch a digital product to I think you'd be safe in assuming millennial and under to be a good demographic to go after if you want rapid adoption. This isn't to say the older generation isn't mentally capable of understanding cutting edge technology, rather it points to the affinity the newer generation has for an online existence and in some cases makes a priority. Irregardless of how healthy this phenomena is for our society, this is the clear direction the evolution of our species is headed towards. Once this realization is understood, it doesn't become so hard to believe our means of assigning value will follow this trend.
The digital revolution has shifted our collective appreciation for whats important and meaningful to our lives. Video game culture is the perfect example of that. Single purchases of virtual clothing and in game items are selling for more than what a copy of an entire game 10 years ago would cost. Today's youth would rather receive digital money designed to only purchase in game content for a specific game than physical fiat money for Christmas. This yearning for a unique and fulfilling digital identity isn't exclusive to video games either. Social media garners the same attention when it comes to social validity. We much rather our online voices be magnified over our physical ones.
What this all tells me is we are witnessing the crossing point where humans are transitioning from assigning value to the physical (land, oil, precious metals), which historically has been humanities only realm of existence, to a digital landscape that future generations moving forward will become more comfortable with as technology advances. As Virtual Reality and Blockchain Technologies develop, new virtual worlds will be created for us to explore and eventually conduct commerce through. Digital assets such as virtual land, data, and digital currencies will underpin a new global economy without borders or central authorities, allowing a culture which spends more time in the online world than the physical to truly engage in an open world free market economy.
Having said all that, if you were born in a world where the majority of your upbringing didn't include this reality, you have to understand how your personal bias could be preventing you from empathizing with the younger generations who had no way of avoiding it.
