Cryptocurrencies and Gold — the Psychology of Post-Apocalyptic Asset
On top of all the insanity of 2020, Bitcoin went from a low of $3,915 in March to a new high of $24,300 this week. Much of this rise in the price of bitcoin has been driven by speculation that cryptocurrencies are poised to supplement gold as the quintessential countercyclical asset. For thousands of years, gold has played the role of the safe-haven asset, a place where cash escapes to in times of uncertainty. Used in this way, it enables investors to diversify their holdings and prepare for market downturns, a trade that worked well in 2020.
The assignment of crypto to the role of an alternative safe asset is a marked difference from the previous crypto boom and bust cycle of 2017. The conversation is focused not on the practical applications of blockchain or the fin-tech revolution, but on the perception that cryptocurrency is here to stay. More than a decade after Bitcoin was first created, practical applications of blockchain technology at scale remain scarce. So has the regulation that will enable crypto to penetrate the mainstream financial markets.
In part, the very fundamentals of blockchain technology, the transparency and immediacy of transfers, make it difficult to use and regulate. Despite the recent purchase of $100 million in Bitcoin by MassMutual, it’s hard to see crypto going mainstream until the ecosystem of regulated custodians, market makers, lending facilities, and deep and liquid markets, mature. There are glimmers of hope, but progress is slow.
But practical applications are not a prerequisite for a safe asset, it is only the shared perception that’s necessary. Gold is of very little use as a hard asset, but its cross-cultural prominence as the ultimate currency convinces us that, in the event of Weimar Republic-like runway hyper-inflation, or a Mad Max post-apocalyptic world, we will be able to trade our gold bracelets and earrings for food. Never mind that the gold is often locked in a safe controlled by a bank, or even invested in ETFs which rely on the existence of a financial ecosystem.
Gold is the quintessential Imagined Reality, the term used by the historian Yuval Noah Harrari, author of Sapiens, to describe social constructs such as gods, laws, human rights, and corporations, which allow human beings to cooperate in large numbers. The shared perception of gold has caused it to transcend its physical limits and instead provide humans with an almost primal allure and sense of safety. The same might be happening to crypto.
In many ways, crypto strikes similar psychological notes to gold. Both are alternatives to fiat currencies circulated by governments. Like gold, crypto offers the promise of maintaining its value through a modern apocalypse. In this Terminator-like reality, technology has gotten out of hand, central banks have failed, and all that is left is to decentralize our currencies. Never mind that the internet would likely go down long before the government disappears. Or that the power needed to mine crypto would surely not be available. If we all agree that crypto has value, then it does. At least until we decide otherwise.
– AD
