Bitcoin A Requiem for Gold
Full Disclosure; I’ve never been much of a fan of gold as an investment. But it wasn’t until I met Bitcoin that I was truly able to understand why.
One of my first initiations researching Bitcoin was the term “digital gold”. That fascinated me as it lead me down a journey to learn something about money that I never knew. How is it that you can go through 16 or 20 years of schooling and not learn simple characteristics and attributes of real money? Also, what is the difference between money and currency? I guess I just thought those two terms were synonymous. I know I’m not alone.
Let’s start with 3 main characteristics of money.
First, you have what we all experience every day; a medium of exchange. This is what we experience using the US dollar every day. Gold was a medium of exchange for thousands of years until banks started issuing gold certificates which were eventually replaced with government issued paper notes.
For 150 years gold and dollars were synonymous. You could bring gold in a bank and get dollars in return. This is what fueled the California gold rush of 1849. But this all changed in 1931 when the US government started decoupling gold from dollars. This decoupling was made final in 1971. So, since 1931 gold has been a terrible medium of exchange.
The next characteristic of money is as a store of value. After 1931 gold became store of value along with other precious metals and real estate. Gold, as a store of value, is the centerpiece of the argument between gold bugs and Bitcoiners today. Most people don’t hold their own gold and most Bitcoin holders don’t control their own private keys. But holding your own private keys is going to become less stressful as new generations see the power and purpose of Bitcoin. You will never be able to hold gold unless you pay commissions, shipping, buy a safe etc. I can hold Bitcoin with a few clicks of a mouse for free. Which store of value is going to win. The new and easy or the old and hard?
Finally, we have money as a unit of account. It’s hard to have sound money unless you can account for each unit of value in circulation. For this, gold is an abomination. For no better alternative gold’s unit of account has been a shared global illusion as most gold is held in accounts on computer screens or in certificate form. How much gold is there in the world? No one knows and no one will ever know.
Mining technology continues to improve so there is no telling how much more gold will go from the ground to secret government vaults or around the necks of Indian housewives (Indian women are the largest demographic holder of gold in the form of jewelry.) And if you doubt that gold has no accountability ask the US, Chinese and German governments to submits an audit of their supply of gold and share it with the world. The only thing more shady than gold as a unit of account is fiat money.
We live in a time where $1,500,000,000,000 in (ANNUAL!) debt is a matter of political routine. We seem to be on a 2 generation long free ride of interest rate manipulation and unfettered printing of fiat. I am not smart enough to know where that road leads but Bitcoin allows you to join the most honest unit of account ledger ever created.
Now for some attributes of money. First, it has to be fungible meaning that each ounce of gold is worth the same as any other ounce of gold regardless of its history or from who held it last. For this gold is fine but superior than any government money so let’s call this attribute a wash.
Bitcoin is not completely fungible depending on your knowledge but developers are working on that so that a few million Satoshis that may have once been used for a know nefarious act can not be discounted in value in the market place.
Sound money must be portable. Gold is heavy and since it’s not accepted as a medium of exchange anyway the need for portability is moot. Bitcoin is weightless and can be moved across the planet in seconds.
Sound money must be divisible. I suppose you could shave off gold from a gold bar or transact with a link of a gold chain but practically speaking, gold is not convenient to divide. Cash can be divided but only to it’s smallest unit, the penny. Bitcoin is divisible to 100 Million subparts and if Bitcoin becomes a process for machine to machine micro payments and the value pushes Bitcoin beyond utility the community will surely look to hard fork into a 9th decimal point. This means Bitcoin can continue limitless utility without increasing the supply.
Finally, sound money must be resistant to counterfeiting. While gold as cannot be counterfeited at the molecular level (sorry to those career Alchemists), it can be made less pure by working in cheaper metals or wrapping copper with gold. Technology keeps fools gold out of the hands of professionals but consumers can still be easily duped. You cannot forge Bitcoin unless you can convince people your Bitcoin clone is the same in all attributes.
Now, bring on Bitcoin.
As a medium of exchange, Bitcoin is still in it’s infancy. It is not accepted by many merchants in first world economies…..yet. There is a race in the development community to create the payments business model of the future to allow traditional swipe and go convenience like we currently enjoy today. Just this year alone, 600,000 Japanese merchants started accepting Bitcoin. It may take a while to get here but don’t count out the rest of the world.
What few people realize is the transaction speed of Bitcoin is really no slower than Visa. That comes as a surprise statement to Bitcoin haters. But, consider this. When you swipe your Visa card, the only thing Visa is doing it validating the account exists and there is a credit limit that allows the transaction to be recorded as valid on their ledger. It still takes 5 -7 business days for the value to hit the books of the merchant.
In the Bitcoin world, the blockchain can validate an account and create a transaction ID is seconds. This TxID is the same thing that Visa does but the benefit to the business is they receive the value in 10 minuets…maybe 20 minutes…maybe 2 hours but is sure as hell is not 5 -7 business days.
Also, if a Txid is created, there are no charge backs or fraud. Credit card payments are rife with fraud and that creates opportunities to reverse charges. This may be great for the consumer but horrible for the merchant. And with Bitcoin the merchant is in control of refunding a dissatisfied customer. This improves the merchant consumer relationship.
Then there is the unit of account. Bitcoin blows both cash and gold out of the water. Do you trust that M1, M2, M3 money supply number supplied by your benevolent government? With Bitcoin, anyone with access to the internet can look up a block explorer and see every single validated transaction and audit the blockchain for supply.
Now, on to Bitcoin’s, money attributes.
Bitcoin is becoming more fungible, much like cash or gold
Bitcoin is portable. So portable you can send it electronically to anyone on the planet, near instantly for negligible fees. Can’t do that with gold and try sending dollars to your grandmother in India and watch the money changers ding you 20% for the privilege of using their system.
Bitcoin is the most divisible form of money every invented. Bitcoin is just a term that defines 100,000,000 individual units of code on the Bitcoin Blockchain. Try doing that with a gold coin or dollar.
Bitcoin is counterfeit proof. Sure Bitcoin can be stolen but you cannot copy Bitcoin and introduce it into the system. If you don’t believe me then I ask you, why hasn’t anyone done it yet?
Second to last nail in the gold coffin. Most people are buying gold from companies with call centers, account managers, buildings, and vaults. Basically, when buying gold you have to be supporting a very expensive overhead structure. You can buy Bitcoin for 1% or less in many cases. The gold company will never tell you how much value you’re losing buy supporting a bloated industry.
The final nail in the gold coffin will be demographics. There is no way that there is a market under the age of 30 will ever buy gold again. You know the end is near when the gold salesmen are buying commercial time on CBS Evening news and CNBC Squak Box. When you see gold commercials sandwiched between pharmaceutical commercials and “A Place for Mom” you know you’re not in a growing market place. The banks of the future will be apps on phones. Have you met a young person that doesn’t know how to download an app?
I’m sorry to call for the death of gold but I’m afraid to say gold’s 5,000 year run of utility is about to end.
Abe Froman Jr.
Crypto King of Chicago
For those of you with an extra 2 minutes, enjoy this Monty Python skit from “The Holy Grail”
