Alexander Vasiliev is the co-founder and CCO of the global payment network Mercuryo.
Ever since bitcoin began to grow in popularity, many people have come to call it “digital gold.”
And for valid reasons.
While the cryptocurrency‘s anonymous creator, Satoshi Nakamoto, originally intended bitcoin to function as a peer-to-peer (P2P) electronic cash system, BTC also possesses excellent store of value and safe-haven asset qualities.
Gold has similar store of value properties, with many conservative investors considering the precious metal one of the safest traditional investment instruments on the market. There’s also a popular belief that the financial instrument is a good inflation hedge.
However, numerous experts from the same group also criticize bitcoin for its lack of stability, often calling the cryptocurrency a bubble.
That said, such statements about gold and bitcoin don’t reflect the full truth.
Bitcoin Beats Gold in Terms of Purchasing Power
To see the entire picture, it’s essential to analyze gold and bitcoin in regard to how the two financial instruments perform in terms of inflation hedges, stores of value, and safe-haven assets.
According to the Bureau of Labor Statistics’ Consumer Price Index (CPI), the United States Dollar has lost 11% of its purchasing power due to inflation in the last five years.
This shouldn’t come as a surprise as fiat currencies like the USD are inflationary due to the lack of fixed supply and continuous money printing practices of central banks.
For an asset to be a decent inflation hedge, it must maintain a value growth at or above the inflation rate to protect investors against the price depreciation of fiat currencies.
If we take a look at the SPDR Gold Shares’ (GLD) performance in the last five years via the chart above, we can see that the precious metal has maintained a value increase of nearly 54%, which is almost five times higher than the USD’s inflation rate.
For that reason, we can call the instrument an inflation hedge. But is it better in this field than bitcoin?
The simple answer is no. The chart above clearly shows that in the last five years – even after bitcoin’s recent price drop and 2018’s bear market – BTC maintained a price appreciation of nearly 7,500%, which is over 138 and 680 times higher than gold’s and the USD’s rate of inflation, respectively.
More Than Simply an Inflation Hedge
Throughout its twelve-year history, bitcoin has outperformed all other asset classes, increasing its purchasing power so significantly that it clarifies that the cryptocurrency is more than just a simple inflation hedge.
Due to BTC’s limited supply capped at 21 million coins, as well as the halving mechanism that cuts the new coin supply into half roughly every four years, the digital asset features a deflationary monetary policy that is hard-coded on the protocol level.
For that reason, there is no way to increase the bitcoin supply during times when the demand for the cryptocurrency is higher.
At the same time, due to the continuously decreasing flow of new supply, BTC will experience a long-term price appreciation even if the demand stays at the same level as it is now.
This, in addition to its durability due to its highly resilient and immutable blockchain network, makes bitcoin an excellent store of value.
While gold is also a highly scarce asset, like oil its production can be increased or decreased based on the current demand.
However, due to the vast stockpile present on Earth and the complexity of gold mining, the precious metal’s annual production rate is usually at around 2% of the total supply.
For that reason and due to gold’s qualities that make it impossible to destroy or synthesize the asset from other materials, the precious metal is also a good store of value that has experienced a long-term price appreciation.
But, in this field, bitcoin has a major advantage over gold. While BTC can be easily utilized for P2P payments without any intermediaries, there is no system of buying products or services with a gold bar.
In terms of being a safe haven asset – a financial instrument that can retain or increase its value when the general market is in turmoil – both bitcoin and gold maintain a relatively low correlation with other asset classes.
Thus, both instruments have safe-haven-asset qualities that distinguish them from others in this field.
Bitcoin Is on the Road to Become a Viable Alternative to Gold
Bitcoin has the necessary qualities to be a viable alternative to gold and other precious metals in terms of an inflation hedge, store of value, and a safe-haven asset.
Despite the criticism, many businesses and institutional investors have chosen to invest in bitcoin to safeguard their assets during the pandemic and the economic fallout that followed.
Tesla is an excellent case study for that, even with Elon Musk’s recent criticism concerning BTC’s high energy usage. The electric car maker generated 23% of its Q1 2021 profits only by selling some of its bitcoin holdings.
And with excellent store of value properties, increased purchasing power, and high versatility, bitcoin has the potential to take the lead from gold and become the standard asset to fight inflation and hedge against general market turmoil.
This is a guest post by Alexander Vasiliev. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
It’s become really easy to get lost with all the volatility and headlines present in Bitcoin lately. The various altcoins are becoming more and more distracting, albeit ever-useless, and new entrants into the space continue to make us forget the real reason why we are here. Unfortunately, the people behind these schemes simply don’t understand what a crucial time we are living through.
Bitcoin is a fix to the current corrupt system.
Traditionally, governments collect some percentage of goods and services produced and manufactured in their respective economies in the form of taxation (the inescapable evil which everybody hates). The state takes the taxes from productivity, then collects and reinvests this into the country. These investments could be anything, from infrastructure to the military. The original purpose and function of all governments (past and present) and taxation is to protect the people, to protect the country, and to build out the infrastructure. Ideally, there is an alignment of incentives where what is good for the people, is also good for the government. By reinvesting these tax receipts back into the economy, the country grows and is able to modernize its infrastructure, thus allowing everyone to become more productive.
Higher productivity coupled with reinvestment of tax revenue grows an economy and thus grows its overall tax base. A government can collect more taxes the more production grows. Organic growth of an economy disincentivizes the government from raising tax rates.
Today however, our economies are being heavily driven by central banks. Enter “money printer go BRRR!” Our economies are driven by excessive quantitative easing. Rather than funding government spending with tax revenue and keeping a balanced budget, central banks put up new money to buy government debt, thus allowing the government to spend beyond its means. The key issue with a central bank driven economy where the government can have its central bank simply print up new money is that at this point, the state no longer has to care about reinvesting tax revenue into the economy, the infrastructure or the education system in order to benefit the people and grow the tax base. The state no longer has to rely solely on taxes. It can simply utilize as much new money from the central bank as needed. Look at the current US federal budget for the fiscal year 2021 and ask yourself “HOW is this sustainable?”
Under this system, taxes don’t go away. They go way up. Wealth and savings wither away through “2% annual inflation”. Under this central bank driven economy, the alignment of incentives between the government and the people is broken. With monetization, assets such as stocks and real estate go up in price over time. As a result, we get more wealth inequality, as those who own these assets become even wealthier. The people who don’t own assets have no hedge against excessive money printing as their costs of living increase. Senseless killing and wars are financed by governments via their central banks. Wealth inequality drives social unrest. Instead of governments being honest with their citizenry, they rather lie and pit them against one another.
When I talk about Bitcoin, it’s not about “number go up” or “have fun staying poor” (although these quips may be humorous) but about buying and holding bitcoin as an imperative. It’s a way of fighting the central bank driven economy. Bitcoin is the one unique way by which we can protest against — and possibly overthrow — this system.
There is a lot of deep thought that has gone into and still flows into Bitcoin. How the Bitcoin network operates is immaculate and majestic all on its own. Bitcoin is still a mystery unfolding before our eyes. I’d go as far as to compare it to how chaotic, yet awe-inspiring, our universe is. You simply don’t see that in other projects. As Alex Gladstein states in his amazing article, “87% of the planet is born into autocracy or considerably less trustworthy currencies. 4.3 billion people live under authoritarianism, and 1.2 billion people live under double or triple-digit inflation.” People like Paul Krugman, Charlie Munger and western elites anger me whenever they lend their thoughts on Bitcoin to the rest of us. They enjoy a degree of civil liberties and stable currencies most of the world simply hasn’t. In the summer of 2018, I visited the Palestinian territories. I have seen what our current central bank driven economic system has done the world over.
Fix the money, fix the world.
This is a guest post by Paul Opoku. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.
Everything in the (observable) universe is ultimately governed by the laws of physics. This includes everything from observable phenomena at the cellular and molecular level to what we can observe in the most distant of galaxies. At its most simplistic level, this centers around energy and energy as a state of matter, something that cannot be created or destroyed, only transferred between entities (first law of thermodynamics).
One of the least thought of ways that energy is present in our world today, until the advent of proof-of-work in Bitcoin, is how the concept of energy applies to money. Despite this, monetary energy is arguably the single most important practical implementation of energy transfer in the world today because it’s the signal of all of the work that people individually and collectively output transferred from our physical selves into the world. As a practical example — to build a bridge, it takes work from the people that are building that bridge, as they are transferring energy in the form of physical labor to build that bridge and are expecting energy in return in the form of getting paid.
The distinct problem that we have today is that the monetary energy in the world is fundamentally distorted to the point where the signal is completely broken. Central banks have routinely bailed out Cantillon insiders and distorted the real cost of capital through interest rate manipulation. This has caused all understanding of monetary value to be lost. Monetary energy can only function optimally in a totally free, uninhibited market. The further distorted the markets become, the less “real” signal the monetary energy produces, and therefore real productivity becomes more distorted from that signal.
Practically what this means is that monetary energy can no longer be transferred across time in a reliable manner. Salability of energy is a key factor in not distorting the monetary energy because I need to know that my purchasing power is going to be worth relatively the same today as it will tomorrow. Otherwise, it will naturally force me up the risk curve to try to preserve my monetary energy.
How do these ideas circle back to physics? As mentioned above, One of the key concepts of physics is thermodynamics. The third law of thermodynamics states that a system’s entropy naturally approaches a constant value as it approaches absolute zero, that is, the lowest limit of the thermodynamic scale. Randomness in systems tends toward the thing that can create order out of disorder. For monetary energy, this would mean seeking the highest signal out of the noise.
Bitcoin combines the first and third law of thermodynamics. It is an entirely emergent system borne out of maximum disorder. This isn’t just theoretically true, it’s practically true, as evidenced by the state of the fiat world.
Ultimately, Bitcoin will absorb the majority of the store of value energy on the planet because it has the hardest monetary properties. Salability, fungibility, censorship resistance, and proof-of -work. Proof-of-work being the most important of these, because it satisfies the first law of thermodynamics, and therefore guarantees that the third law of thermodynamics brings the majority of the monetary energy existent into the network.
Bitcoin isn’t a perfect monetary system. It’s simply the best monetary system the world has ever seen. This is why, on a long enough time scale, the majority of the world’s monetary energy will be stored on the Bitcoin network. It’s simply the natural laws of the universe that make this inevitable.
The short-term exchange rate will fluctuate, often dramatically, as the world assigns various probabilities to the ultimate accrual of monetary energy by the hardest monetary network ever created. But Bitcoin doesn’t work based on a probabilistic function, it works based on a deterministic one. The short-term exchange rate represents the discounting that the world’s population is collectively placing on the laws of thermodynamics playing out. However, anyone that understands these fundamental truths knows that the conclusion is built into the protocol and the emergent systems that develop around the protocol.
While HODLers wait on the world to get caught up, they can rest easy knowing that Bitcoin succeeding isn’t a human question, it’s a question of energy transfer of entropy. And the laws that we know emerge from those guarantee its ultimate success.
This is a guest post by Mind/Matter. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.